Econ 471 (Exam #3 Prep Chapter 17/18/19/23)
Suppose Bank A's rate-sensitive assets total $45 million and its rate-sensitive liabilities total $32 million. If the interest rates rise by 1 %, GAP will be equal to (1) $13 million and the bank income will change by (2) $130,000 . A finance company's manager conducts income gap and duration gap analyses and concludes that the company will gain from a rise in interest rates. The finance company is still subject to interest-rate risk. Which of the following are problems with income gap analysis? (Check all that apply.) A. The approximation that changes in interest rates are small. B. The assumption that interest rates on all maturities change by exactly the same amount when the level of interest rates changes. C. The assumption that interest rates for all maturities are the same. D. The manager's estimates of the proportion of fixed-rate assets and liabilities that may be rate-sensitive might not be accurate.
(1) $45 - $32 = $13 (2) $13 x 10000 = $ 130,000 Answer: B & D
According to the text, there are about A. 5,700 commercial banks in the United States. Your answer is correct. B. 15,000 commercial banks in the United States. C. 10,000 commercial banks in the United States. D. 5,000 commercial banks in the United States. Most industries in the United States have fewer firms than the commercial banking industry.
A.
To use the concept of duration to analyze the effect of changes in interest rates on the market value of an asset, a bank manager would multiply A. the negative of the duration of the asset by Upper Delta i /(1 + i). B. the duration of the asset by Upper Delta i /(1 + i). C. the duration of the asset by the change in the interest rate, Upper Delta i. D. the negative of the duration of the asset by the change in the interest rate, Upper Delta i.
A.
Which is the least costly way for a bank to handle deposit outflows? A. Hold excess reserves. B. Borrow from other banks. C. Sell securities. D. Call in loans.
A.
What do your previous answers tell you about the tradeoffs between the two accounting systems? (Check all that apply.) A. Using historical dash cost can provide more capital stability for banks during downturns. Your answer is correct. B. Using a mark dash to dash market system during booms makes access to liquidity more difficult. C. Mark-to-market rules generally provide a more accurate picture of a bank's capital position. Your answer is correct. D. The historical-cost system provides a more accurate picture of a bank's capital position.
ANSWER: A. C.
What are the disadvantages of interstate banking? (Check all that apply.) A. Interstate lending may cause a reduction in lending to small businesses. Your answer is correct. B. There may be a decrease in competition as small banks may fail. Your answer is correct. C. Diversification of a bank's loan portfolio increases the bank's risk. D. There may be increased risk from expanding into new geographical markets.
ANSWER: A. B. D.
Suppose Universal Bank holds $100 million in assets, which are composed of the following: Required Reserves: $10 million Excess Reserves: $ 5 million Mortgage Loans: $20 million Corporate Bonds: $15 million Stocks: $25 million Commodities: $25 million Do you think it is a good idea for Universal Bank to hold stocks, corporate bonds, and commodities as assets? A. Yes, as these types of assets surely provide the bank with extra profits. B. No, as these types of assets are relatively high risk, and there is a threat of insolvency. Your answer is correct. If the housing market suddenly crashed, Universal Bank would be better off with the historical-cost accounting system. If the price of commodities suddenly increased sharply, Universal Bank would be better off with a mark-to-market accounting system.
ANSWER: B.
The government agency that oversees the banking system and is responsible for the supply of money and credit in the economy is the A. national bank B. central bank Your answer is correct. C. virtual bank D. community bank The Bank of the United States , established in 1791, is the first central bank in the United States. The current central bank of the United States is A. the Federal Reserve Your answer is correct. B. the First National Bank of Boston C. Morgan Stanley D. the Third Bank of the United States
ANSWER: B. A.
