Ch 111

The largest single category of loans on the typical bank's balance sheet in 2010 was

real estate loans

A contingent promise by a bank to pay a bill when it comes due if the bill's originator fails to pay is an example of a

standby letters of credit

A bank is considering an investment in a municipal security that offers a yield of 7 percent. What is this security's tax equivalent yield if the bank's tax rate is 20 percent?

tax equivalent yield is 0.07/(1-0.20) = 8.75%

A bank's balance sheet equates the value of total assets to the sum of total liabilities and equity capital.

true

d

30. An ILC is a type of A. finance company. B. thrift institution. C. credit card bank. D. nonbank bank. E. foreign-owned loan corporation.

A wholesale bank is one that focuses its business activities on commercial banking relationships

true

Banks have an average total debt ratio of about 90%.

true

Banks have higher leverage than most manufacturing firms

true

C&I loans are loans to businesses used to finance capital needs, equipment purchases, and plant expansions

true

In 2010, the notional value of bank off-balance-sheet activities was greater than bank industry assets.

true

Loans comprise the single largest asset category for a bank.

true

On average, bank liabilities tend to have shorter maturities and greater liquidity than bank assets.

true

The allowance for loan and lease losses is bank management's estimate of the amount of gross loans and leases that will not be repaid to the bank

true

Wholesale CDs obtained from an investment house rather than directly from a customer are referred to as brokered deposits

true

Net loans and leases plus ___________ plus ____________ equals gross loans and leases

unearned income; the allowance for loan and lease losses

d

26. Loans past due 90 days or more and loans that are not accruing interest because of problems of the borrower are called A. loan losses. B. net charge-offs. C. provisional loans. D. noncurrent loans. E. contra loans.

c

27. Which of the following is the primary regulator of bank holding company activities? A. Federal Bank Holding Company Board B. FDIC C. Federal Reserve D. State regulatory agency in the chartering states E. U.S. Treasury

e

28. Banks differ from other types of depository institutions in that I. banks have more diversified asset portfolios. II. banks obtain funds from more different types of sources. III. the average size bank is larger than other depository institutions. A. I only B. I and II only C. I and III only D. II and III only E. I, II, and III

e

29. Advantages of going global for U.S. banks include all but which one of the following? A. Diversification of earnings B. Greater opportunities to exploit economies of scale C. Greater sources of funds D. Conducting business in less regulated environments E. Low fixed costs involved in international expansion

true

3. Banks have an average total debt ratio of about 90 percent.

c

31. A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest-bearing liabilities. However, the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points, the bank's new pretax net interest income will be __________. A. $600,000 B. $450,000 C. $300,000 D. $250,000 E. $175,000 (1.50% - 0.50%) × $30 million

c

32. A bank is earning 6 percent on its $150 million in earning assets and is paying 4.75 percent on its liabilities. The bank's interest rate spread is __________. A. 6.00 percent B. 4.75 percent C. 1.25 percent D. 10.75 percent E. 1.26 percent 6% - 4.75% = 1.25%

An example of off balance sheet activity includes:

purchasing a futures contract

The largest single category of loans on the typical bank's balance sheet in 20016 was

real estate loans

In a bankruptcy situation, the Federal Reserve acts as the liquidator of the bank.

False

Negotiable certificates of deposit (CDs) do not have an active secondary market.

False

Nontransaction deposits at banks include NOW accounts and demand deposits.

False

Small banks control about 70 percent of banking industry assets.

False

The majority of banks are nationally chartered and insured by the FDIC.

False

Which of the following is the primary regulator of bank holding company activities?

Federal Reserve

Nationally chartered banks receive chartering and merger approval from the

Office of Comptroller of the Currency

An ILC is a type of

nonbank bank

a

21. Commercial banks are the __________________ financial intermediary in the United States as measured by asset size. A. largest B. second-largest C. third-largest D. fourth-largest E. fifth-largest

a

22. The provision of banking services to other banks, such as check clearing, foreign exchange trading, and so forth, is an example of A. correspondent banking. B. trust services. C. off-balance-sheet assets. D. economies of scope. E. credit derivatives.

b

23. A contingent promise by a bank to pay a bill when it comes due if the bill's originator fails to pay is an example of a A. swap agreement. B. standby letters of credit. C. forward contract. D. loan commitment. E. commitment to buy foreign exchange.

b

24. A contingent item that may eventually be placed on the right-hand side of the balance sheet or expensed on the income statement is a(n) A. loan commitment. B. off-balance-sheet liability. C. off-balance-sheet asset. D. net charge-off. E. loan sold without recourse.

