Winter Econ Exam 2

Because ________ are less liquid for the depositor than _______, they earn higher interest rates (2)

Passbook savings; checkable deposits

The most important advantage of discount policy is that the Fed can use it to

Perform its role as lender of last resort

The Second Bank of the United States was denied a new charter by

President Andrew Jackson

Credit cards date back to

Prior to the second World War

The McFadden Act of 1927

Prohibited banks from branching across state lines

Banks hold excess and secondary reserves to

Provide for deposit outflows

Moral hazard is an important concern of insurance arrangements because the existence of insurance

Provides increased incentives for risk taking

If the FDIC decides that a bank is too big to fail, it will use the ______ method, effectively ensuring that ______ depositors will suffer loses

Purchase and assumption; no

The Argentine banking crisis of 2001 resulted from banks in that nation being required to

Purchase large amounts of government debt

What is the disadvantage of quantitative easing as an alternative to conventional monetary policy when short-term interest rates are at the zero lower-bound?

Quantitative easing may not actually have the effect of increasing economic activity

Why do equity holders care more about ROE than about ROA

ROE measures how much equity holders are earning, while ROA measures how efficiently the bank is being run

When banks offer borrowers smaller loans than they have requested, banks are said to

Ration credit

A $5 million deposit outflow from a bank has the immediate effect of

Reducing deposits and reserves by $5 million

According to Edward Kane, because the banking industry is one of the most ______ industries in America, it is an industry in which ______ is especially likely to occur

Regulated; loophole mining

Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government _________

Regulation

What bank regulation is NOT designed to reduce moral hazard problems created by deposit insurance?

Regulation-Q

The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is known as

Regulatory arbitrage

Politicians and regulators __________, thereby increasing the cost of the S&L bailout

Relaxed capital standards, removed restrictions on holdings of risky assets, and engaged in regulatory forbearance

Although neither ______ nor the ______ is officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee

Reserve requirements; discount rate

Which of the following are reported as assets on a bank's balance sheet?

Reserves

Which of the following bank assets is the most liquid?

Reserves

If a bank depositor withdraws $1,000 of currency from an account, what happens to reserves, checkable deposits, and the monetary base? Assume that the required reserve ratio on checkable deposits is 10% and banks do not hold any excess reserves

Reserves fall by $1,000, checkable deposits fall by $10,000, and the monetary base remains unchanged

Why is it important for the U.S. government to have resolution authority

Resolution authority allows the government to quickly takeover a failing firm

Provisions in loan contracts designed to mitigate the moral hazard problem are called

Restrictive covenants

Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called

Restrictive covenants

Net profit after taxes per dollar of assets is a basic measure of bank profitability called

Return on assets

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called

Return on equity

Following the global financial crisis in 2008, assets on the Federal Reserve's balance sheet increased dramatically, from approximately $800 billion at the end of 2007 to $3 trillion in 2011

Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to reduce its balance sheet, thus DECREASING THE MONEY SUPPLY and RAISING SHORT-TERM INTEREST RATES

An open market purchase would shift the supply curve to the ____ and cause the federal funds rate to ____

Right; fall

How could higher deposit insurance premiums for banks with riskier assets benefit the economy?

Risk-based premiums would help mitigate the moral hazard problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are

The Basel Accord, an international agreement, requires banks to hold capital based on

Risk-weighted assets

Banks acquire the funds that they use to purchase income-earning assets from such sources as

Savings accounts

Because of the abuses by state banks and the clear need for a central bank to help the federal government raise funds during the War of 1812, Congress created the

Second Bank of the United States in 1816

Both ______ and ______ are Federal Reserve assets

Securities; loans to financial institutions

______ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans

Securitization

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can

Sell $3 million of securities

Examples of off-balance-sheet activities include

Selling loan portfolios

All of the following are examples of off-balance sheet activities that generate fee income for banks except

Selling negotiable CDs

One way for banks to reduce the principal-agent problems associated with trading activities is to

Set limits on the total amount of a trader's transactions

Which of the following functions is NOT performed by the twelve Federal Reserve Banks?

Setting the reserve requirement

Experts predict that future trends in the U.S. banking industry will lead to

Several thousand banks

Eliminating the Fed's independence might lead to a more pronounced political business cycle because a politically exposed Fed would be more concerned with

Short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election

Secondary reserves include

Short-term Treasury securities

In general, banks make profits by selling ______ liabilities and buying ______ assets

Short-term; longer-term

Bruce the Bank Manager can reduce interest rates by ______ the duration of the bank's assets to increase their rate sensitivity or, alternatively, _______ the duration of the bank's liabilities

Shortening; lengthening

The share of checkable deposits in total bank liabilities has

Shrunk over time

Why has the trend in bank supervision moved away from a focus on capital requirements to a focus on risk management?

Since capital requirements do not effectively indicate whether banks are taking on too much risk, risk management allows supervisors to focus more on risk-taking procedures and thus may prevent insolvency in the future

Despite the important role that the Board of Governors has in setting monetary policy, seats to serve on the Board of Governors can sometimes be empty for several years. How could this happen?

