Econ 353 Practice Exam #3

10) When you deposit a $50 bill in the Security Pacific National Bank A) its assets increase by $50. B) its cash items in the process of collection increase by $50. C) its liabilities decrease by $50. D) its reserves decrease by $50.

A

13) A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and the bank's ________ by $100. A) reserves B) securities C) capital D) loans

A

14) Rising interest-rate risk A) increased the demand for financial innovation. B) increased the cost of financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation.

A

16) The large number of banks in the United States is an indication of A) lack of competition within the banking industry. B) only efficient banks operating within the United States. C) consumer preference for local banks. D) vigorous competition within the banking industry.

A

2) Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side. A) federal government; states B) state governments; municipalities C) federal government; municipalities D) municipalities; states

A

23) If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $50,000. B) $40,000. C) $30,000. D) $25,000.

A

24) Bank holding companies that rival money center banks in size, but are not located in money center cities are A) superregional banks. B) local banks. C) international banks. D) bank clearing houses.

A

28) If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000.

A

28) The legislation that overturned the prohibition on interstate banking is A) the Riegle-Neal Act. B) the Glass-Steagall Act. C) the Gramm-Leach-Bliley Act. D) the McFadden Act.

A

31) The legislation overturning the Glass-Steagall Act is A) the Gramm-Leach-Bliley Act. B) the Riegle-Neal Act. C) the McFadden Act. D) the Garn-St. Germain Act.

A

31) When banks offer borrowers smaller loans than they have requested, banks are said to A) ration credit. B) raze credit. C) shave credit. D) rediscount the loan.

A

35) Under the Gramm-Leach-Bliley Act the oversight of the securities activities of bank holding companies belongs to A) the SEC. B) the Federal Reserve. C) the U.S. Treasury. D) the Comptroller of the Currency.

A

4) Because checking accounts are ________ liquid for the depositor than savings accounts, they earn ________ interest rates. A) more. lower B) less. lower C) less. higher D) more. higher

A

4) Prior to 1863, all commercial banks in the United States A) were chartered by the banking commission of the state in which they operated. B) were regulated by the central bank. C) were chartered by the U.S. Treasury Department. D) were regulated by the Federal Reserve.

A

40) Assuming that the average duration of its assets is five years, while the average duration of its liabilities is three years, then a 5 percentage point increase in interest rates will cause the net worth of First National to decline by ________ of the total original asset value. A) 10 percent B) 15 percent C) 25 percent D) 5 percent

A

45) Foreign banks may engage in banking activities in the United States by opening all of the following EXCEPT A) a McFadden Corporation. B) a branch of the foreign bank. C) an agency office of the foreign bank. D) a subsidiary U.S. bank.

A

46) A reason why rogue traders have bankrupt their banks is due to A) a failure to maintain proper internal controls. B) the separation of trading activities from the bookkeepers. C) stringent supervision of trading activities by bank management. D) accounting errors.

A

46) In 2017, ________ of the ten largest banks in the world were not U.S. banks. A) nine B) five C) seven D) two

A

50) The principal-agent problem that exists for bank trading activities can be reduced through A) creation of internal controls that separate trading activities from bookkeeping. B) elimination of regulation of banking. C) creation of internal controls that combine trading activities with bookkeeping. D) elimination of internal controls.

A

7) The U.S. banking system is considered to be a dual system because A) it is regulated by both state and federal governments. B) it was established before the Civil War, requiring separate regulatory bodies for the North and South. C) it actually includes both banks and thrift institutions. D) banks offer both checking and savings accounts.

A

1) Which of the following are bank assets? A) a customer's checking account B) the building owned by the bank C) a discount loan D) a negotiable CD

B

11) Adjustable rate mortgages A) generally have higher initial interest rates than on conventional fixed-rate mortgages. B) benefit homeowners when interest rates are falling. C) protect households against higher mortgage payments when interest rates rise. D) keep financial institutions' earnings high even when interest rates are falling.

B

12) Disintermediation resulted from A) elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits). B) interest rate ceilings combined with inflation-driven increases in interest rates. C) increases in federal income taxes. D) reserve requirements.

B

13) In this type of arrangement, any balances above a certain amount in a corporation's checking account at the end of the business day are "removed" and invested in overnight securities that pay the corporation interest. This innovation is referred to as a A) share draft account. B) sweep account. C) removed-repo account. D) stockman account.

B

16) Asset transformation can be described as A) borrowing and lending for the long term. B) borrowing short and lending long. C) borrowing long and lending short. D) borrowing and lending only for the short term.

B

17) The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the A) Garn-St.Germain Act. B) McFadden Act. C) Glass-Steagall Act. D) National Bank Act.

