EXAM 2 REVIEW

If the interest received on bank loans is 7%, the return on equity is 10%, and the interest paid on bank deposits is 4%, a bank's interest-rate spread is: A. 3% B.4% C. 7% D.10%

A

Since the 1930s, the number of commercial banks has: A. Decreased as small unit banks have been replaced with branch banking B. Increased as the number of banks with branches has increased C. Increased due to the growth of state chartered banks D. Remained constant due to the number of ATMs

A

Which of the following is a bank liability? A. Mortgage loans B. Demand deposits C. Reserves D. U.S. Treasury securities

B

A bank that makes most of its long-term loans at adjustable interest rates is: A. Reducing both interest rate and credit risk B. Reducing credit risk and increasing interest-rate risk C. Increasing credit risk and reducing interest rate risk D. Increasing both interest-rate and credit risk

C

Everything else equal, if the ratio of bank assets to bank capital (leverage) increases, the bank's return on equity should: A. Remain constant B. Decrease C. Increase D. Cannot be determined from the information provided

C

One negative consequence of regulatory competition is: A. It is expensive B. Financial institutions are over regulated at a cost to customers C. Financial institutions often seek out the most lenient regulator D. It minimizes competition

C

Over the past half century, the proportion of banks' total assets held as securities has: A. Increased B. Decreased C. Remained about the same D. Not changed because securities are not a part of bank assets

C

A bank that makes most of its long-term loans at adjustable interest rates is: A. Reducing both interest rate and credit risk B. Increasing credit risk and reducing interest rate risk C. Reducing credit risk and increasing interest-rate risk D. Increasing both interest-rate and credit risk

B

Considering a bank's balance sheet, which of the following statements is true? A. Total Bank Assets= Total Bank Capital - Total Bank Liabilities B. Total Bank Assets= Total Bank Liabilities+ Total Bank Capital C. Total Bank Assets+ Total Bank Capital= Total Bank Liabilities D. Total Bartle Assets+ Total Bank Liabilities= Total Bank Capital

B

During a bank crisis: A. Officials at the Federal Reserve find it easy to sort out solvent from insolvent banks B. It is important for regulators to be able to distinguish insolvent from illiquid banks C. It is easy to determine the market prices of bank's assets D. A bank will go to the central bank for a loan before going to other banks

B

During the financial crisis of2007-2009 in the United States it was revealed that the function of a lender of last resort had not kept pace with the evolving financial system because: A. financial intermediaries had grown sufficiently large so as not to need a lender of last resort B. shadow banks lacked access to the financial capital available through the lender of last resort C. banks were sufficiently linked to one another that the need for a lender of last resort had diminished D. banks had become sufficiently diversified so as to be able to provide for their own liquidity

B

Economies of scale associated with financial intermediaries means: A. The total cost of handling transactions rises as more transactions are handled B. The cost per transaction falls as a larger volume of similar transactions are handled C. The cost per transaction increases as more transactions are handled D. The cost per transaction decreases regardless of the size of the transaction

B

Everything else equal, if a bank's leverage (ratio of bank assets to bank capital) decreases, the bank's return on equity (ROE) and risk should: A. Remain constant B. Both ROE and risk decrease C. Both ROE and risk increase D. ROE increases but risk decreases

B

Fannie Mae, Ginnie Mae, and Freddie Mac are examples of: A. Private regulatory bodies that supervise home mortgage lenders B. Government-sponsored enterprises chartered to encourage home lending C. Government-sponsored enterprises that were chartered to encourage small business loans D. Government-sponsored enterprises that provide homeowners insurance to people who cannot obtain it from private insurers

B

A bank that does not want to hold a lot of excess reserves but wants to manage liquidity risk is likely to: A. Hold a lot in highly liquid securities B. Make sure that most of its assets are in small business loans C. Have a high ratio of loans to securities D. Limit withdrawals by customers