Since members of the Board of Governors are appointed by the president and confirmed by the senate, these seats may remain vacant due to the arduous and lengthy political approval process that candidates must endure

The money multiplier when people hold currency and when banks hold excess reserves is ________ the simple multiplier (the multiplier found when currency held and excess reserves are both zero)

Smaller than

When investors are involved in trading activities in an attempt to outguess markets, investors are:

Speculating

Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks? Non-Federal Reserve member state banks:

State banking authorities

Higher Capital requirements will reduce the problems incurred when troubled _______ which had been off-balance sheet activities come back on the balance sheet

Structured investment vehicles (SIVs)

If a foreign bank operates a subsidiary bank in the U.S., the subsidiary bank is

Subject to the same regulations as a U.S. owned bank

Bank holding companies that rival money center banks in size but are not located in money center cities are known as

Superregional banks

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

Sweep account

The business term for economies of scope is

Synergies

The S&L crisis can be analyzed as a principal-agent problem. The principals in this case, the ______, did not have the same incentive to minimize cost to the economy as the agents, the ______

Taxpayers; Politicians/regulators

Sweep accounts which were created to avoid reserve requirements became possible because of a change in

Technology

In the ten year period 1981-1990, 1202 commercial banks were closed, with a peak of 206 failures in 1989. This rate of failures was approximately ______ times greater than that in the period from 1934 to 1980

Ten

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of _____ percent

Ten

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is

That the FDIC guarantees all deposits when it uses the "purchase and assumption" method

Which of the following statements regarding Federal Reserve independence is incorrect?

The 14-year non-renewable terms for governors effectively insulate the Board of Governors from political pressure

Agreements such as _____ are attempts to standardize international banking regulation

The Basel Accord

Which of the following entities in the Federal Reserve System controls the discount rate?

The Board of Governors

Which of the following entities in the Federal Reserve System sets reserve requirements?

The Board of Governors

Which of the following is a correct statement about the Dodd-Frank Act of 2010?

The Dodd-Frank Act created a new independent agency -- the Consumer Financial Protection Bureau -- that is funded and housed within the Federal Reserve

Which is more independent, the Federal Reserve or the European Central Bank? Why?

The European Central Bank -- its charter cannot be changed through legislation, making it more independent than the Federal Reserve

In May 1991, the FDIC announced that it would sell the government's stake in Continental Illinois, a bank that it had rescued in 1984. Why did the FDIC initially take control of Continental Illinois, rather than liquidate it?

The FDIC believed that Continental Illinois was too big to fail

Which of the following entities in the Federal Reserve System directs open market operations?

The FOMC

If the Federal Reserve has a specific mandate from Congress to achieve "maximum employment and low, stable prices," then how does the Fed have goal independence?

The Fed is free to interpret exactly what these objectives mean

"Discount loans are no longer needed because the presence of the FDIC eliminates the possibility of bank panics." Why is this statement false?

The Fed uses discounting to keep bank failures from spreading

The Fed is the most independent of all US government agencies. What is the main difference between it and other government agencies that explains the Fed's greater independence?

The Fed's source of revenue is free from the appropriations process

The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within

The Federal Reserve

The federal agencies that examine banks include

The Federal Reserve System

How does the Federal Reserve have a high degree of instrument independence?

The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives

The legislation overturning the Glass-Steagall Act is

The Gramm-Leach-Bliley Act

The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of

The National Bank Act of 1863

Federally chartered banks are supervised by

The Office of the Comptroller of the Currency

The legislation that overturned the prohibition on interstate banking is

The Riegle-Neal Act

Under the Gramm-Leach-Bliley Act the oversight of the securities activities of bank holding companies belongs to

The SEC

What country is given credit for the birth of the Eurodollar market?

The Soviet Union

The players in the money supply process include all of the following except

The Treasury

When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bank's final balance sheet

The assets at the bank increase by $1 million

A bank finds that its ROE is too low because it has too much bank capital. Which of the following will NOT raise its ROE?

The bank can sell part of its holdings of securities and hold more excess reserves

A bank has a required reserve ratio of 10%. If the bank has deposits of $100,000 and is holding $12,000 in reserves

The bank is holding $2,000 in excess reserves

The development of money market mutual funds contributed to the growth of _____ since the money market mutual funds need to hold liquid, high-quality, short-term assets

The commercial paper market

The most important developments that have reduced banks cost advantages in the past thirty years include

The competition from money market mutual funds

With lack of solid information about financial conditions, the failure of one bank can lead to runs on other banks. This is known as

The contagion effect

Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been

The creation of the FDIC

Which of the following does NOT explain the poor performance of thrift regulators in the 1980s?

The determination of Congress to protect taxpayers from the unsound banking practices of managers at many of the nations savings and loans

The most significant change in the economic environment that changed the demand for financial products in recent years has been

The dramatic increase in the volatility of interest rates

Which of the following is a main provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989

The establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts

Reasons for holding Eurodollars include

The fact that dollars are widely used to conduct international transaction

Prior to 1980, member banks left the Federal Reserve System due to

The high cost of required reserves

Why have banks been losing cost advantages in acquiring funds in recent years?

The increased cost of funds from higher interest rates and the abolishment of Regulation Q

Prior to 2008, the bank's cost of holding reserves equaled

The interest earned on loans times the amount on reserves

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, the bank's final balance sheet

The liabilities of the bank increase by $1,000,000

When the zero-lower-bound problem occurs, central banks can rely on

The liquidity provision

Measuring the sensitivity of bank profits to change in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called

The maturity bucket approach to gap analysis

The sum of the Fed's monetary liabilities and the U.S. Treasury's monetary liabilities is called

The monetary base

Predict what will happen to the money supply if there is a sharp rise in the currency ratio

The money supply falls

If the economy starts to boom and loan demand picks up, what do you predict will happen to the money supply?

The money supply will increase

Which of the following is NOT a motivation for the original Glass-Steagall Act in 1933?

The need to further consolidate the banking industry and securities industry

The principal-agent problem that exists for bank trading activities can be reduced by

The physical separation of trading activities from bookkeeping activities.

A dilemma challenging the existing structure of the European Central Bank (ECB) has been brought on by

The possibility of expanding membership in the Eurosystem

Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?

The presence of overnight loan markets reduces the costs associated with deposit outflows

The spectacular growth in international banking can be explained by

The rapid growth in international trade

Which of the following is NOT part of the checks and balances of the Federal Reserve System?