B

20) Banks hold capital because A) higher capital increases the returns to the owners. B) they are required to by regulatory authorities. C) higher capital increases the return on equity. D) it increases the likelihood of bankruptcy.

B

21) Lack of competition in the United States banking industry can be attributed to A) the fact that branching has eliminated competition. B) nineteenth-century populist sentiment. C) recent legislation restricting competition. D) the fact that competition does not benefit consumers.

B

23) One of the concerns of increased bank consolidation is the reduction in community banks which could result in A) loss of cultural identity. B) less lending to small businesses. C) more bank regulation. D) higher interest rates.

B

24) If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to A) buy back bank stock. B) reduce the bank's assets by making fewer loans. C) pay higher dividends. D) sell securities the bank owns and put the funds into the reserve account.

B

25) As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. A) decrease. increase B) increase. increase C) increase. decrease D) decrease. not be affected

B

26) Critics of nationwide banking fear A) cutthroat competition. B) an elimination of community banks. C) banks with economies of scale problems. D) increased lending to small businesses.

B

27) Although it has a population about half that of the United States, Japan has A) many more banks. B) fewer than 100 commercial banks. C) about 25 percent of the number of banks. D) more than 5,000 commercial banks.

B

27) Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on investment. B) return on assets. C) return on capital. D) return on equity.

B

29) The primary reason for the recent reduction in the number of banks is A) restrictions on interstate branching. B) bank consolidation. C) bank failures. D) re-regulation of banking.

B

3) Which of the following are reported as liabilities on a bank's balance sheet? A) real estate loans B) discount loans C) U.S. Treasury securities D) reserves

B

30) Bank consolidation will likely result in A) less competition. B) increased competition. C) the elimination of community banks. D) a shift in assets from larger banks to smaller banks.

B

34) Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the A) requirement that firms keep compensating balances at the banks from which they obtain their loans. B) requirement that firms place on their board of directors an officer from the bank. C) requirement that individuals provide detailed credit histories to bank loan officers. D) inclusion of restrictive covenants in loan contracts. 4

B

37) In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity. A) dividerless B) universal C) barrier-free D) severable

B

38) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called A) the segmented maturity approach to interest-exposure analysis. B) the maturity bucket approach to gap analysis. C) the segmented maturity approach to gap analysis. D) basic gap analysis.

B

41) If a bank has ________ rate-sensitive assets than liabilities, a ________ in interest rates will reduce bank profits, while a ________ in interest rates will raise bank profits. A) fewer. decline. decline B) more. decline. rise C) fewer. rise. rise D) more. rise. decline

B

42) Like the dual banking system for commercial banks, thrifts can have either ________ or ________ charters. A) municipal; federal B) state; federal C) local; federal D) state; local

B

43) Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________. A) assets. deposit liabilities B) assets. liabilities C) loan portfolio. deposit liabilities D) securities portfolio. non-deposit liabilities

B

49) Which of the following is NOT an example of a backup line of credit? A) loan commitments B) mortgages C) overdraft privileges D) standby letters of credit

B

6) With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System ________ to purchase FDIC insurance for their depositors, while non-member commercial banks ________ to buy deposit insurance. A) were required; were required B) were required; could choose C) could choose; were required D) could choose; were given the option

B

10) Automated teller machines A) cost about the same to use as human tellers in banks, so banks discourage their use by charging more for use of ATMs. B) are more costly to use than human tellers, so banks discourage their use by charging more for use of ATMs. C) cost less than human tellers, so banks may encourage their use by charging less for using ATMs. D) cost nothing to use, so banks provide their services free of charge.

C

11) A deposit outflow results in equal reductions in A) reserves and capital. B) assets and capital. C) assets and liabilities. D) loans and reserves. 2

C

14) When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the reserves of the First National Bank increase by $10. B) the assets of Citibank decrease by $10. C) the liabilities of the First National Bank decrease by $10. D) the liabilities of Citibank decrease by $10.

C

15) Because of securitization, a new class of residential mortgages offered to borrowers with less-than-stellar credit records developed. These mortgages are known as A) adjustable-rate mortgages. B) risk-enhanced mortgages. C) subprime mortgages. D) bundled mortgages.

C

15) In general, banks make profits by selling ________ liabilities and buying ________ assets. A) risky. risk-free B) illiquid. liquid C) short-term. longer-term D) long-term. shorter-term

C

18) Financial innovations that grew out of the bank branching restrictions were A) bank holding companies and securitization. B) automated teller machines and bank credit cards. C) bank holding companies and automated teller machines. D) automated teller machines and sweep accounts.