Which of the following is true of a banking system with deposit insurance? A. The moral hazard problem in banking is reduced. B. Depositors are less likely to withdraw their money in the event of a crisis. C. Depositors are more likely to collect information about the quality of the bank's loans. D. Depositors are less likely to deposit their money in a bank. In order to limit the moral hazard incentives for banks to engage in the excessively risky behavior encouraged by deposit insurance, A. the government should be able to monitor the actions of the depositors. B. a strong, institutional environment must be in place. C. there must be only a few large banks. D. banks should pay a premium for the deposit insurance.
ANSWER: B. B.
Regulation Q A. separated commercial banking and investment banking. B. set the ceiling on interest rates that banks could pay on their deposits. Your answer is correct. C. set the ceiling on interest rates that banks could charge on their loans. D. restricted interstate branching. When depositors fail to deposit funds in banks or withdraw existing deposits because they have found more profitable alternatives, we have observed A. financial innovation. B. the effects of economies of scope. C. securitization. D. disintermediation.
ANSWER: B. D.
Which of the following is not a source of competition that has reduced the income advantages banks once had on their traditional assets? A. increasing use of securitization B. growth in the commercial paper market C. growth in the use of activities with larger risks Your answer is correct. D. the passage of Regulation Upper Q The decline in traditional banking in the United States has led to A. an increase in the number of savings and loans. B. an increase in riskier bank loans and off-balance-sheet activities of banks. Your answer is correct. C. an increase in the number of banks. D. reduced regulation of banks.
ANSWER: C. B.
Which of the following routes could the government take to save the government-sponsored enterprises (GSEs) from getting into serious financial trouble? (Check all that apply.) A. Leave them as privately owned GSEs but loosen regulations which restrict the amount of risk they take. B. Leave them as privately owned GSEs but force them to expand so they no longer expose the taxpayer to huge losses. C. Fully privatize GSEs by taking away their government sponsorship, thereby removing the implicit backing for their debt. Your answer is correct. D. Completely nationalize them by taking away their private status and make them government agencies.
ANSWER: C. & B.
Why might more competition in financial markets be bad? A. More funds would be spent on regulations to monitor financial institutions. B. It would be more difficult for the FDIC to use the purchase-and-assumption method to handle failed banks. C. There would be a higher probability of a contagion effect during economic downturns. D. There would be greater incentive for financial firms to take on greater risk. Would restrictions on competition be better? A. Yes, restrictions would decrease the incentive for risk by financial markets and therefore increase bank profits. B. Yes, restrictions may increase the efficiency of banking institutions. C. No, restrictions would decrease the efficiency of banking institutions. D. No, restrictions would result in lower fees to consumers and therefore lower profits for banks.
ANSWER: D. C.
The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance A. are likely to take on greater risks than they otherwise would. B. are likely to be too conservative, reducing the probability of turning a profit. C. are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety. D. are placed at a competitive disadvantage in acquiring funds
ANSWER: A
If a financial firm is deemed ____, it poses a risk to the overall financial system because its failure would cause widespread damage. A. systemic B. systematic C. toominus big D. financially important
ANSWER: A.
If the FDIC uses the purchase and assumption method to handle a failed bank, A. all deposits will be paid in full. Your answer is correct. B. small deposits will be paid in full but deposits over the insurance limit will not. C. all deposits will suffer losses. D. none of the above will occur.
ANSWER: A.
Small banks are also known as A. savings and loan institutions. B. state banks. C. supraregional banks. D. community banks. Your answer is correct. Large banks are more efficient than community banks and have less likelihood of failure
ANSWER: A.
What is the major difference between banking systems in the United States and Japan? A. American banks are not allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks can. B. Bank holding companies are illegal in the United States. C. Japanese banks are usually organized as bank holding companies. D. Japanese banks are not allowed to hold substantial equity stakes in commercial firms, whereas American banks can.
ANSWER: A.
Which of the following is the only depository institution to maintain a tax-exempt status? A. Credit unions B. Savings and loan associations C. Mutual savings banks D. Commercial banks
ANSWER: A.