A

A bank's Return on Equity (ROE) is calculated by: A. Dividing the bank's net profit after taxes by the bank's capital B. Dividing the banks liabilities by the bank's capital C. Taking the bank's assets plus the net profit after taxes and dividing this sum by the bank's capital D. Dividing the bank's net profit after taxes by the sum of the bank's assets and its liabilities

A

A late-night news report says the president of a local bank is about to be arrested for embezzling money from the bank at which he works. This causes most of the depositors to line up in front of the bank the next morning wanting to withdraw their deposits. This is an example of: A. Liquidity risk B. Operational risk C. Interest rate risk D. Credit risk

A

If a bank has $150 million in assets and a net worth of $20 million, its asset-to-equity ratio is: A. 6.5 to 1 B. 7.5 to 1 C. 0.13 to 1 D. 0.15 to 1

B

One of the unique problems that banks face is: A. They hold liquid assets to meet illiquid liabilities B. They hold illiquid assets to meet liquid liabilities C. They hold liquid assets to meet liquid liabilities D. Both their assets and their liabilities are illiquid

B

Bank capital is the cushion banks have against: A. Sudden drops in the value of their assets B. An unexpected decrease in liabilities C. Systemic risk D. Moral hazard

A

Commercial hanks increased their investment in mortgages over the years due to: A. The ability to securitize mortgages which made them more liquid B. The demands ofregulators C. The increase in commercial loans demanded due to the development of the commercial paper market D. The reduced risk of borrowers' defaulting on mortgage loans

A

One way for a bank to deal with credit risk is to: A. Charge all borrowers from the same industry an average rate for that industry B. Add a risk premium to the cost of funds for a specific borrower based on the borrower's credit history C. Avoid making loans to borrowers from a broad spectrum and specialize geographically and in specific industries D. Limit the number ofloans made in any year

B

The 1988 Basel Accord is: A. A basic set of operating guidelines a bank can choose to follow B. A set of guidelines for basic capital requirements for internationally active banks C. An agreement between state and federal regulators to have one set of merger guidelines for all banks D. A set of guidelines applied only to international banks operating with U.S. boundaries

B

Contagion is: A. The failure of one bank spreading to other banks through depositors withdrawing of funds B. The phenomenon that if one bank loan defaults it will cause other bank loans to default C. The rapid contraction of investment spending that occurs when interest rates are increased by the Federal Reserve D. The rapid inflation that results from the printing of money

A

The Bank Holding Company Act of 1956: A. Significantly broadened the scope of what bank holding companies could do B. Limited bank holding companies to operating only within their chartered state C. Limited the scope of bank holding companies in terms of services offered D. Repealed the McFadden Act of 1927

A

The Federal Deposit Insurance Corporation (FDIC) was created: A. In 1933 as a part of the Glass-Steagall Act B. When the Federal Reserve was created in 1914 C. Prior to the stock market crash of 1929 D. In 1927 as a part of the McFadden Act

A

The Glass-Steagall Act of 1933: A. Required commercial banks to be separate from investment banking operations B. Eliminated the FDIC C. Required federally chartered banks to meet the branching restrictions of the states D. Required all state banks to get federal charters

A

The creation of the Federal Reserve in 1913: A. Provided the opportunity to be lender of last resort but not the guarantee that it would be used B. Guaranteed the Federal Reserve would always prevent financial crises C. Eliminated bank panics in the U.S D. Was in response to the Great Depression in the U.S

A

The financial crisis in the United States in 2007-2009 brought about all but which of the following changes: A. an increase in the number of unit banks B. an increase in the deposit share of the top four US commercial banks C. the placement of the two government-sponsored enterprises for housing finance into conservatorship D. a run on money-market mutual funds

A

The reasons for the government to get involved in the financial system include each of the following, except: A. To protect the bank's monopoly position B. To protect investors C. To ensure the stability of the financial system D. To protect bank customers from monopolistic exploitation

A

The risk that depositors will suddenly withdraw funds is known as: A. Liquidity risk B. Credit risk C. Interest-rate risk D. Trading risk

