ECON 2035 Ch. 10 - Banking and the Management of Financial Institutions
If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million B) $1.1 million C) $1 million D) $900,000
$1.2 million
If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000 B) $25,000 C) $20,000 D) $10,000
$25,000
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 A) $50,000 B) $40,000 C) $30,000 D) $25,000
$50,000
With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A) $90 B) $100 C) $10 D) $110
$90
A deposit outflow results in equal reductions in A) loans and reserves B) assets and liabilities C) reserves and capital D) assets and capital
assets and liabilities
In recent years the interest paid on checkable and time deposits has accounted for around _______ of total bank operating expenses, while the costs involved in servicing accounts have been approximately _______ of operating expenses. A) 45 percent; 55 percent B) 55 percent; 4 percent C) 25 percent; 50 percent D) 50 percent; 30 percent
25%; 50%
A bank failure occurs whenever A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements B) a bank suffers a large deposit outflow C) a bank has to call in a large volume of loans D) a bank is now allowed to borrowing from the Fed
a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements
Which of the following statements are true? A) a bank's assets are its source of funds B) a bank's liabilities are its use of funds C) a bank's balance sheet shows that total assets equal total liabilities plus equity capital D) a bank's balance sheets indicates whether or not the bank is profitable
a bank's balance sheet shows that total assets = total liabilities + equity capital
Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans. A) adverse selection B) moral hazard C) moral suasion D) intentional fraud
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 A) adverse credit risk B) adverse selection C) moral hazard D) lemon lenders
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. A) moral hazard B) adverse selection C) moral suasion D) adverse lending
adverse selection
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. A) adverse selection; moral hazard B) moral hazard; adverse selection C) adverse selection; diversification D) diversification; moral hazard
adverse selection; moral hazard
Which of the following statements is false? A) a bank's assets are its use of funds B) a bank issues liabilities to acquire funds C) the bank's assets provide the bank with income D) bank capital is recorded as an asset on the bank balance sheet
bank capital is recorded as an asset on the bank balance sheet
Which of the following statements most accurately describes the task of bank asset management? A) banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity B) banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations C) banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits D) banks seek to acquire funds in the least costly way
banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity
If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could A) borrow from another bank in the federal funds market B) buy U.S. Treasury bills C) increase loans D) buy corporate bonds
borrow from another bank in the federal funds market
Of the following, which would be the first choice for a bank facing reserve deficiency? A) call in loans B) borrow from the Fed C) sell securities D) borrow from other banks
borrow from other banks
Banks that actively manage liabilities will most likely meet a reserve shortfall by A) calling in loans B) borrowing federal funds C) selling municipal bonds D) seeking new deposits
borrowing federal funds
In general, banks would prefer to acquire funds quickly by _______ rather than _______. A) reducing loans; selling securities B) reducing loans; borrowing from the Fed C) borrowing from the Fed; reducing loans D) "calling in" loans; selling securities
borrowing from the Fed; reducing loans
Asset transformation can be described as A) borrowing long and lending short. B) borrowing short and lending long C) borrowing and lending only for the short term D) borrowing and lending for the long term
borrowing short and lending long
A bank will want to hold more excess reserves (everything else equal) when A) it expects to have deposit inflows in the near future B) brokerage commissions on selling bonds increase C) the cost of selling loans falls D) the discount rate decreases
brokerage commissions on selling bonds increase
A bank with insufficient reserves can increase its reserves by A) lending federal funds B) calling in loans C) buying short-term Treasury securities D) buying municipal bonds
calling in loans
_______ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. A) selling securities B) selling loans C) calling in loans D) selling negotiable CDs
calling in loans
Conditions that likely contributed to a credit crunch during the global financial crisis include: A) capital shortfalls caused in part by falling real estate prices B) regulated hikes in bank capital requirements C) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital D) increases in reserve requirements
capital shortfalls caused in part by falling real estate prices
Holding all else constant, when a bank receives the funds for a deposited check. A) cash items in the process of collection fall by the amount of the check B) bank assets increase by the amount of the check C) bank liabilities decrease by the amount of the check D) bank reserves increase by the amount of required reserves
cash items in the process of collection fall by the amount of the check
Which of the following are not reported as assets on a bank's balance sheet? A) cash items in the process of collection B) deposits with other banks C) U.S. Treasury securities D) checkable deposits
checkable deposits