Which of the following was not a contributing factor towards the occurrence of financial crises throughout the world? A. They all started with the adoption of protectionist policies. B. There was a government safety net. C. Weak bank regulatory systems were present. D. They all started with financial liberalization or innovation.
ANSWER: A.
Some view that Doddminus Frank eliminated the toominus bigminustominus fail problem. How did it achieve this? A. By eliminating the Volcker rule B. By making it harder for the Federal Reserve to bail out financial institutions C. By reducing the regulation of SIFIs D. All of the above.
ANSWER: B
A common element to all the banking crisis in countries discussed is the existence of _____. A. strong government regulation B. a government safety net C. some type of deposit insurance D. strict capital requirements
ANSWER: B.
Commercial banks that provide a full range of banking, securities, and insurance services, all within a single legal entity, are part of: A. barrier-free banking B. a universal banking system C. decentralised banking D. an international banking system
ANSWER: B.
The cost of rescuing banks in Indonesia tops the list in terms of cost as a percentage of GDP. Rescuing banks following the crisis in 1997minus 2001 cost __ of Indonesia's GDP. A. 75% B. 57% C. 30% D. 110%
ANSWER: B.
Up until 1863, all commercial banks in the United States were chartered by the A. First Bank of the United States. B. banking commission of the state in which each operated. C. Second Bank of the United States. D. municipal government in which the bank is located. Federally dash chartered banks are also known as national banks .
ANSWER: B.
The National Bank Act of 1863 created a new banking system of national banks . The national banks created by the National Bank Act of 1863 are chartered and supervised by the A. Second Bank of the United Sates B. state government in which the banks are located C. Office of the Comptroller of the Currency D. Federal Reserve
ANSWER: C
Bank failures have contributed to the decline in the number of banks. Another major reason is the A. history of branching restrictions. B. existence of securitization. C. prevalence of bank consolidation. Your answer is correct. D. creation of financial derivatives. Banks could gain the benefits of diversification because they would now be able to make loans in different states rather than focus in just one.
ANSWER: C.
Bank holding companies LOADING... that rival money center banks in size but are not located in money center cities are known as: A. district branch banks. B. international banks. C. superregional banks. D. multinational banks.
ANSWER: C.
The large number of banks in the United States A. are likely to substantially grow in number over the next few decades. B. resulted from increased international demand for U.S. goods. C. are greater than the number of banks in most developed countries. Your answer is correct. D. is evidence that the banking system in the United States is very competitive. Historically in the United States, branching laws have been most restrictive in the Midwest .
ANSWER: C.
The Glass-Steagall Act, which was repealed in 1999, prohibited commercial banks from: A. purchasing any debt securities B. issuing equity to finance bank expansion C. engaging in underwriting and dealing in corporate securities Your answer is correct. D. selling new issues of government securities
ANSWER: C.
The presence of deposit insurance increases the adverse selection problem in banking by A. reducing the amount of deposits in the bank. B. increasing risky loans in banking. C. attracting risk-loving people into bank ownership. Your answer is correct. D. reducing bank capital. With deposit insurance, less information regarding banks will be collected by the depositors.
ANSWER: C. LESS....
Which of the following is not a provision of the Volcker rule? A. Banks are allowed to own a small percentage of private equity funds. B. Banks are not allowed to take large trading risks. C. Banks are allowed to own a small percentage of hedge funds. D. There is no limit on banks to engage in proprietary trading.
ANSWER: D
Which of the following is not an incentive created by regulatory agencies to encourage international banking? A. Special tax treatment. B. Relaxed branching regulations for Edge Act corporations. C. Relaxed branching regulations for international banking facilities (IBFs). D. Direct federal subsidies.