A

The weighted average difference between the interest received on assets and the interest rate paid for liabilities for a bank is the banks: A. Interest rate spread B. Net interest margin C. Net interest income D. Return on equity

A

Under the purchase-and-assumption method of dealing with a failed bank, the FDIC: A. Finds another bank to take over the insolvent bank B. Takes over the day to day management of the bank C. Sells the failed bank to the Federal Reserve D. Sells off the profitable loans of the failed bank in an open auction

A

When a bank takes savings from many small savers and lends it to many borrowers, the bank: A. Decreases the risk to savers through diversification B. Increases the risk to borrowers through high transaction costs C. Decreases the risk to savers through economies of scale D. Decreases the return to savers and increases the cost to borrowers

A

Which of the following is an example of the economies of scope argument for increased profits for large financial holding companies? A. Financial holding companies offer a wide array of services under one name B. Financial holding companies need only one CEO, one Board of Directors, and one accounting system so administrative costs are reduced C. Financial holding companies are well diversified so risk is reduced D. The profitability of financial holding companies does not rely on one particular line of business

A

The Gramm-Leach-Bliley Act: A. Repealed the Reigle-Neal Interstate Banking and Branching Efficiency Act B. Repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms C. Repealed the McFadden Act's restriction on bank branching D. Reinforced the Glass-Steagall Act's limitation on commercial banks' availability to merge with insurance or securities firms by increasing the penalties for doing so

B

The government's too-big-to-fail policy applies to: A. Certain highly populated states where a bank run impacts a large percent of the total population B. Large banks whose failure would certainly start a widespread panic in the financial system C. Large corporate payroll accounts held by some banks where many people would lose their income D. Banks that have branches in more than two states

B

Which of the following is an example of the economies of scale argument for increased profits for large financial holding companies? A. Financial holding companies offer a wide array of services under one name B. Financial holding companies need only one CEO, one Board of Directors, and one accounting system so administrative costs are reduced C. Financial holding companies are well diversified so risk is reduced D. The profitability of financial holding companies does not rely on one particular line of business

B

Which of the following is not a role of a financial institution acting as a financial intermediary? A. Pooling the resources of small savers B. Formulating oversight regulations C. Providing ways to diversify risk D. Supplying liquidity

B

The financial crisis of 2007-2009 has made which of the following macro-prudential regulatory goals a top priority: A. disclosure of accounting information B. minimum deposit requirements for FDIC coverage C. avoidance of systemic risk D. promotion of competition

C

The financial system is inherently more unstable than most other industries due to the fact that: A. While in most other industries customers disappear at a faster rate, in banking they disappear slowly so the damage is done before the real problem is identified B. Banks deal in paper profits, not in real profits C. A single firm failing in banking can bring down the entire system; this isn't true in most other industries D. There is less competition than in other industries

C

The major source of funds for commercial bank lending is: A. Borrowing of federal funds in the inter-bank market B. Borrowing from the Federal Reserve C. Customers' deposits D. Overnight repurchase agreements

C

When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by: A. Taking over the lender of last resort function and assigning this function to the U.S. Treasury B. Ordering the printing of tens of billions of dollars of additional currency C. Creating the FDIC and offering deposit insurance D. Declaring a bank holiday and closing banks for 30 days

C

Which of the following statements best completes the following statement: "Over the past 30 years, the percentage(s) of assets for all financial intermediaries... "? A. controlled by banks has decreased as has the percentage for mutual funds while insurance companies have increased their percentage B. controlled by insurance companies and mutual funds has decreased and the percentage controlled by banks has increased C. controlled by banks and insurance companies has decreased while the percentage controlled by mutual funds and pensions has increased D. controlled by banks, insurance companies, mutual funds and pensions have all increased

C

Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because: A. Customers will not want to obtain loans from this bank B. The rumors will cause people to not want to deposit in this bank C. Regulators will scrutinize the bank heavily looking for something wrong D. Depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have sufficient liquid assets on hand

