Money and Banking Chapter 9

Order to resolve reserve deficiency:

1. Borrow from other banks 2. Call in loans 3. Sell securities 4. Borrow from the fed

Banks that actively manage liabilities will most likely meeta reserve shortfall by

Borrowing federal funds

Asset transformation can be described as:

Borrowing short and lending long

The First State Bank has gap equal to a positive $20 million, then a 5 percentage point drop in interest rates will cause profits to

Decline by $1.0 million

Assuming that the average duration of its assets is four years, while the average duration of its liabilities is three years, then the 5 percentage point increase in interest rates will cause net worth of the First National to __________ by ________ of the total original asset value.

Decline; 5 percent

True or False? When interest rates are expected to rise in the future, a banker is likely to make long-term rather than short-term loans.

False (Banker WANTS to make short-term loans.)

All else the same, if a bank has more rate-sensitive assets than liabilities, then a(n) __________ in interest rates will _______ bank profits.

Increase; increase

Modern liability management has resulted in

Increased sales of certificates of deposits to raise funds

Assets >Securities >Loans >Reserves

Liabilities >Deposits >Borrowings >Bank capital

Bank capital is listed on the _________ side of the bank's balance sheet because it represents a ________ of funds.

Liability; Source

Because checking accounts are ________ liquid, for the depositor than passbook savings, they earn ________ interest rates.

More; lower

Checkable deposits and money market deposits accounts are

Payable on demand and liabilities of the banks

Which of the following bank assets is the least liquid?

Secondary reserves

In general, banks make profits by selling _________ liabilities and buying ________ assets.

Short-term; longer-term

Bruce the Bank Manager can reduce interest rate risk 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

True or false? When interest rates are expected to rise in the future, a banker is likely to buy short-term rather than long-term bonds.

True

Bank reserves include

deposits at the Fed and vault cash.

For a given return on assets,

the lower is bank capital, the higher is the return for the owners of the bank

Everything else held constant, a bank will hold less excess reserves

when it expects to have a deposit inflow in the near future.