The requirement that all depository institutions keep deposits at the fed

What is the primary tool that Congress uses to exercise some control over the Fed?

The threat that Congress will acquire greater control over the Fed's finances and budget

The fact that hundreds of S&Ls were not examined even once in the period January 1984 through June 1986 can be explained by

The unwillingness of Congress to allocate the necessary funds to thrift regulators

Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central bank, as in other countries?

The writers of the Federal Reserve Act wanted to ensure the Fed's power was not centralized in a single location

Why is there only one U.S. bank among the ten largest banks in the world? (2)

There is more competition among banks in the United States, which keeps U.S. banks smaller

The money multiplier declined significantly during the period of 1930 - 1933 and also during the recent financial crisis of 2008 - 2010. Yet the M1 money supply decreased by 25% in the Depression period but increased more than 20% during the recent financial crisis. What explains the difference in outcomes?

There was a significant increase in the monetary base during the financial crisis

In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as "breaking the buck." This means that

They could no longer afford to redeem shares at the par value of $1

What has been the likely effect of the Gramm-Leach-Bliley Act on financial consolidation?

This legislation further stimulated financial consolidation of the banking industry. Thus, more financial mergers are likely to occur, which will increase both the size and complexity of financial institutions in the future

Because _______ are less liquid for the depositor than _______, they earn higher interest rates

Time deposits; passbook savings

If a banker expects interest rates to fall in the future, her best strategy for the present is

To increase the duration of the bank's assets

The primary reason for the creation of the Federal Reserve System was

To reduce or eliminate future bank panics

In the absence of regulation, banks would probably hold

Too little capital

Bank capital is equal to _____ minus ______

Total assets; Total liabilities

The Volcker Rule addresses the off-balance-sheet problem involving

Trading risks

The largest percentage of banks' holdings of securities consist of

Treasury and government agency securities

"The federal funds rate can sometimes be above the discount rate." T/F?

True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma

If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today. T/F?

True. Higher inflation helped raise interest rates, which caused the disintermediation process to occur and helped create money market mutual funds

Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has _____ million dollars in vault cash

Two

Why is there only one U.S. bank among the ten largest banks in the world?

U.S. banks are more heavily regulated than foreign banks, thus limiting the number of mergers in the United States. With fewer mergers and bank consolidation, U.S. banks are less dominant in world markets

Should the Federal Reserve redraw its district boundaries, similar to how congressional districts are periodically realigned?

Uncertain. This would required Congress to rewrite the Federal Reserve Act, which could create opportunities for political interests to interfere with the monetary policy

In a ______ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity

Universal

Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the

Value-at-risk approach

Total reserves minus bank deposits with the Fed equals

Vault cash

Excess reserves are equal to

Vault cash plus deposits with Federal Reserve banks minus required reserves

In order to ensure that borrowers have an ability to repay residential mortgages, the new consumer protection legislation requires lenders to do all of the following except

Verify that the borrower can read and understand a loan contract

The declining cost of computer technology has made ______ a reality

Virtual banking

In May 1991, the FDIC announced that it would sell the government's final 26% stake in Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois

Was too big to fail

Prior to 1863, all commercial banks in the United States

Were chartered by the banking commission of the state in which they operated

Everything else held constant, in the market for reserves, increases in the DISCOUNT RATE affect the federal funds rate

When the funds rate equals the discount rate

A major controversy involving the banking industry in its early years was

Whether the federal government or the states should charter banks

The analysis of the political economy of the savings and loan crisis provides an understanding of

Why thrift regulators willingly accommodated pressures placed upon them by members of Congress

Do disclosure requirements help limit excessive risk taking by banks?

Yes. Disclosure requirements better enable depositors to evaluate and monitor financial institutions and thus act as a deterrent to excessive risk taking

If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, what actions can you take to keep your bank from failing?

You can call in or sell off loans You can go to the discount window You can borrow reserves in the federal funds market (Any of the above)

If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans?

You would want to make short-term loans so you can reinvest the funds at higher interest rates after their maturity

The Federal Deposit Insurance Corporation Improvement Act of 1991 (2)

required the FDIC to establish risk-based deposit insurance premiums

Federal deposit insurance covers deposits up to $250,000, but as part of a doctrine called "too-big-to-fail" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses the

"Purchase and assumption" method

A bank has $200,000 of checkable deposits and a required reserve ratio of 20 percent. The bank currently holds $160,000 in reserves. How much of these reserves are excess reserves?

$120,000

The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to

$250,000

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

$50,000

If the required reserve ratio on checkable deposits increases to 20%, how much multiple deposit creation will take place when reserves are increased by $100? Assume that banks do not hold any excess reserves and the public's holdings of currency do not change

$500

Suppose $10,000 is deposited at a bank. The required reserve ratio is 5 percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the bank's total loans?

$9,500

Why is being nosy a desirable trait for a banker?

-A banker determines credit risk by learning as much as possible about potential borrowers -A banker has to screen out good credit risks from bad credit risks -To reduce moral hazard, a banker must continually monitor borrowers to ensure that they are complying with restrictive loan covenants (all of the above are correct)

A bank almost always insists that the firms it lends to keep compensating balances at the bank. Why?

-Compensating balances help establish long-term customer relationships, which make it easier for the bank to collect information about prospective borrowers, thus reducing the adverse selection problem -Compensating balances help the bank monitor the activities of a borrowing firm, which reduces the moral hazard problem -Compensating balances can act as collateral

The Board of Governors of the Federal Reserve System

-Establishes, within limits, reserve requirements -Effectively sets the discount rate -Sets margin requirements (all of the above)

The European system of central banks uses similar monetary policy tools to that of the Federal reserve. These tools involve

-Open market operations -Lending to banks -Reserve requirements (All of the above are correct)

Why are repurchase agreements used to conduct most short-term monetary policy operations, rather than simply buying and selling securities outright?