Which of the following are reported as liabilities on a bank's balance sheet? A) reserves B) checkable deposits C) loans D) deposits with other banks
checkable deposits
Which of the following statements are true? A) checkable deposits are payable on demand B) checkable deposits do not include NOW accounts C) checkable deposts are the primary source of bank funds D) demand deposits are checkable deposits that pay interest
checkable deposits are payable on demand
Which of the following statements is false? A) checkable deposits are usually the lowest cost source of bank funds B) checkable deposits are the primary source of bank funds C) checkable deposits are payable on demand D) checkable deposits include NOW accounts
checkable deposits are the primary source of bank funds
Property promised to the lender as compensation if the borrower defaults is called A) collateral B) deductibles C) restrictive covenants D) contingencies
collateral
If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in A) deposits and reserves B) deposits and loans C) capital and reserves D) capital and loans
deposits and reserves
Which of the following are reported as liabilities on a bank's balance sheet? A) discount loans B) reserves C) U.S. Treasure securities D) loans
discount loans
Bank loans from the Federal Reserve are called ______ and represent a _______ of funds. A) discount loans; use B) discount loans; source C) fed funds; use D) fed funds; source
discount loans; source
From the standpoint of ______, specialization in lending is surprising but makes perfect sense when one considers the _______ problem. A) moral hazard; diversification B) diversification; moral hazard C) adverse selection; diversification D) diversification; adverse selection
diversification; adverse selection
The amount of assets per dollar of equity capital is called the A) asset ratio B) equity ratio C) equity multiplier D) asset multiplier
equity multiplier
Through correspondent banking, large banks provide services to small banks, including A) loan guarantees B) foreign exchange transactions C) issuing stock D) debt reduction
foreign exchange transactions
Because of their ______ liquidity, _______ U.S. government securities are called secondary reserves. A) low; short-term B) low; long-term C) high; short-term D) high; long-term
high; short-term
Banks that suffered significant losses in the 1980s made the mistake of A) holding too many liquid assets B) minimizing default risk C) failing to diversify their loan portfolio D) holding only safe securities
holding only safe securities
As the costs associated with deposit outflows _______, the banks willingness to hold excess reserves will _______. A) decrease; increase B) increase; decrease C) increase; increase D) decrease; not be affected
increase; increase
When a new depositor opens a checking account at the First National Bank, the bank's assets ______ and its liabilities _______. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease
increase; increase
Which of the following has not resulted from more active liability management on the part of banks? A) increased bank holdings of cash items B) aggressive targeting of goals for asset growth by banks C) increased use of negotiable CDs to raise funds D) an increased proportion of bank assets held in loans
increased bank holdings of cash items
Modern liability management has resulted in A) increased sales of certificates of deposits to raise funds B) increase importance of deposits as a source of funds C) reduced borrowing by banks in the overnight loan market D) failure by banks to coordinate management of assets and liabilities
increased sales of certificates of deposits to raise funds
Holding large amounts of bank capital helps prevent bank failures because A) it means that the bank has a higher income B) it makes loans easier to sell C) it can be used to absorb the losses resulting from bad loans D) it makes it easier to call in loans
it can be used to absorb the losses resulting from bad loans
When you deposit a $50 bill in the Security Pacific National Bank, A) its liabilities decrease by $50 B) its assets increase by $50 C) its reserves decrease by $50 D) its cash items in the process of collection increase by $50
its assets increase by $50
A bank is insolvent when A) its liabilities exceed its assets B) its assets exceed its liabilities C) its capital exceeds its liabilities D) its assets increase in value
its liabilities exceed its assets
When you deposit $50 in currency at Old National Bank, A) its assets increase by less than $50 because of reserve requirements B) its reserves increase by less than $50 because of reserve requirements C) its liabilities increase by $50 D) its liabilities decrease by $50
its liabilities increase by $50
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 A) place a bank officer on their board of directors B) place a corporate officer on the bank's board of directors C) keep compensating balances in a checking account at the bank D) purchase the bank's CDs
keep compensating balances in a checking account at the bank
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. A) loans; deposits B) securities; deposits C) liabilities; assets D) assets; liabilities
liabilities; assets
Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n) _______ for the borrowing bank and a(n) ________ for the lending bank. A) asset; asset B) asset; liability C) liability; liability D) liability; asset
liability; asset
Bank capital is listed on the _______ side of the bank's balance sheet because it represents a _______ of funds. A) liability; use B) liability; source C) asset; use D) asset; source
liability; source
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 A) liability management B) liquidity management C) managing interest rate risk D) managing credit risk
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 A) an adjustable gap loan B) an adjustable portfolio loan C) loan commitment D) pre-credit loan line