In terms of profitability, a well-run bank usually has an ROA of

0.5-3 percent

In terms of profitability, a well-run bank usually has an ROA of

0.5-3%

true

1. Business loans have dropped in importance since 1987 as measured by the proportion of these loans on the bank balance sheet.

c

25. Reasons behind the drop in bank profitability in the second half of the previous decade include I. flattening of the yield curve. II. increase in competitive pressures on asset pricing. III. increases in foreclosures in the mortgage market. IV. increases in net interest margin. A. I only B. II and III only C. I, II, and III only D. II, III, and IV only E. III and IV only

A bank is earning 6 percent on its $150 million in earning assets and is paying 4.75 percent on its liabilities. The bank's interest rate spread is ____________.

1.25 percent Explanation: 6% - 4.75% = 1.25%

e

10. Banking may be subdivided into at least three categories of banks. Match the definitions with the appropriate name. I. A bank that specializes in retail or consumer banking in a local market II. A bank that engages in a complete array of wholesale commercial banking activities and usually also provides retail banking services III. A bank that is located in a financial center and relies on nondeposit or borrowed sources of funds for a significant portion of its liabilities A. money center bank; community bank; super-regional bank B. community bank; money center bank; super-regional bank C. super-regional bank; money center bank; community bank D. money center bank; super-regional bank; community bank E. community bank; super-regional bank; money center bank

Equity capital at commercial banks in 2016 comprised about _______ of liabilities and equity.

11 percent

Equity capital at commercial banks in 2010 comprised about ____________ of liabilities and equity.

11%

b

11. Bank assets tend to have _____________ maturities and _____________ liquidity than/as bank liabilities. A. longer; greater B. longer; lower C. shorter; greater D. shorter; lower E. equal; equal

a

13. In terms of profitability, a well-run bank usually has an ROA of A. 0.5-3 percent. B. 3-5 percent. C. 5-10 percent. D. 10-15 percent. E. 15-20 percent.

c

14. Which of the following could result in a negative NIM? A. Growth in net interest income B. Lower non-interest expense C. Decline in net interest income D. Higher non-interest income E. Positive net interest spread

e

15. Most of the changes in size, structure, and composition of the banking industry in recent years are due to A. bank failures. B. increasing regulations. C. new charters granted. D. declines in the number of branch offices. E. mergers and acquisitions.

d

16. About __________________ of federally insured banks are nationally chartered and about __________________ of federally insured banks are members of the Federal Reserve. A. 77 percent; 65 percent B. 65 percent; 77 percent C. 34 percent; 22 percent D. 20 percent; 34 percent E. 40 percent; 60 percent

b

17. Nationally chartered banks receive chartering and merger approval from the A. Federal Deposit Insurance Corporation. B. Office of Comptroller of the Currency. C. Federal Reserve System. D. Office of Thrift Supervision. E. Any of the options may grant a charter and approve a merger.

c

18. State chartered banks ________________ be members of the Federal Reserve System and nationally chartered banks ________________ be members of the Federal Reserve System. A. must; may B. must; must C. may; must D. may; may

About _____________ of federally insured banks are nationally chartered and about ______________ of federally insured banks are members of the Federal Reserve.

19 percent ; 34 percent

d

19. The largest single category of loans on the typical bank's balance sheet in 2013 was A. U.S. government securities. B. commercial and industrial loans. C. consumer loans. D. real estate loans. E. interbank loans.

true

2. Loans comprise the single largest asset category for a bank.

Fernando Bank has interest expense of $150 million, earning assets of $1,400 million and a NIM of 5%. The bank also has interest -bearing liabilities of $1,100 million. Fernando Bank's spread is

2.08% [(0.05 * 1400) + 150]/1400 - (150/1100)

d

20. Equity capital at commercial banks in 2013 comprised about ____________ of liabilities and equity. A. 25 percent B. 21 percent C. 55 percent D. 11 percent E. 5 percent

true

4. On average, bank liabilities tend to have shorter maturities and greater liquidity than bank assets.

false

5. Nontransaction deposits at banks include NOW accounts and demand deposits.

false

6. The majority of banks are nationally chartered and insured by the FDIC.

false

7. Since 1980, the number of banks in the United States has been increasing dramatically due to deregulation of the industry.

true

9. In 2010, the notional value of bank off-balance-sheet activities was greater than bank industry assets.

A bank is considering two securities: a 30 year bond yielding 8 percent and a 30-year municipal bond yielding 3 percent. a. If the bank's tax rate is 3 percent, calculate the Treasury bond's tax equivalent yield. b. Which bond offers the higher tax equivalent yield?

A. tax equivalent yield = 8% * (1 - 0.30) = 5.6% b. The treasury bond offers the better deal since its tax equivalent yield is 5.6% and the municipal bond yield is 4.29%

Banking may be subdivided into at least three categories of banks. Match up the definitions with the appropriate name. I. A bank that specializes in retail or consumer banking in a local market. II. A bank that engages in a complete array of wholesale commercial banking activities and usually also provides retail banking services. III. A bank that is located in a financial center and relies on nondeposit or borrowed sources of funds for a significant portion of its liabilities.

