Money and Banking Exam 2 Chapter 9

Asset transformation can be described as Select one: a. borrowing long and lending short. b. borrowing and lending only for the short term. c. borrowing and lending for the long term. d. borrowing short and lending long.

Asset transformation can be described as

A bank failure occurs whenever Select one: a. a bank cannot satisfy its obligations to pay its depositors and other creditors. b. a bank suffers a large deposit outflow. c. a bank refuses to make new loans. d. a bank has to call in a large volume of loans.

a. a bank cannot satisfy its obligations to pay its depositors and other creditors.

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans. Select one: a. adverse selection b. moral suasion c. moral hazard d. intentional fraud

a. adverse selection

Which of the following are reported as liabilities on a bank's balance sheet? Select one: a. checkable deposits b. reserves c. deposits with other banks d. consumer loans

a. checkable deposits

Banks that suffered significant losses in the 1980s made the mistake of Select one: a. failing to diversify their loan portfolio. b. holding too many liquid assets. c. holding only safe securities. d. minimizing default risk.

a. failing to diversify their loan portfolio.

When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms. Brown's bank ________ assets of $100 and ________ liabilities of $100. Select one: a. loses; loses b. gains; gains c. loses; gains d. gains; loses

a. loses; loses

Traders working for banks are subject to the Select one: a. principal-agent problem. b. free-rider problem. c. double-jeopardy problem. d. exchange-risk problem.

a. principal-agent problem.

Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets. Select one: a. reduces; reduces b. reduces; increases c. increases; increases d. increases; reduces

a. reduces; reduces

Net profit after taxes per dollar of assets is a basic measure of bank profitability called Select one: a. return on assets. b. return on equity. c. return on investment. d. return on capital.

a. return on assets.

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can Select one: a. sell $3 million of securities. b. increase loans by $3 million. c. repay its discount loans from the Fed. d. reduce deposits by $3 million.

a. sell $3 million of securities.

When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach. Select one: a. stress-test b. maximum value c. trading-loss d. value-at-risk

a. stress-test

Bank capital is equal to ________ minus ________. Select one: a. total assets; total liabilities b. total liabilities; total borrowings c. total liabilities; total assets d. total assets; total reserves

a. total assets; total liabilities

Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the Select one: a. value-at-risk approach. b. stress-testing approach. c. trading-loss approach. d. doomsday approach.

a. value-at-risk approach.

Of the following, which would be the last choice for a bank facing a reserve deficiency? Select one: a. Sell securities. b. Call in loans. c. Borrow from the Fed. d. Borrow from other banks.

b. Call in loans.

Which of the following statements are TRUE? Select one: a. Checkable deposits do not include NOW accounts. b. Checkable deposits are payable on demand. c. Checkable deposits are assets for the bank. d. Checkable deposits are the primary source of bank funds.

b. Checkable deposits are payable on demand.

Bank ________ is/are listed on the liability side of the bank's balance sheet. Select one: a. cash items b. capital c. securities d. reserves

b. capital

Which of the following are transaction deposits? Select one: a. certificates of deposit b. checkable deposits c. small-denomination time deposits d. savings accounts

b. checkable deposits

All of the following are nontransaction deposits EXCEPT Select one: a. small-denomination time deposits. b. checkable deposits. c. savings accounts. d. certificates of deposit.

b. checkable deposits.

From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem. Select one: a. moral hazard; diversification b. diversification; adverse selection c. diversification; moral hazard d. adverse selection; diversification

b. diversification; adverse selection

A bank is insolvent when Select one: a. its capital exceeds its liabilities. b. its liabilities exceed its assets. c. its assets exceed its liabilities. d. its assets increase in value.

b. its liabilities exceed its assets.

When banks offer borrowers smaller loans than they have requested, banks are said to Select one: a. raze credit. b. ration credit. c. rediscount the loan. d. shave credit.

b. ration credit.

Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. Select one: a. reduce; increase b. reduce; screen c. increase; screen d. increase; increase

b. reduce; screen

When banks involved in trading activities attempt to outguess markets, they are Select one: a. engaging in riskless arbitrage. b. speculating. c. forecasting. d. diversifying.

b. speculating.

Banks hold capital because Select one: a. it increases the likelihood of bankruptcy. b. they are required to by regulatory authorities. c. higher capital increases the returns to the owners. d. higher capital increases the return on equity.

b. they are required to by regulatory authorities.

First National BankAssetsLiabilitiesRate-sensitive$20 million$50 millionFixed-rate$80 million$50 million 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. Select one: a. 5 percent b. 15 percent c. 10 percent d. 25 percent

c. 10 percent

All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. Select one: a. a decline; reduce b. an increase; increase c. an increase; reduce d. a decline; not affect

c. an increase; reduce

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________. Select one: a. securities portfolio; non-deposit liabilities b. loan portfolio; deposit liabilities c. assets; liabilities d. assets; deposit liabilities

c. assets; liabilities

The amount of assets per dollar of equity capital is called the Select one: a. asset ratio. b. asset multiplier. c. equity multiplier. d. equity ratio.

c. equity multiplier.

Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. Select one: a. low; long-term b. high; long-term c. high; short-term d. low; short-term

c. high; short-term

Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of Select one: a. managing interest rate risk. b. liability management. c. liquidity management. d. managing credit risk.

c. liquidity management.

Because checking accounts are ________ liquid for the depositor than savings accounts, they earn ________ interest rates. Select one: a. less; lower b. less; higher c. more; lower d. more; higher

c. more; lower

In general, banks make profits by selling ________ liabilities and buying ________ assets. Select one: a. illiquid; liquid b. long-term; shorter-term c. short-term; longer-term d. risky; risk-free

c. short-term; longer-term

In the absence of regulation, banks would probably hold Select one: a. too much capital, making it more difficult to obtain loans. b. too much capital, reducing the efficiency of the payments system. c. too little capital. d. too much capital, reducing the profitability of banks.

c. too little capital.

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 Select one: a. $30,000. b. $40,000. c. $25,000. d. $50,000.

d. $50,000.

With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is Select one: a. $100. b. $110. c. $10. d. $90.

d. $90.

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. Select one: a. Selling loans b. Selling negotiable CDs c. Selling securities d. Calling in loans

d. Calling in loans

A bank with insufficient reserves can increase its reserves by Select one: a. buying municipal bonds. b. lending federal funds. c. buying short-term Treasury securities. d. calling in loans.

d. calling in loans.

First National BankAssetsLiabilitiesRate-sensitive$20 million$50 millionFixed-rate$80 million$50 million If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits (measured using gap analysis) will Select one: a. decline by $2.5 million. b. increase by $1.5 million. c. decline by $0.5 million. d. decline by $1.5 million.

d. decline by $1.5 million.

If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in Select one: a. deposits and loans. b. capital and reserves. c. capital and loans. d. deposits and reserves.

d. deposits and reserves.

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the Select one: a. interest-sensitivity index. b. rate-risk index. c. duration. d. gap.

d. gap.

Risk that is related to the uncertainty about interest rate movements is called Select one: a. security risk. b. default risk. c. the problem of moral hazard. d. interest-rate risk.

d. interest-rate risk.

The amount of checkable deposits that banks are required by regulation to hold are the Select one: a. excess reserves. b. vault cash. c. total reserves. d. required reserves.

d. required reserves.

Examples of off-balance-sheet activities include Select one: a. borrowing from other banks. b. selling negotiable CDs. c. extending loans to depositors. d. trading activities.

d. trading activities.

Holding large amounts of bank capital helps prevent bank failures because Select one: a. it makes it easier to call in loans. b. it makes loans easier to sell. c. it can be used to absorb the losses resulting from bad loans. d. it means that the bank has a higher income.

it can be used to absorb the losses resulting from bad loans.