D

Suppose that a bank initially has a leverage ratio of 8 to 1. If this bank increases its capital by $10 million and its assets by $1 million, then the bank's: A. Risk increases and its leverage decreases B. Liabilities decrease and its leverage increases C. Leverage decreases and its liabilities increase D. Leverage and risk decrease

D

Suppose that a bank initially has a leverage ratio of 8 to 1. If this bank increases its capital by $1million and its assets by $10 million, then the bank's: A. Risk increases and its leverage decreases B. Liabilities decrease and its leverage increases C. Leverage decreases and its liabilities increase D. Leverage and risk increases

D

The federal government is concerned about the health of the banking system for many reasons, the most important of which may be: A. Banks buy all of the government bonds available B. A significant number of people are employed in the banking industry C. Many people earn the majority of their income from interest on bank deposits D. Banks are of great importance in enabling the economy to operate efficiently

D

The government's providing deposit insurance and functioning as the lender of last resort has significantly: A. Decreased the incentive for bank managers to take on risk B. Increased the amount of regulation of banks required, but has had no effect on bank's incentive to take on risk C. Increased the incentive for banks to take on risk, but has had no effect on the amount of regulation of banks required D. Increased the amount of regulation of banks required and increased the incentive for banks to take on risk

D

Banks do not hold a lot of their assets in the form of cash mainly because of: A. Regulation B. The fear of being robbed C. The opportunity cost of holding cash; cash does not earn interest D. It can encourage employee theft

C

In today's world, the goal of financial stability means: A. No institution should fail B. Competition should be eliminated C. Preventing large-scale financial catastrophes D. Creating one mega regulatory agency

C

One reason financial intermediaries earn profits is because: A. Individuals are not aware of the true cost of using an intermediary B. Financial intermediaries are charging for services people do not value C. Individuals are willing to pay for the reduction in transaction costs financial intermediaries provide D. They raise the cost of transactions and pass these higher costs on to customers

C

The actual results of the McFadden Act included: A. Increased efficiency of banking across the country B. A tight network of interconnected banks across the country C. A safety net that allowed small inefficient banks to continue to operate D. The elimination of banking monopolies

C

The dual banking system in the U.S. today refers to: A. A bank's ability to issue checking and saving accounts B. A bank's ability to own another financial institution C. The ability of banks to be either federally or state chartered D. A deposit institution's decision to be either a bank or a savings and loan

C

The federal funds market: A. Is the term used for bank lending to the Federal Reserve System B. Is the lending to banks by the U.S. treasury when banks face liquidity emergencies C. Is the inter-bank market where excess reserves from one bank can be loaned to another bank D. Is the borrowing by American banks from foreign lenders

C

Considering the balance sheet for all commercial banks in the U.S., the largest category of assets is: A. Cash items B. U.S. Government Securities C. Required reserves D. Loans

D

Deflation can cause widespread bank crises for all of the following reasons except: A. A decline in the value of borrowers' net worth but not their liabilities B. Borrowers' default rates increase C. Bank balance sheets deteriorate as the level of economic activity decreases D. Information asymmetry problems decrease during deflationary periods

D

During the period 1980 -2009, commercial bank assets in the U.S.: A. Exhibited an increasing proportion of real estate loans relative to the total B. Exhibited an increasing proportion of commercial and industrial loans relative to the total C. Exhibited a decreasing proportion of cash relative to the total D. A and C

D

In 2008, interbank lending rates soared more than 3% after Lehman Bros declared bankruptcy. This is an example of: A. A financial panic causing a 'run' by depositors concerned about liquidity B. A failure of the Federal Reserve to act as the lender of last resort C. Contagion spreading across financial institutions due to asymmetric information D. A and C

D

Prior to the Civil War most state banks issued their own banknotes. This resulted in all of the following problems except: A. Their values decreased as the holder moved further from the bank B. They were worthless if the bank failed C. They were not efficient as a means of payment if the holder was far from the bank D. They were convertible into Federal Reserve Notes

D