-Repurchase agreements are temporary open market purchases that can be reversed -Repurchase agreements allow the Fed to easily adjust open market operations in response to daily conditions (A and B)

How did competitive forces lead to the repeal of the Glass-Steagall Act's separation of the banking and securities industries

-The Fed allowed bank holding companies to enter the underwriting business -The Act's restrictions put American banks at a competitive disadvantage relative to foreign banks -Financial innovation motivated banks and other financial institutions to bypass the intent of the Glass-Steagall Act

The monetary base is affected by

-The Federal Reserve through open market operations -The Federal Reserve through its extension of discount loans -Float and Treasury deposits at the Federal Reserve (All of the above)

Why might the procyclical behavior of interest rates (rising during business cycle expansions and falling during recessions) lead to procyclical movements in the money supply?

-The excess reserves ratio e falls with rising interest rates and the money supply rises when e falls -Discount loan borrowing is positively related to interest rates and the money supply is positively related to the level of discount loans from the Fed (both A and C)

What are the advantages of interstate banking?

-There is a convenience factor for bank customers -There is increased efficiency in the banking industry -Interstate banking creates geographical diversification of bank loan portfolios

Why does the United States operate under a dual banking system?

-There is skepticism of centralized power in the U.S. banking system -Federally chartered banks help to stabilize the banking system and are less prone to failure

What are the disadvantages of interstate banking?

-There may be a decrease in competition as small banks may fail -Interstate lending may cause a reduction in lending to small businesses -There may be increased risk from expanding into new geographical markets

Open market operations as a monetary policy tool have the advantage that

-They occur at the initiative of the Fed -They are easily reversed if mistakes are made -They are flexible and precise (all of the above)

In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy?

-Through their administration of the discount facilities at each bank -By having five of their presidents sit on the FOMC -By having members serve on the Federal Advisory Council (All of the above)

The M2 money multiplier increases in value when the

-Time deposit ratio (t) increases -Money market fund ratio (mm) increases (A and B are correct)

Under 100% reserve banking, the money multiplier will be

1

Rank in order of liquidity

1) Reserves 2) Securities 3) Commercial Loans 4) Physical Capital

The FDIC must take steps to close down banks whose equity capital is less than _____ of assets

2%

In recent years the interest paid on checkable and time deposits have accounted for around _______ of total bank operating expenses, while the costs involved in servicing accounts have been approximately _______ of operating expenses

25 percent; 50 percent

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

5; 15

There are _____ members of the Board of Governors of the Federal Reserve System

7

The Basel Accord requires banks to hold as capital an amount that is at least ______ of their risk-weighted assets

8%

Foreign banks may engage in banking activities in the United States by opening all of the following except

A McFadden Corporation

A bank failure occurs whenever

A bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements

A bank failure is less likely to occur when

A bank has more bank capital

Which of the following statements are true?

A bank's balance sheet shows that total assets equal total liabilities plus equity capital

A debit card differs from a credit card in that

A credit card is a loan while for a debit card purchase, payment is made immediately

If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then

A decrease in interest rates will reduce bank profits

The fall in the supply curve is caused by

A decrease in the discount rate

During the holiday season when the public's holdings of currency increase, what defensive open market operations typically occur?

A defensive open market purchase

If the Treasury has just paid a large bill to defense contractors and as a result its deposits with the Fed fall, what defensive open market operations will the manager of the open market desk undertake?

A defensive open market sale

A reason why rogue traders have bankrupt their banks is due to

A failure to maintain proper internal controls

An instrument developed to help investors and institutions hedge interest-rate risk is

A financial derivative

The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is

A futures contract

The many regional Federal Reserve banks resulted from a compromise between parties favoring

A private central bank and those favoring a government institution

Deposit insurance has not worked well in countries with

A weak institutional environment

Why have banks been losing income advantages on their assets in recent years

A&C- Securitization has enabled other financial institutions to originate loans, taking away some of the banks' loan business -The growth of the commercial paper market and the development of the junk bond market have given corporations alternatives to borrowing funds from banks, thus eroding the competitive advantage of banks on the lending side

As financial intermediaries, banks

Accept deposits and make loans

Although the National Bank Act of 1863 was designed to eliminate state-chartered banks by imposing a prohibitive tax on banknotes, these banks have been able to stay in business by

Acquiring funds through deposits

Both ______ and _______ were financial innovations that occurred because of interest rate volatility

Adjustable-rate mortgages; financial derivatives

Banks face the problem of ______ in loan markets because bad credit risks are the ones most likely to seek bank loans

Adverse selection

If borrowers with the most risky investment projects are more likely to seek bank loans as compared to those borrowers with the safest investment projects, banks are said to face the problem of

Adverse selection

If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of

Adverse selection

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

Adverse selection

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the

Adverse selection problem

Collateral requirements lessen the consequences of ______ because the collateral reduces the lender's losses in the case of a loan default and it reduces _______ because the borrower has more to lose from a default

Adverse selection; moral hazard

The chartering process is especially designed to deal with the ______ problem, and regular bank examinations help to reduce the ______ problem

Adverse selection; moral hazard

Politicians and regulators, who are known as the _____, have not had the same incentives to minimize costs of deposit insurance as do the taxpayers, who are known as the ______

Agents; Principals

Why was the United States one of the last major industrialized countries to have a central bank?

Agricultural and other U.S. interests were suspicious of centralized power and opposed the creation of a central bank

Banks subject to reserve requirements set by the Federal Reserve System include

All banks whether or not they are members of the Federal Reserve System

'The independence of the Fed leaves it completely unaccountable for its actions.' Why is this statement not true?