Community bank; Super-regional bank; Money center bank

Banking may be subdivided into at least three categories of banks. Match the definitions with the appropriate name. I. A bank that specializes in retail or consumer banking in a local market. II. A bank that engages in a complete array of wholesale commercial banking activities and usually also provides retail banking services. III. A bank that is located in a financial center and relies on nondeposit or borrows sources of funds for a significant portion of its liabilities.

Community bank; super-regional bank; money center bank

Banks differ from other types of depository institutions in that I. banks have more diversified asset portfolios II. banks obtain funds from more different types of sources III. the average size bank is larger than other depository institutions.

I, II, and III

Banks differ from other types of depository institutions in that I. banks have more diversified asset portfolios. II. banks obtain funds from more different types sources. III. the average size bank is larger than other depository institutions.

I, II, and III

Reasons behind the drop in bank profitability in the second half of this decade include: I. flattening of the yield curve II. increase in competitive pressures on asset pricing III. increases in foreclosures in the mortgage market IV. increases in net interest margin

I, II, and III only

c

In comparison to small banks, larger banks typically have A. more equity capital. B. more core deposits. C. more off-balance-sheet activities. D. larger net interest margins. E. all of the options.

Most of the changes in size, structure, and composition of the banking industry in recent years are due to

mergers and acquisitions

In comparison to small banks, larger banks typically have

more off-balance-sheet activities

Bank assets tend to have __________ maturities and _______________ liquidity than/as bank liabilities.

Longer; Lower

Advantages of going global for U.S. banks include all but which one of the following?

Low fixed costs involved in international expansion

Loans past due 90 days or more and loans that are not accruing interest because of problems of the borrower are called

noncurrent loans

false

Small banks control about 70 percent of banking industry assets.

A contingent item that may eventually be placed on the right-hand side of the balance sheet or expensed on the income statement is a(n)

off-balance-sheet liability

A contingent item that may eventually be placed on the right-hand side of the balance sheet or expenses on the income statement is a(n)

off-balance-sheet liability

Business loans have dropped in importance since 1987 as measured by the proportion of these loans on the bank balance sheet.

True

Off-balance-sheet activities consist of issuing financial instruments such as various types of guarantees and engaging in derivative trading to generate additional revenue.

True

On average, bank liabilities tend to have shorter maturities and greater liquidity than bank assets.

True

The financial statements for MHM Bank are shown below. Balance Sheet Assets Cash and due from banks $2090 demand deposits at other FIs 2800 investments 6410 federal funds sold 3160 loans (less reserve for loan losses of 4100) 20380 premises 2440 total assets $37280 Liabilities and Equity demand deposits 10790 small time deposits 10520 jumbo CDs 7840 federal funds purchased 640 other liabilities 4030 equity 3460 total liabilities/ equity $37280 Income Statement interest income 4398 interest expense 2364 provision for loan losses 1800 noninterest income 870 noninterest expense 1145 taxes 405 a. Calculate the dollar value of MHM's earning assets b. Calculate the dollar value of MHM's interest-bearing liabilities c. Calculate MHM's spread. d. Calculate MHM's interest expense ratio

a. earning assets = investment securities + net income = 6410 + 3160 + 20380 = $29950 b. interest bearing liabilities = 10520 + 7840 + 640 = $19,000 c. Spread = (4398/29950) - (2364/ 19000) = 2.242% d. interest expense ration = 2364 / (4398 + 870) = 44.875%

Which of the following is not an off-balance sheet activity? commercial letter of credit consumer loans futures contract standby letter of credit swap transactions

consumer loans

Which of the following could result in a negative NIM?

decline in net interest income

Banks generally pay higher interest rates on NOW accounts than on MMDAs

false

Nontransaction deposits at banks include NOW accounts and demand deposits.

false

Since 1980 the number of banks in the United States has been increasing dramatically due to deregulation of the industry.

false

Small banks control about 70% of banking industry assets.

false

The financial crisis of 2008, demonstrated that activities such as trading in financial futures and interest-rate swaps have low risk.

false

The majority of banks are nationally chartered and insured by the FDIC.

false

The provision for loan loss account is actual loan losses less loan recoveries in a given time period

false

loans to consumers and to individuals are jointly termed C&I loans on a bank's balance sheet

false

Commercial banks are the ________________ financial intermediary in the United States as measured by asset size

largest

Commercial banks are the __________________ financial intermediary in the United States as measured by asset size.

largest

Bank assets tend to have _____________ maturities and _____________ liquidity than/as bank liabilities.

longer; lower

State chartered banks ________________ be members of the Federal Reserve System and nationally chartered banks ________________ be members of the Federal Reserve System.

may; must

Stater chartered banks _____________ be members of the Federal Reserve System and nationally chartered banks _________________ be members of the Federal Reserve System.

may; must