C

18) When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then A) the assets of Chemical Bank rise by $50. B) the liabilities at Chemical Bank rise by $50. C) the reserves at First National fall by $50. D) the assets of First National rise by $50.

C

2) Which of the following statements are TRUE? A) Checkable deposits are assets for the bank. B) Checkable deposits do not include NOW accounts. C) Checkable deposits are payable on demand. D) Checkable deposits are the primary source of bank funds.

C

22) If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could A) increase loans. B) buy U.S. Treasury bills. C) borrow from another bank in the federal funds market. D) buy corporate bonds. 3

C

22) The McFadden Act of 1927 A) required that banks maintain bank capital equal to at least 6 percent of their assets. B) separated the commercial banks and investment banks. C) effectively prohibited banks from branching across state lines. D) effectively required that banks maintain a correspondent relationship with large money center banks.

C

26) A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and loans by $5 million. B) reducing deposits and securities by $5 million. C) reducing deposits and reserves by $5 million. D) reducing deposits and capital by $5 million.

C

32) A major difference between the United States and Japanese banking systems is that A) bank holding companies are illegal in the United States. B) Japanese banks are usually organized as bank holding companies. C) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot. D) American banks are allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks cannot.

C

36) Under the Gramm-Leach-Bliley Act states retain regulatory authority over A) bank subsidiaries engaged in securities underwriting. B) securities activities. C) insurance activities. D) bank holding companies.

C

37) The difference of rate-sensitive liabilities and rate-sensitive assets is known as the A) duration. B) rate-risk index. C) gap. D) interest-sensitivity index.

C

39) If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to A) increase by $1.5 million. B) decline by $15 million. C) decline by $1.5 million. D) increase by $15 million. Rate-Sensitive: A - $20M L - $50M Fixed-Rate: A - $80M L - $50M

C

39) The Federal Reserve makes discount loans to banks, and similarly, the FHLBS makes loans to savings and loan institutions. The Fed loans are expected to be repaid ________ while the FHLBS loans are ________. A) quickly; to be repaid when the S&L becomes solvent B) when the market rebounds; of short duration C) quickly; for longer periods of time D) when the bank becomes solvent; to be repaid quickly

C

40) Thrift institutions include A) insurance companies. B) brokerage firms. C) mutual savings banks. D) commercial banks.

C

43) ________ are the only depository institutions that are tax-exempt. A) Savings and loans B) Mutual savings banks C) Credit unions D) Commercial banks

C

44) Mutual savings banks are primarily regulated by A) the FDIC. B) the National Credit Union Administration. C) the states in which they are located. D) the Federal Reserve.

C

44) One way for banks to reduce the principal-agent problems associated with trading activities is to A) reduce the regulations on the traders so that they have more flexibility in conducting trades. B) encourage traders to take on more risk if the potential rewards are higher. C) set limits on the total amount of a traders' transactions. D) make sure that the person conducting the trades is also the person responsible for recording the transactions.

C

45) Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the A) stress-testing approach. B) doomsday approach. C) value-at-risk approach. D) trading-loss approach. 5

C

47) U.S. banks have most of their branches in A) Mexico, the Middle East, the Caribbean, and London. B) South America, the Middle East, the Caribbean, and Canada. C) Latin America, the Far East, the Caribbean, and London. D) Latin America, the Middle East, the Caribbean, and London.

C

48) Traders working for banks are subject to the A) double-jeopardy problem. B) free-rider problem. C) principal-agent problem. D) exchange-risk problem.

C

48) ________ of a foreign bank operates in the U.S. but cannot accept deposits from domestic residents. A) A Basel branch B) A universal corporation C) An agency office D) A McFadden corporation

C

5) Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans. use B) fed funds. use C) discount loans. source D) fed funds. source

C

8) Secondary reserves include A) state and local government securities. B) deposits at other large banks. C) short-term U.S. government securities. D) deposits at Federal Reserve Banks.

C

1) Which regulatory body charters national banks? A) the Federal Reserve B) the U.S. Treasury C) the FDIC D) the Comptroller of the Currency

D

12) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet A) the liabilities of the bank increase by $800,000. B) the assets at the bank increase by $800,000. C) reserves increase by $160,000. D) the liabilities of the bank increase by $1,000,000.

D

17) When a new depositor opens a checking account at the First National Bank, the bank's assets ________ and its liabilities ________. A) decrease. increase B) decrease. decrease C) increase. decrease D) increase. increase

D

19) A financial innovation that developed as a result of banks avoidance of bank branching restrictions was A) junk bonds. B) money market mutual funds. C) commercial paper. D) bank holding companies.