All of the above

Why is the New York Federal Reserve always a voting member on the FOMC?

All of the above are correct

Credit easing refers to

Altering the composition of the Fed's balance sheet in order to improve the functioning of particular segments of the credit markets

How do sweep accounts and money market mutual funds allow banks to avoid reserve requirements?

Although they function as interest-earning deposits, these accounts are not legally deposits and so are not subject to reserve requirements

What is the major difference between banking systems in the United States and Japan?

American banks are not allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks can

_______ of a foreign bank operates in the U.S. but cannot accept deposits from domestic residents

An agency office

Critics of nationwide banking fear

An elimination of community banks

Which of the following is likely a result of increased interest-rate volatility?

An increase in demand for financial services and products

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

An increase; reduce

Prior to 2008, bank managers looked on reserve requirements

As a tax on deposits

Moral hazard and adverse selection problems increased in the 1980s

As part of the financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking

What happens to reserves at the First National Bank if one person withdraws $900 of cash and another person deposits $300 of cash? Use a T-account to explain your answer

Assets/Reserves $-600 Liabilities/Checkable deposits $-600

Loans that the Fed makes to banks appear on the balance sheet as part of its ______, and deposits made by banks appear on the Fed's balance sheet as part of its _______

Assets; liabilities

Which of the following is not an income-producing asset on a bank's balance sheet?

Bank Reserves

Which of the following statements is false?

Bank capital is recorded as an asset on the bank balance sheet

A financial innovation that developed as a result of banks avoidance of bank branching restrictions was ______

Bank holding companies

Which of the following is NOT a reason for the dramatic increase in the number of bank holding companies?

Bank holding companies can monopolize the market for banking services in a given region

The modern commercial banking system began in America when the

Bank of North America was chartered in Philadelphia in 1782

Currency circulated by banks that could be redeemed for gold was called ______

Banknotes

Why has noninterest income been growing as a source of bank operating income

Banks can increase profits by engaging in noninterest income, or off-balance-sheet activities

Why is loophole mining so prevalent in the banking industry in the United States?

Banks engage in loophole mining in order to avoid regulatory constraints that restrict their ability to earn profits

Why does imposing bank capital requirements on banks help limit risk taking?

Banks have more to lose if they fail and are thus more likely to pursue less risky activities

Measuring the sensitivity of bank profits to changes in interest rates by calculating the product of the gap and the change in the interest rate is called

Basic gap analysis

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called

Basic gap analysis

Why is there a higher percentage of banks with less than $25 million of assets among commercial banks than among savings and loans and mutual savings banks?

Because restrictions on branching are stricter for commercial banks than for savings and loans, small commercial banks have greater protection from competition and are more likely to survive than small savings and loans

If reserve requirements were eliminated in the future, as some economists advocate, what effect would this have on the size of money market mutual funds? Money market mutual funds (MMMFs) would likely _______

Become smaller

Adjustable rate mortgages

Benefit homeowners when interest rates are falling

If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could

Borrow from another bank in the federal funds market

Why might a bank be willing to borrow funds from other banks at a higher interest rate rather than borrow from the Fed?

Borrowing from the Fed might invite greater supervisory scrutiny from the central bank

Transformation of assets can be accomplished by

Borrowing short and lending long

Regulations that reduced competition between banks included

Branching restrictions

Because of an expected rise in interest rates in the future, a banker will likely

Buy short-term rather than long-term bonds

At the height of the global financial crisis in October 2008, the U.S. Treasury forced nine of the largest U.S. banks to accept capital injections, in exchange for nonvoting ownership stock, even though some of the banks did not need the capital and did not want to participate. What could be the rationale for doing this?

By forcing all banks to accept capital injections, it would help prevent bank runs on the weakest banks

Banks earn profits from off-balance sheet loan sales

By selling existing loans for more than the original loan amount

A bank with insufficient reserves can increase its reserves by

Calling in loans

______ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow

Calling in loans

The leverage ratio is the ratio of a bank's

Capital divided by its total assets

Future regulation related to the Dodd-Frank Act of 2010 needs to include

Capital requirements, compensation, GSEs, credit-rating agencies, and the dangers of overregulation

Conditions that likely contributed to a credit crunch during the global financial crisis include

Capital shortfalls caused in part by falling real estate prices

Holding all else constant, when a bank receives the funds for a deposited check

Cash items in the process of collection fall by the amount of the check

Prior to 1980, the Fed set an interest rate _____, a maximum limit on the interest rate that could be paid on time deposits

Ceiling

Now identify the policy tools that have the Least: Flexibility, reversibility, speed of implementation, effectiveness

Changes in reserve requirements; "; "; Loans to the financial institutions

Which of the following are not reported as assets on a bank's balance sheet?

Checkable Deposits

Which of the following are reported as liabilities on a bank's balance sheet?

Checkable deposits

Which of the following is NOT an asset on a bank's balance sheet?

Checkable deposits

Which of the following statements are true? (2)

Checkable deposits are payable on demand

Which of the following statements is false? (2)

Checkable deposits are the primary source of bank funds

If a bank decides that it wants to hold $1 million of excess reserves, what effect will this have on checkable deposits in the banking system? Assume that the required reserve ratio on checkable deposits is 10% and the public's holdings of currency do not change

Checkable deposits decline by $10 million

What happens to checkable deposits in the banking system when the Fed lends an additional $1 million to the First National Bank, assuming that the required reserve ratio on checkable deposits is 10%, banks do not hold any excess reserves, and the public's holdings of currency do not change

Checkable deposits rise by $10 million

An important function of the regional Federal Reserve Banks is

Clearing checks

Assets of value promised to the lender as compensation if the borrower defaults are called

Collateral

During the boom years of the 1920s, bank failures were quite

Common, averaging about 600 per year

Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks? National banks:

Comptroller of the Currency

Why were consumer protection provisions included in the Dodd-Frank bill, a bill designed to strengthen the financial system?