ANSWER: D
If the FDIC considers an insolvent bank to be "too big to fail", it will resolve the insolvency through the A. purchase and assumption method, which guarantees only deposits that do not exceed $250,000. B. payoff method, which guarantees all deposits. C. payoff method, which guarantees only deposits that do not exceed $250,000. D. purchase and assumption method, which guarantees all deposits. Your answer is correct. The "too big to fail" policy of the FDIC increases the moral hazard incentives for large banks
ANSWER: D LARGE.....
Regular bank examinations and restrictions on asset holdings indirectly help to reduce the ________ problem because, given fewer opportunities to take on risk, riskminus prone entrepreneurs will be discouraged from entering the banking industry. A. ex post shirking B. moral hazard C. postminus contractual opportunism D. adverse selection
ANSWER: D.
The Doddminus Frank bill requires many standardized derivative products _____ to reduce the risk of losses. A. to be sold montly B. to be banned C. to be held offminus balanceminus sheet D. to be traded on exchanges and cleared through clearinghouses
ANSWER: D.
The United States is said to have a dual banking system because A. the banking system includes both bank holding company affiliates and branch banks. B. commercial banks offer both banking and securities market services. C. the depository system includes both commercial banks and thrift institutions. D. state banks and national banks operate side by side. Your answer is correct. E. banks are regulated and examined by both the Federal Reserve and the FDIC. From 1836 to 1913, the United States did not have a central bank. This changed when the Federal Reserve System was created in 1913.
ANSWER: D.
Which of the following factors does not explain the rapid growth in international banking? A. The expansion of U.S. banks into the Eurodollar market. B. Rapid growth in international trade and multinational corporations. C. Increased profitability of U.S. banks in global investment banking. D. Increased regulation of the U.S. banking industry.
ANSWER: D.
Which of the following is not a function of the Financial Stability Oversight Council? A. Designates which firms are systemically important. B. Monitors markets for asset price bubbles. C. Monitors markets for buildup of systemic risk. D. Prohibits payments to brokers for pushing borrowers into higherdash priced loans.
ANSWER: D.
Which of the following is not a reason for the dramatic increase in the number of bank holding companies LOADING... ? A. Bank holding companies can provide leasing, credit card services, and servicing of loans in other states B. Bank holding companies can circumvent branching restrictions because they can own a controlling interest in several banks even if branching is not permitted C. Bank holding companies can engage in other activities related to banking, which can be highly profitable D. Bank holding companies can monopolise the market for banking services in a given region
ANSWER: D.
Which of the following solutions have been proposed to solve the toominus bigminustominus fail problem? A. Do nothing, since Doddminus Frank effectively eliminated the problem. B. Break up large, systemically important financial institutions. C. Impose higher capital requirements on large, systemically important financial institutions. D. All of the above have been proposed
ANSWER: D.
Suppose that a bank's balance sheet consists of the following: On the liability side it has $93 of deposits and $7 of capital, while on the asset side it has $10 of reserves and $90 of loans.This bank can then sustain ________of bad loans before it becomes solvent. (Round your response to the nearest whole number.)
Answer: $7 A bank cannot satisfy its obligations to pay its depositors and other creditors if the sum of its debt obligations and outgoing deposits exceed the available capital.
What happens to reserves at the First National Bank if one person withdraws $900 of cash and another person deposits $700 of cash? Use a T-account to explain your answer. The T-account for First National Bank is:
Answer: $700-$900= -$200 Written as..... Assets: Reserves= -$200 Liabilities: Checkable Deposits= -$200
Suppose Bank Z's total asset value is $160 million and its total liability value is $125 million. The bank manager wants to know what happens when interest rates rise from 10 % to 11%. If the average duration of the assets is 3.05 years and the average duration of liabilities is 1.50 years, the change in the market value of the assets is equal to (1)= -2.77%, and the change in the market value of liabilities will be equal to (2) = - 1.36%. (Round your answers to two decimal places.) Based on the information presented in the previous step, the duration gap for Bank Z will be (3)= 1.88 years. The change in the bank's market value of net worth as a percentage of its assets will be (4)= -1.71 %. (Round your answers to two decimal places.)