loan commitment
Banks make their profits primarily by issuing A) equity B) negotiable CDs C) loans D) NOW accounts
loans
The most important category of assets on a bank's balance sheet is A) discount loans B) securities C) loans D) cash items in the process of collection
loans
Unanticipated moral hazard contingencies can be reduced by A) screening B) long-term customer relationships C) specialization in lending D) credit rationing
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. A) gains; gains B) gains; loses C) loses; gains D) loses; loses
loses; loses
Which of the following are primary concerns of the bank manager? A) maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) extending loans to borrowers who will pay low interest rates, but who are poor credit risks C) acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized D) maintaining high levels of capital and thus maximizing the returns to the owners
maintaining sufficient reserves to minimize the cost to the bank of deposit outflows
To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also A) monitor and enforce them B) be willing to rewrite the contract if the borrower cannot comply with the restrictions C) trust the borrower to do the right thing D) be prepared to extend the deadline when the borrower needs more time to comply
monitor and enforce them
Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the A) adverse selection problem B) lemon problem C) adverse credit risk problem D) moral hazard problem
moral hazard problem
Because checking accounts are ______ liquid for the depositor than passbook savings, they earn ______ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower
more; lower
Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure? A) excess reserves B) secondary reserves C) bank capital D) mortgages
mortgages
Which of the following are transaction deposits? A) savings accounts B) small-denomination time deposits C) negotiable order of withdraw accounts D) certificates of deposits
negotiable order of withdraw accounts
Which of the following is not a nontransaction deposit? A) savings accounts B) small-denomination time deposits C) negotiable order of withdraw accounts D) certificates of deposits
negotiable order of withdraw accounts
Large-denomination CDs are _______, so that like a bond they can be resold in a _______ market before they mature. A) nonnegotiable; secondary B) nonnegotiable; primary C) negotiable; secondary D) negotiable; primary
negotiable; secondary
Because ______ are less liquid for the depositor than _______, they earn higher interest rates. A) money market deposit accounts, time deposits B) checkable deposits; passbook savings C) passbook savings; checkable deposits D) passbook savings; time deposits
passbook savings; checkable deposits
Banks hold excess and secondary reserves to A) reduce the interest-rate risk problem B) provide for deposit outflows C) satisfy margin requirements D) achieve higher earning than they can do with loans
provide for deposit outflows
The goals of bank asset management include A) maximizing risk B) minimizing liquidity C) lending at high interest rates regardless of risk D) purchasing securities with high returns and low risk
purchasing securities with high returns and low risk
Long-term customer relationships _______ the cost of information collection and make it easier to ______ credit risks. A) reduce; screen B) increase; screen C) reduce; increase D) increase; increase
reduce; screen
Bank capital has both benefits and costs for the bank owners. Higher bank capital _______ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets. A) reduces; reduces B) increases; increases C) reduces; increases D) increases; reduces
reduces; reduces
A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and reserves by $5 million B) reducing deposits and loans by $5 million C) reducing deposits and securities by $5 million D) reducing deposits and capital by $5 million
reducing deposits and reserves by $5 million
The amount of checkable deposits that banks are required by regulation to hold are the A) excess reserves B) required reserves C) vault cash D) total reserves
required reserves
Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the A) requirement that firms keep compensating balances at the banks from which they obtain their loans B) requirement that firms place on their board of directors an officer from the bank C) inclusion of restrictive covenants in loan contracts D) requirement that individuals provide detailed credit histories to bank loan officers
requirement that firms place on their board of directors an officer from the bank
Which of the following are reported as assets on a bank's balance sheet? A) borrowings B) reserves C) savings deposits D) bank capital
reserves
Which of the following bank assets is the most liquid? A) consumer loans B) reserves C) cash items in process of collection D) U.S. government securities
reserves
Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called A) proscription bonds B) restrictive covenants C) due-on-sale clauses D) liens
restrictive covenants
Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on assets B) return on capital C) return on equity D) return on investment
return on assets
Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A) return on assets B) return on capital C) return on equity D) return on investment
return on equity
Banks acquire funds that they use to purchase income-earning assets from such sources as A) cash items in the process of collection B) savings accounts C) reserves D) deposits at other banks
savings accounts
If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) reduce deposits by $3 million B) increase loans by $3 million C) sell $3 million of securities D) repay its discount loans from the Fed
sell $3 million of securities