Consumer protection will avert future financial problems in the housing market

What are the five areas included in the Dodd-Frank Act of 2010

Consumer protection, resolution authority, systemic risk regulation, Volcker rule, and derivatives

Automated Teller Machines

Cost less than human tellers, so banks may encourage their use by charging less for using ATMs

The Fed's lender-of-last-resort function

Creates a moral hazard problem

The principal-agent problem that exists for bank trading activities can be reduced through

Creation of internal controls that separate trading activities from bookkeeping

When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in

Credit rationing

______ are the only depository institutions that are tax-exempt

Credit unions

What is a primary characteristic of credit unions?

Credit unions are organized around a group of individuals that belong to a common institution

Unlike commercial banks, savings and loans, and mutual savings banks, credit unions did not have restrictions on locating branches in other states. Why, then, are credit unions typically smaller than the other depository institutions?

Credit unions are small because members usually share a common employer or have ties to a particular organization

The monetary base consists of

Currency in circulation and reserves

The monetary liabilities of the Federal Reserve include

Currency in circulation and reserves

If casualty insurance companies provided fire insurance without any restrictions, what kind of moral hazard problem might result?

Customers would take less preventive care in avoiding fire risk with this type of insurance

One factor contributing to the decline in cost advantages that banks once had is the

Decline in the importance of checkable deposits from over 60 percent of banks' liabilities to 2 percent today

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ____ in the reserve requirement ____ the demand for reserves, LOWERING the fedreal funds interest rate

Decline; decreases

The volume of checkable deposits relative to total bank liabilities has

Declined over time

In a financial panic, you would expect the money multiplier to ______ and the money supply to ______, which would cause the excess reserves ratio to ______. Thus depositors are likely to ______ their holdings of currency

Decrease; decrease; increase; increase

______ are intended to offset movements in other factors that affect reserves and the monetary base

Defensive open market operations

Why are deposit insurance and other types of government safety nets important to the health of the economy?

Deposit insurance and other government safety nets help to eliminate a contagion effect

Mutual savings banks are owned by _____

Depositors

If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in

Deposits and reserves

What does the cross-sectional evidence from banking crisis in several countries indicate?

Deregulation and poor regulatory supervision and raise moral hazard incentives

What does the cross-sectional evidence from banking crises in several countries indicate?

Deregulation and poor regulatory supervision raise moral hazard incentives

Which of the following is not an incentive created by regulatory agencies to encourage international banking?

Direct federal subsidies

A main provision of the Competitive Equality in Banking Act (CEBA) of 1987 included

Directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance

Regulations designed to provide information to the marketplace so that investors can make informed decisions are called

Disclosure requirements

Bank loans from the Federal Reserve are called _______ and represent a _______ of new funds for financial intermediaries

Discount loans; Source

The interest rate charged to banks that borrow funds from the Fed is known as the

Discount rate

The process in which people take their funds out of the banking system seeking higher-yielding securities is called

Disintermediation

From the standpoint of ______, specialization in lending is surprising but makes perfect sense when one considers the ______ problem

Diversification; adverse selection

Eurodollars are

Dollar-denominated deposits held in banks outside the United States

The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as a

Dual banking system

_____ are intended to change the level of reserves and the monetary base

Dynamic open market operation

The ability to use one common resource to provide different products and services is

Economies of scope

Competition between banks

Encourages greater risk taking

The Glass-Steagall Act, which was repealed in 1999, prohibited commercial banks from

Engaging in underwriting and dealing in corporate securities

One motive behind the development of the current regulatory system has been the desire to

Ensure a sound banking system

The federal funds interest rate is determined by the

Equilibrium of supply and demand in the market for RESERVES

The amount of assets per dollar of equity capital is called the

Equity multiplier

Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by foreign banks has been

Eroded

The depository Institutions Deregulation and Monetary Control Act of 1980 (3)

Established uniform reserve requirements for all banks

Deposits in European banks denominated in dollars for the purpose of international transactions are known as

Eurodollars

Total reserves are the sum of ____ and ____

Excess reserves; required reserves

State banks that are not members of the Federal Reserve System are most likely to be examined by the

FDIC

Banks that suffered significant losses in the 1980s made the mistake of

Failing to diversify their loan portfolio

"Because diversification is a desirable strategy for avoiding risk, it never makes sense for a bank to specialize in making specific types of loans." T/F?

False. A bank may have developed expertise in screening and monitoring a particular type of loan, thus improving its ability to handle problems of adverse selection and moral hazard

"Bank managers should always seek the highest return possible on their assets." Is this statement true, false, or uncertain?

False. A bank must also consider an asset's risk and liquidity when deciding which assets to hold

"The only way that the Fed can affect the level of borrowed reserves is by adjusting the discount rate." T/F?

False. The Fed can also limit the amount of discount loans that an individual bank can have

"The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the industry, while in the United States there are around 6,500 commercial banks" T/F?

