MB Exam 2 9-10
If a bank has $1000 in deposits and the required reserve ratio is 10%, then the amount required as the bank's reserves is
$100
A bank has $50,000 of checkable deposits and a required reserve ratio of 25 percent. The bank currently holds $37,500 in reserves. How much of these reserves are excess reserves?
$25000
What happens to reserves at the First National Bank if one person withdraws $1,500 of cash and another person deposits $400 of cash? Use a T-account to explain your answer. The T-account for First National Bank is:
Assets Liabilities Reserves $negative −1100 Checkable deposits $negative 1100
Using the T-accounts of the First National Bank and the Second National Bank, describe what happens when Jane Brown writes a $65 check 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.
Assets Liabilities Reserves $negative −65 Checkable deposits $negative −65 (For T bank) T-account for the Second National Bank: Assets Liabilities Reserves $65 Checkable deposits $65 (for second)
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.
Which of the following is not an asset on a bank's balance sheet?
Checkable deposits.
Required reserves are a fixed percentage of a bank's
E. checkable deposits.
To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance.
FDIC
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.
______________ requires financial firms to value assets at what they would sell for in the market.
Mark-to-market accounting
The largest percentage of banks' holdings of securities consist of
Treasury and government agency securities.
The bank you own has the following balance sheetLOADING...: Assets Liabilities Reserves $ 75 million Deposits $500 million Loans $525 million Bank capital $100 million 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.
A bank failure is less likely to occur when
a bank has more bank capital.
When bad drivers line up to purchase collision insurance, automobile insurers are subject to the
adverse selection problem.
The government safety net creates ________ problem because risk−loving entrepreneurs might find banking an attractive industry.
an adverse selection
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
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.
Banks are required to file ________ usually quarterly that list information on the bank's assets and liabilities, income and dividends, and so forth.
call reports
Conditions that likely contributed to a credit crunch during the global financial crisis include:
capital shortfalls caused in part by falling real estate prices.
Property promised to the lender as compensation if the borrower defaults is called ________.
collateral
Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the
contagion effect.
The fact that banks operate on a "sequential service constraint" means that
depositors arriving first have the best chance of withdrawing their funds.
Bank loans from the Federal Reserve are called ________ and represent a source of new funds for financial intermediaries.
discount loans
Deposit insurance is only one type of government safety net. All of the following are types of government support for troubled financial institutions except
forgiving tax debt.
Modern liability management has resulted in
increased sales of negotiable CDs to raise funds.
Holding large amounts of bank capital helps prevent bank failures because
it can be used to absorb the losses resulting from bad loans.
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.
liability; asset
Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for ________.
liquidity
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.
To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also
monitor and enforce them.
Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk.
moral hazard; much
If a bank has ________ rate−sensitive assets than liabilities, then ________ in interest rates will increase bank profits.
more; an increase
Moral hazard is an important concern of insurance arrangements because the existence of insurance
provides increased incentives for risk taking.
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.
reduces; reduces
The practice of keeping high−risk assets on a bank's books while removing low−risk assets with the same capital requirement is know as
regulatory arbitrage.
The sum of a bank's vault cash plus its deposits at the Fed is the bank's
reserves.
Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called
return on equity.
The Basel Accord, an international agreement, requires banks to hold capital based on
risk−weighted assets.
Bank chartering reduces adverse selection problems by:
screening proposals for new institutions to prevent undesirable people from running the institution.
When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach.
stress−test
Although the FDIC was created to prevent bank failures, its existence encourages banks to
take too much risk.
The ________ that required separation of commercial and investment banking was repealed in 1999.
the Glass−Steagall Act.
A major flaw of the mark-to-market accounting is that
the price of an asset sold at a time of financial distress or a bubble does not reflect its fundamental value.
Bank reserves include
vault cash and deposits at the Fed.
A problem with the too−big−to−fail policy is that it ________ the incentives for ________ by big banks.
increases; moral hazard
Banks generate profits by earning higher returns on their ____________ than they pay in interest on _____________.
loans; deposits
If a bank has ________ rate−sensitive assets than liabilities, a ________ in interest rates will reduce bank profits, while a ________ in interest rates will raise bank profits.
more; decline; rise
A well−capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.
more; less
Gap analysis measures the difference between a bank's:
rate-sensitive liabilities and rate-sensitive assets
Long−term customer relationships________ the cost of information collection and make it easier to________ credit risks.
reduce; screen