Which of the following would not be a way to increase the return on equity? A) buy back bank stock B) pay higher dividends C) acquire new funds by selling negotiable CDs and increase assets with them D) sell more bank stock
sell more bank stock
Secondary reserves include A) deposits at Federal Reserve Banks B) deposits at other large banks C) short-term Treasury securities D) state and local government securities
short-term Treasury securities
In general, banks make profits by selling ______ liabilities and buying _______ assets. A) long-term; shorter-term B) short-term; longer-term C) illiquid; liquid D) risky; risk-free
short-term; longer-term
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to A) buy back bank stock B) pay higher dividends C) shrink the size of the bank D) sell securities the bank owns and put the funds into the reserve account
shrink the size of the bank
The share of checkable deposits in total bank liabilities has A) expanded moderately over time B) expanded dramatically over time C) shrunk over time D) remained virtually unchanged since 1960
shrunk over time
In one sense _______ appears surprising since it means that the bank is not _______ its portfolio of loans and thus is exposing itself to more risk. A) specialization in lending; diversifying B) specialization in lending; rationing C) credit rationing; diversifying D) screening; rationing
specialization in lending; diversifying
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, A) the assets at the bank increase by $1 million B) the liabilities of the bank decrease by $1 million C) reserves increase by $200,000 D) liabilities increase by $200,000
the assets at the bank increase by $1 million
Which of the following are bank assets? A) the building owned by the bank B) a discount loan C) a negotiable CD D) a customer's checking account
the building owned by the bank
For a given return on assets, the lower is bank capital, A) the lower is the return for the owners of the bank B) the higher is the return for the owners of the bank C) the lower is the credit risk for the owners of the bank D) the lower the possibility of bank failure
the higher is the return for the owners of the bank
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank increase by $10 B) the reserves of the First National Bank increase by $10 C) the liabilities of Citibank increase by $10 D) the assets of Citibank fall by $10
the liabilities of Citibank increase by $10
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank decrease by $10 B) the reserves of the First National Bank increase by $10 C) the liabilities of Citibank decrease by $10 D) the assets of Citibank decrease by $10
the liabilities of the First National Bank decrease by $10
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, in the bank's final balance sheet, A) the assets at the bank increase by $800,000 B) the liabilities of the bank increase by $1,000,000 C) the liabilities of the bank increase by $800,000 D) reserves increase by $160,000
the liabilities of the bank increase by $1,000,000
When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then A) the assets of First National rise by $50 B) the assets of Chemical Bank rise by $50 C) the reserves at First National fall by $50 D) the liabilities at Chemical Bank rise by $50
the reserves at First National fall by $50
Banks hold capital because A) they are required to by regulatory authorities B) higher capital increases the returns to the owners C) it increases the likelihood of bankruptcy D) higher capital increases the return on equity
they are required to by regulatory authorities
Secondary reserves are so called because A) they can be converted into cash with low transaction costs B) they are not easily converted into cash, and are, therefore, of secondary importance to banking firms C) 50% of these assets count toward meeting required reserves D) they rank second to bank vault cash in importance of bank holdings
they can be converted into cash with low transaction costs
Banks' asset portfolios include state and local government securities because A) they help to attract business from these government entities B) banks consider them helpful in attracting accounts of Federal employees C) the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts D) there is no default-risk with state and local government securities
they help to attract business from these government entities
Because ______ are less liquid for the depositor than _______, they earn higher interest rates. A) passbook savings; time deposits B) money market deposit accounts; time deposits C) money market deposit accounts; passbook savings D) time deposits; passbook savings
time deposits; passbook savings
In the absence of regulation, banks would probably hold A) too much capital, reducing the efficiency of the payments system B) too much capital, reducing the profitability of banks C) too little capital D) too much capital, making it more difficult to obtain loans
too little capital
Bank capital is equal to ______ minus _______. A) total assets; total liabilities B) total liabilities; total assets C) total assets; total reserves D) total liabilities; total borrowings
total assets; total liabilities
Which of the following is not a source of borrowing for a bank? A) Federal funds B) Eurodollars C) transaction deposits D) discount loans
transaction deposits
The largest percentage of banks' holdings of securities consist of A) treasury and government agency securities B) tax-exempt municipal securities C) state and local government securities D) corporate securities
treasury and government agency securities
Bank reserves include A) deposits at the Fed and short-term treasure securities B) vault cash and short-term Treasury securities C) vault cash and deposits at the Fed D) deposits at the other banks and deposits at the Fed
vault cash and deposits at the Fed