False. The reason for the large number of US banks is anticompetitive regulations such as branching restrictions

Which of the following is responsible for the supervision of savings and loan associations

Federal Home Loan Bank System

The FHLBS gives loans to S&Ls and thus performs a function similar to the ______ for commercial banks

Federal Reserve

The bank panic of 1907 led to the passage of the

Federal Reserve Act of 1913

Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks? Bank holding companies:

Federal Reserve System

Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks? Federal Reserve member state banks:

Federal Reserve System

Today the United States has a dual banking system in which banks supervised by the ______ and by the ______ operate side by side

Federal government; states

Unlike banks, _____ have been allowed to branch statewide since 1980

Federally - chartered S&Ls

Although it has a population about half that of the United States, Japan has

Fewer than 100 commercial banks

Currency in circulation that cannot be redeemed for gold is called

Fiat money

Financial instruments whose payoffs are linked to previously issued securities are called ______

Financial Derivatives

The FSLIC and the Federal Home Loan Bank Board were abolished by the

Financial Institutions Reform, Recovery, and Enforcement Act of 1989

Financial instruments with returns tied to previously issued securities are called

Financial derivatives

______ is the process of researching and developing new instruments to address the needs of investors and institutions in a rapidly changing financial climate

Financial engineering

During the 1960s, 1970s, and early 1980s, traditional bank profitability declined because of

Financial innovation that increased competition from new financial institutions

Which of the following is NOT a difficulty in the regulation and supervision of banks?

Financial institutions are not required to follow the rules

Identify an important factor that led to the banking crises in Latin America

Financial liberalization that occured in the 1980s

The Dodd-Frank Act of 2010 is the most comprehensive

Financial reform legislation since the Great Depression

Moral hazard problems increased in prominence in the 1980s

Following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the

Gap

If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?

Given the ROA, if bank capital doubles, then ROE will fall by half

The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the

Glass-Steagall Act

Two primary assets of the Federal Reserve System are

Government securities and loans to commercial banks

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%

Has no effect on the federal funds rate

Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve on the DOWNWARD SLOPING SECTION, decreasing the interest rate paid on excess reserves

Has no effect on the federal funds rate

Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers

Has shrunk dramatically, from around 40 percent of total credit advanced to around 25 percent by 2011

Because of their _______ liquidity, _______ U.S. government securities are called secondary reserves

High; Short-term

Using _______ can provide more capital stability for banks during downturns

Historical-cost

How could the approval of International banking facilities (IBFs) by the Fed in 1981 have reduced employment in the banking industry in Europe?

IBFs encourage American and foreign banks to do more banking business in the United States, thus shifting employment from Europe to the United States

One factor contributing to the rapid growth of the commercial paper market since 1970 is

Improved information technology making it easier to screen credit risks

The most important source of the changes in supply conditions that stimulate financial innovation has been the

Improvement in computer and telecommunications technology

Which of the following statements about central bank structure and independence is true?

In recent years, there has been a remarkable trend toward increasing independence

Off-balance sheet activities involving guarantees of securities and back-up credit lines

Increase the risk a bank faces

As the costs associated with deposit outflows _____, the banks willingness to hold excess reserves will ______

Increase; increase

When a new depositor opens a checking account at the First National Bank, the bank's assets _______ and its liabilities ______

Increase; increase

Which of the following has NOT resulted from more active liability management on the part of banks?

Increased bank holdings of cash items

The Depository Institutions Deregulation and Monetary Control Act of 1980 (2)

Increased deposit insurance from $40,000 to $100,000

Which of the following does not explain the rapid growth in international banking?

Increased regulation of the U.S. banking industry

The Federal Deposit Insurance Corporation Improvement Act of 1991

Increased the FDIC's ability to borrow from the Treasury to deal with failed banks

Rising interest-rate risk

Increased the demand for financial innovation

In the market for reserves, if the federal funds rate is BETWEEN the discount rate in the interest rate paid on excess reserves, an increase in the reserve requirement _____ the demand for reserves, _____ the federal funds rate, everything else held constant

Increases; raising

Under the Gramm-Leach-Bliley Act states retain regulatory authority over _____

Insurance activities

Why does the existence of deposit insurance increase the likelihood that depositors will need deposit protection?

Insured banks tend to pursue greater risks than they otherwise would

Firms that are designated as systemically important financial institutions (SIFIs) are subject to all of the following additional Federal Reserve regulations except

Interest rate ceilings on time deposits

Disintermediation resulted from

Interest rate ceilings with inflation-driven increases in interest rates

Risk that is related to the uncertainty about future interest-rate movements is called

Interest-rate risk

The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed

Is so secretive about the conduct of future monetary policy

Why is paying interest on reserves an important tool for the Federal Reserve to manage crises?

It allows the Fed to increase its lending as much as it wants without reducing the federal funds rate

Why did many economists criticize the FIRREA legislation?

It did little to deal with the underlying adverse selection and moral hazard problems created by deposit insurance

How does the emergence of interest-rate risk help explain financial innovation?

It increases the demand for financial products and services that could reduce that risk

Which agency has regulatory responsibility when a bank operates in many different countries?

It is not always clear

The European System of Central Banks (ESCB) is similar to the Federal Reserve System in that

It is structured such that the central banks for each country have a similar role to that of the Federal Reserve banks

Critics of Fed independence argue that

It is undemocratic to have monetary policy controlled by an elite group responsible to no one

When you deposit a $50 bill in the Security Pacific National Bank

Its assets increase by $50

Which legislation enacted in 1998 granted the Bank of Japan new powers and greater autonomy, its critics contend that

Its independence is limited by the Ministry of Finance's veto power over part of the Bank's budget

A bank is insolvent when

Its liabilities exceed its assets

The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize

Its own welfare

So-called fallen angels differ from junk bonds in that

Junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds that have had their credit ratings fall below Baa

A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to

Keep compensating balances in a checking account at the bank

Banks engage in regulatory arbitrage by

Keeping high-risk assets on their books while removing low-risk assets with the same capital requirement

The management of expectations is a strategy best defined by

Keeping the federal funds rate at zero for an extended period to lower the market's expectations of short-term future interest rates

The large number of banks in the United States is an indication of

Lack of competition within the banking industry

U.S. banks have most of their branches in

Latin America, the Far East, the Caribbean, and London

Give one example each of moral hazard and adverse selection in private insurance agreements

