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; "; "