D

19) When you deposit $50 in currency at Old National Bank A) its assets increase by less than $50 because of reserve requirements. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities decrease by $50. D) its liabilities increase by $50.

D

20) The presence of so many commercial banks in the United States is most likely the result of A) consumers' strong desire for dealing with only local banks. B) adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks. C) consumers' preference for state banks. D) prior regulations that restricted the ability of these financial institutions to open branches.

D

21) If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) reduce deposits by $3 million. B) repay its discount loans from the Fed. C) increase loans by $3 million. D) sell $3 million of securities that the bank currently owns.

D

25) The ability to use one resource to provide different products and services is A) economies of scale. B) diversification. C) vertical integration. D) economies of scope.

D

29) A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be reduced, will require borrowers to A) purchase the bank's CDs. B) place a bank officer on their board of directors. C) place a corporate officer on the bank's board of directors. D) keep compensating balances in a checking account at the bank.

D

3) The Second Bank of the United States was denied a new charter by A) Vice President John Calhoun. B) President John Q. Adams. C) President Benjamin Harrison. D) President Andrew Jackson.

D

30) A bank's commitment to provide a firm with loans up to pre-specified limit at an interest rate that is tied to a market interest rate is called A) pre-credit loan line. B) an adjustable portfolio loan. C) an adjustable gap loan. D) loan commitment.

D

32) In order to reduce the ________ problem in loan markets, bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones. A) moral suasion B) moral hazard C) adverse lending D) adverse selection

D

33) In a ________ banking system, commercial banks engage in securities underwriting, but legal subsidiaries conduct the different activities. Also, banking and insurance are not typically undertaken together in this system. A) universal B) short-fence C) compartmentalized D) British-style universal

D

33) Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. A) increase. screen B) reduce. increase C) increase. increase D) reduce. screen

D

34) As a result of the global financial crisis several of the large, free-standing investment banking firms chose to become bank holding companies. This means that they will now be regulated by A) the FDIC. B) the Treasury. C) the state banking authorities. D) the Federal Reserve.

D

35) Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans. A) moral suasion B) intentional fraud C) moral hazard D) adverse selection

D

36) If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits. A) fewer. an increase B) fewer. a surge C) more. a decline D) more. an increase

D

38) The FHLBS gives loans to S&Ls and thus performs a function similar to the ________ for commercial banks. A) U.S. Mint B) Office of the Comptroller of the Currency C) U.S. Treasury D) Federal Reserve

D

41) An essential characteristic of credit unions is that A) branching across state lines is prohibited. B) their lending is primarily for mortgage loans. C) they are typically large. D) they are organized for individuals with a common bond.

D

42) Because of an expected rise in interest rates in the future, a banker will likely A) make long-term rather than short-term loans. B) buy long-term rather than short-term bonds. C) make either short or long-term loans. expectations of future interest rates are irrelevant. D) buy short-term rather than long-term bonds.

D

47) Banks earn profits from off-balance sheet loan sales A) by foreclosing on delinquent accounts. B) by selling the loans at discounted prices. C) by calling-in loans before the maturity date. D) by selling existing loans for more than the original loan amount.

D

49) The spectacular growth in international banking can be explained by A) the creation of the World Trade Organization. B) the collapse of the Bretton Woods system. C) the 1988 Basel Agreement. D) the rapid growth in international trade.

D

5) The Federal Reserve Act of 1913 required that A) state banks be subject to the same regulations as national banks. B) state banks could not join the Federal Reserve System. C) national banks establish branches in the cities containing Federal Reserve banks. D) national banks join the Federal Reserve System.

D

50) Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by foreign banks in the U.S. has been A) completely eliminated. B) mildly expanded. C) greatly expanded. D) reduced.

D

6) Banks acquire the funds that they use to purchase income-earning assets from such sources as A) reserves. B) cash items in the process of collection. C) deposits at other banks. D) savings accounts.

D

7) Which of the following statements are TRUE? A) A bank's balance sheet indicates whether or not the bank is profitable. B) A bank's assets are its sources of funds. C) A bank's liabilities are its uses of funds. D) A bank's balance sheet shows that total assets equal total liabilities plus equity capital.

D

8) State banking authorities have sole jurisdiction over state banks A) that are not members of the Federal Reserve System. B) chartered in the 21st century. C) operating as bank holding companies. D) without FDIC insurance.

D

9) In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 3.5 percent; in the 1980s it fluctuated between ________ percent and ________ percent. A) 4; 18 B) 5; 10 C) 4; 11.5 D) 5; 15

D

9) Which of the following bank assets is the most liquid? A) U.S. government securities B) state and local government securities C) consumer loans D) reserves

D