Answer: (0.11-0.10) = 0.01 (1) = -3.05 x (0.01/(1+0.10))=-0.0277= -2.77% (2) = -1.50 x (0.01/(1+0.10))= -0.0136 = -1.36% (3)= 3.05 - ((125/160) x 1.50) = 1.88 years (4) = -1.88 x (0.01/(1+0.10))=-0.0171 = -1.71%
Collateral reduces the risk of adverse selection because it reduces the lender's losses in the case of a loan default . Which of the following is not a feature of the loan commitment agreement? A. It promotes a long-term relationship between the borrowing firm and the bank. B. It reduces the bank's screening and information collection costs. C. The firm needs to supply the bank with information about its income, but not its asset and liability position. D. It acts as a source of credit to the borrowing firm when it needs. Which of the following is not an activity the lending institution can monitor from the borrowing firm's checking account? A. The bank can observe whether the firm is engaging in risky activities leading to moral hazard. B. The bank can observe the firm's check payment practices. C. The bank can observe whether the firm is engaging in risky equity transactions. D. The bank can check whether the borrower is pursuing new lines of business.
Answer: #1 = C #2 = C
Suppose that a bank has $160 in checkable deposits, reserves of $15 ,and a reserve requirement of 10%. Also assume that the the bank suffers a $10 deposit outflow. If the bank chooses to borrow from the Fed to meet its reserve requirement, then the bank would need to borrow (Round your response to the nearest two decimal place.)
Answer: $10 A=(rr x (D-O))-(R-O) where A = the amount the bank needs 10% = rr = the required reserve ratio $160 = D = checkable deposits $15 = R = reserves $10 = O = deposit outflow
If a bank has $1000 in deposits and the required reserve ratio is 10%,then the amount required as the bank's reserves is $.......
Answer: $1000*10% = $100
First National Bank Assets Liabilities Rate-sensitive $20 million $50 million Fixed-rate $80 million $40 million Referring to the table, First National Bank has a gap of ________. A. +30 B. -30 C. 60 D.
Answer: $20-$50= -$30 B.
If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation? (Check all that apply.) A. Issue stock. B. Borrow from other banks or corporations. C. Decrease dividend payments to increase retained earnings. D. Call in existing loans in an attempt to decrease its asset holdings.
Answer: A,C & D
A bank's balance sheet is a list of its _______________its uses to which the funds are put.
Answer: Assets
___________are those that generate profits for banks but are not visible on banks' balance sheets.
Answer: Balance-Sheet Activities
Short-term U.S. government securities are called____________ because of their high liquidity.
Answer: Secondary Reserves
Banks also obtain funds by borrowing from the Federal Reserve System. These borrowings are known as_____________________.
Answer: discount loans
Which of the following were reasons for weak performance of commercial banks in the late 1980s? (Check all that apply.) A.Rise in return on assets (ROA) and return on equity (ROE). B. Decrease in net income. C. Interestdash rate movements. D. Increase in loan loss provisions in the early 1980s.
B & D
'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.' Is this statement true or false? Explain your answer. A. False. It is not true that the industry is dominated by a few large firms; thus, based on the Herfindahl-Hirschman Index, the banking industry in Canada is just as competitive as in the United States B. False. The reason for the large number of US banks is anticompetitive regulations such as branching restrictions C. True. The reason for the large number of US banks is regulations that promote competition such as branching restrictions D. True. The banking industry is less competitive in Canada than in the United States because Canada has a national banking system, i.e., owned and operated by the government
B.
Reserves, cash items in process of collection, and deposits at other banks are collectively called A. bank capital B. cash items C. secondary reserves D. discount loans
B.
Which of the following cannot be an example of a rate-sensitive liability of a bank? A. Variable-rate CDs. B. Variable-rate mortgages. C. Federal funds. D. Money market deposit accounts
B.