Leaving your car unlocked with the keys in it is an example of moral hazard, while a person with poor health seeking health insurance is an example of adverse selection

The depository Institutions Deregulation and Monetary Control Act of 1980

Led to the creation of NOW accounts nationwide

A bank with excess reserves can economize on these reserves by

Lending reserves in the federal funds market

In England, the Chancellor of the Exchequer (the equivalent of the US Secretary of Treasury) sets the goal of monetary policy, a target for inflation. Thus, when compared to the Fed, the Bank of England has

Less goal independence

One of the concerns of increased bank consolidation is the reduction in community banks which could result in

Less lending to small businesses

Banks earn profits by selling ______ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy _______ with a different set of characteristics

Liabilities; assets

Bank capital is listed on the ________ side of the bank's balance sheet because it represents a _______ of funds

Liability; source

Regulators attempt to reduce the riskiness of banks' asset portfolios by

Limiting the amount of loans in particular categories or to individual borrowers

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

Liquidity management

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

Loan commitment

Examples of off-balance-sheet activities include (2)

Loan sales

Banks generate profits by earning higher returns on their ______ than they pay in interest on ______

Loans; deposits

Unanticipated moral hazard contingencies can be reduced by

Long-term customer relationships

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

Loses; loses

Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve ALONG THE HORIZONTAL SECTION of the demand curve, lowering the interest rate paid on excess reserves

Lowers the federal funds rate

If Jane Brown closes her account at First National Bank and uses the money instead to open a money market mutual fund account, what happens to M1? Why?

M1 does not change because the funds that go to the money market mutual fund are first deposited into the mutual fund's bank account

Which of the following is a main responsibility of the bank manager?

Maintaining reserves at a level to minimize the cost to the bank of deposit outflows

Which of the following are primary concerns of the bank manager?

Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows

Why might American businesses want to hold Eurodollars?

Many commercial transactions and international contracts are denominated in dollars

As a result of strict banking regulations, the United States has

Many more smaller banks when compared to other industrialized countries

Banking institutions in the European Monetary Union (against eligible collateral) overnight loans from national central banks at the

Marginal lending rate

_________ rules generally provide a more accurate picture of a bank's capital position

Mark-to-market

With ______, firms value assets on their balance sheet as what they would sell for in the market

Mark-to-market accounting

ATMs were developed because of breakthroughs in technology and as a

Means of avoiding restrictive branching regulations

The inaccurate ratings provided by credit-rating agencies

Meant that investors did not have the information they needed to make informed choices about their investments.

Which of the following is a requirement of the Federal Deposit Insurance Corporation?

Member banks of the Federal Reserve System are required to purchase FDIC insurance for their depositors

With the creation of the Federal Deposit Insurance Corporation

Member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could choose to buy deposit insurance

The primary reason for the recent reduction in the number of banks is

Mergers and acquisitions

In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status

Michael Milken

Open market purchases raise the _____, thereby increasing the ______

Monetary base and reserves; money supply

In order to halt the decline in the number of savings and loans and mutual savings banks, the Garn-St. Germain Act of 1982 allowed

Money market deposit accounts (MMDAs)

To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be to be effective, banks also

Monitor and enforce them

In order to reduce the _____ problem in loan markets, banks often insist on collateral from potential borrowers

Moral hazard

The European Central Bank (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System, the ECB is

More independent

A well-capitalized financial institution has ________ to lose if it fails and thus is _______ likely to pursue risky activities

More; Less

If a bank has _______ rate-sensitive assets than liabilities, then _______ in interest rates will increase bank profits

More; an increase

U.S. banks are _____ regulated than foreign banks, which _____ bank consolidation and mergers in the U.S. banks

More; limits

Which of the following may not be used as a backup line of credit?

Mortgages

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure?

Mortgages

Thrift institutions include

Mutual savings banks

The _______ established the Office of the Comptroller of the Currency

National Bank Act of 1863

Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks? Federally chartered credit unions:

National Credit Union Administration

The Federal Reserve Act of 1913 required that

National banks join the Federal Reserve System

The Federal Reserve Act required all _______ banks to become members of the Federal Reserve System, while _______ banks could choose to become members of the system

National; state

One can conclude that central bank independence and inflation are

Negatively related; countries with low ratings have generally produced higher inflation

Which of the following are transaction deposits?

Negotiable order of withdraw accounts

Large-denomination CDs are ______, so that like a bond, they have a ________ degree of liquidity and can be sold in secondary markets

Negotiable; greater

The Federal Reserve Bank of _____ plays a special role in the Federal Reserve System because it houses the open market desk

New York

If the bank at which you keep your checking account is owned by foreigners, should you worry that your deposits are less safe than if the bank were owned by Americans?

No, because the foreign bank is subject to the same regulations as the American-owned bank

You often read in the newspaper that the Fed has just lowered the discount rate. Does this signal that the Fed is moving to a more expansionary monetary policy? Why or why not?

No. The Fed usually lowers the discount rate when market rates fall regardless of the direction of monetary policy

If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to lend out?

No. There are several ways that reserves can be acquired. For example, the bank can borrow at the discount window or in the federal funds market, or it can acquire funds by issuing negotiable CDs

An advantage to American banks from operating foreign branches is that Eurodollar deposits in offshore branches are

Not subject to reserve requirements

An advantage to American banks operating foreign branches is that Eurodollar deposits in offshore branches are

Not subject to reserve requirements

The zero-lower-bound problem

Occurs because people can always earn more from holding bonds than holding cash

Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks? Federally chartered savings and loan associations:

Office of Thrift Supervision

The Fed's most commonly used means of changing the money supply is

Open market operations

Identify the policy tools that have the greatest: Flexibility, reversibility, speed of implementation

Open market operations; "; "