Which of the following is the difference between interest income and interest expenses as a percentage of total assets? A. Return on equity. B. Net interest margin. C. Operating income. D. Return on assets.
B.
Why are deposit insurance and other types of government safety nets important to the health of the economy? A. Government safety nets were designed to weaken the shadow banking system. B. Deposit insurance and other government safety nets help to eliminate a contagion effect. C. Deposit insurance and other types of government safety nets eliminate the adverse selection problem. D. Deposit insurance prevents depositors from withdrawing their funds and thus eliminates runs on banks.
B.
Why do equity holders care more about ROE than about ROA? A. ROE measures how efficiently the bank is being run, while ROA measures how much equity holders are earning. B. ROE measures how much equity holders are earning, while ROA measures how efficiently the bank is being run. C. A higher ROE indicates a higher level of liquidity for the investment, while a higher ROA does not. D. A change in ROE indicates a change in the safety of the investment, while a change in ROA does not.
B. ROE measures how much equity holders are earning, while ROA measures how efficiently the bank is being run.
Which of the following is the greatest source of funds to commercial banks in the past? A. bank capital B. checkable deposits C. borrowings D. nontransaction deposits
B. checkable deposits
Which of the following is true regarding how banks manage their assets? Banks seek assets that A. do not provide diversification. B. generate high returns. C. have no default risk. D. are not liquid.
B. generate high returns.
The share of checkable deposits in total bank liabilities has A. expanded moderately over time. B. remained virtually unchanged since 1960. C. shrunk over time. D. expanded dramatically over time.
C.
When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, it is said to engage in ________. A. strategic refusal B. collusive behavior C. credit rationing D. constrained lending
C.
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 instead makes loans, 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 $800,000. C. the liabilities of the bank increase by $1,000,000. D. reserves increase by $160,000.
C.
Which of the following would substitute for discount loans? A. Loans to bank holding companies B. Loans to businesses C. Repurchase agreements D. Investing in Eurodollars E. Reverse repurchase agreements
C.
Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A. equity multiplier. B. return after taxes. C. return on equity. D. return on assets.
C. return on equity.
In 2015, operating income totalled ________ for all federally insured commercial banks. A. $5.6 billion B. $50 billion C. $231 billion D. $1.2 trillion
C.$231 billion
When investors are involved in trading activities in an attempt to outguess markets, investors are: A. diversifying B. engaging in riskless arbitrage C. speculating D. hedging
C.speculating
Which of the following does not describe an off-balance-sheet activity? A. A bank guarantees a firm's debt by signing a banker's acceptance. B. A bank writes a mortgage and sells it to a life insurance company. C. A bank exchanges dollars for euros for a large corporate customer. D. A bank makes a loan to a large corporate customer.
D.
Which of the following is not a benefit of long-term customer relationships to the financial institutions and the firms? A. The firms have an incentive to avoid risky activities that would upset the financial institution. B. Firms having long-term relationships with financial institutions can get loans at lower interest rates. C. The balances in the checking and savings accounts tell the loan officer how liquid the potential borrower is. D. The cost of monitoring long-term customers are higher than the cost of monitoring new customers
D.
Which of the following is not a category of regulations under the Dodddash Frank bill? A. Volcker rule. B. Systemic risk regulation. C. Consumer protection. D. Interstate banking regulation
D.
Which of the following is not a noninterest expense of a bank? A. Salaries for tellers and officers. B. Purchase of equipment. C. Servicing cost of equipment. D. Service charge on deposit accounts.
D.
Examples of offminus balanceminus sheet activities include A. trading in financial futures. B. loan sales. C. foreign exchange market transactions. D. all of the above. E. only A and B of the above.
D. All of the above
When a bank sells all or part of the cash stream from a specific loan, A. it removes the loan from its balance sheet. B. it usually does so at a loss. C. it usually does so at a profit. D. both A and B of the above occur. E. both A and C of the above occur.
E.both A and C of the above occur.
A bank's balance sheet includes several components such as the following except A. employed workers. B. cash items in process of collection. C. bank capital. D. non-transaction deposits.
a. Employed Workers
Using the T-accounts of the First National Bank and the Second National Bank, describe what happens when Jane Brown writes a check for $70 on her account at the First National Bank to pay her friend Joe Green, who in turn deposits the check in his account at the Second National Bank.
T-account for the First National Bank: Assets: Reserves $-70 Liabilities: Checkable deposits $- 70 T-account for the Second National Bank: Assets Liabilities Reserves $70 Checkable deposits $70
When regulators engage in microprudential regulation, they focus on ________. A. the credit standards of individual loans B. the safety and soundness of each customer of a financial institution C. the safety and soundness of individual financial institutions D. the safety and soundness of each asset the financial institution holds
ANSWER: C.
Which of the following could not be the result of financial liberalization? A. It can lead to an increase in moral hazard. B. It can result in a banking crisis if regulation and supervision are lax. C. It makes firms less competitive. D. It can make a financial system more efficient.
ANSWER: C.
Which of the following is not an effect of imposing higher capital requirements? A. Helps restrain unsustainable booms. B. A larger buffer to withstand losses. C. An increase in moral hazard. D. Less incentive to take on risk.
ANSWER: C.
An argument that supports a regulated minimum capital requirement is that banks that hold too little capital A. are unprofitable. B. have an unfair competitive advantage over savings and loans. C. impose costs on other banks because they are more likely to fail. D. includes all of the above.
C.
n general, banks make profits by selling ________ liabilities and buying ________ assets. A. longminus term; shorterminus term B. illiquid; liquid C. short- term; longer- term D. risky; riskminus free
C.
Suppose the Fed pays no interest on bank reserves. For every $2000 in deposits, how much do banks lose in forgone interest due to the reserve requirement (after rounding to the nearest two decimal place) if the reserve requirement is 10 % and the rate at which banks lend is 8 %? A. 160 B. 200 C. 16 Your answer is correct. D. 160 If the interest rate on the loans increases, then the opportunity cost of the reserves rises .
C. 16 ($2000) X (0.08) X (0.10) = 16
For every $1000 in deposits, the amount that banks lost in forgone interest (opportunity cost) because of reserve requirements if banks charged 14 % on loans and the require reserve ratio was 22 % is 1) $30.8 . (Round your response to the nearest two decimal place.) If the required reserve ratio decreases, then the foregone interest due to reserve requirements declines .
(1) = i x rr x d ($1000 x 0.14 x 0.22)= 30.8
The sum of a bank's vault cash plus its deposits at the Fed is the bank's A. reserves. B. excess reserves. C. cash items in the process of collection. D. capital. E. federal funds.
A
Thrift institutions include: A. insurance companies B. commercial banks C. brokerage firms D. mutual savings banks
ANSWER: D.
Required reserves are a fixed percentage of a bank's A. loans. B. assets. C. capital. D. checkable deposits. E. liabilities.
D
When a bank suffers deposit outflows and has no excess reserves, the bank will generally first try to raise the funds by A. borrowing from the Fed. B. calling in some loans. C. selling some loans. D. selling some of its securities.
D
Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as A. collateral and compensating balances. B. screening and monitoring of loan applicants. C. credit rationing. D. all of the above. E. only A and B of the above.
D.
Examples of off-balance-sheet activities LOADING... include: A. extending loans to depositors B. selling negotiable CDs C. borrowing from other banks D. selling loan portfolios
D.
The principal-agent problem LOADING... that exists for bank trading activities can be reduced by: A. combining trading activities with bookkeeping activities B. eliminating the regulation of the financial industry C. eliminating internal controls D. the physical separation of trading activities from bookkeeping activities
D.
___________how well the bank is doing on an ongoing basis.
Net operating income indicates
