Econ 330 Ch9

Suppose ​$10,000 is deposited at a bank. The required reserve ratio is 10 ​percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the​ bank's total​ reserves? Total reserves are

1,000

Joe deposits his ​$2600 paycheck into his checking account at Local Bank. The​ bank's assets will then increase by

2600

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.

7

"Because diversification is a desirable strategy for avoiding​ risk, it never makes sense for a bank to specialize in making specific types of​ loans." Is this statement true or​ false? Explain your answer. A. False. A bank may have developed expertise in screening and monitoring a particular type of​ loan, thus improving its ability to handle problems of adverse selection and moral hazard. B. True. A bank can reduce its risk by using​ diversification, just like individuals can. C. False. A bank does not gain anything by​ diversifying; the bank only raises its costs when it diversifies. D. True. Diversification is a desirable strategy for a​ bank, so it does not make sense for a bank to specialize in certain types of lending.

A

A bank finds that its ROE is too low because it has too much bank capital. Which of the following will not raise its​ ROE? A. The bank can sell part of its holdings of securities and hold more excess reserves B. The bank can pay out more dividends C. The bank can increase the amount of its assets by acquiring new funds D. The bank can buy back some of its shares

A

All of the following are examples of offminus−balance sheet activities that generate fee income for banks except A. selling negotiable CDs. B. foreign exchange trades. C. back−up lines of credit. D. guaranteeing debt securities.

A

Asset transformation can be described as A. borrowing short and lending long. B. borrowing long and lending short. C. borrowing and lending for the long term. D. borrowing and lending only for the short term.

A

If a bank doubles the amount of its capital and ROA stays​ constant, what will happen to​ ROE? A. Given the​ ROA, if bank capital​ doubles, then ROE will fall by half. B. Even if the bank doubles its amount of​ capital, if ROA is​ constant, then ROE will remain unchanged. C. Given the​ ROA, if bank capital​ doubles, then ROE will also double. D. The effect on ROE cannot be determined based on the information provided.

A

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.

A

Which of the following are reported as liabilities on a​ bank's balance​ sheet? A. Checkable deposits B. Reserves C. Consumer loans D. Deposits with other banks

A

Banks make profits by selling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics. This process is known as ___________.

Asset Transformation

If a bank has​ ________ rate−sensitive assets than​ liabilities, then​ ________ in interest rates will increase bank profits. A. more; a decline B. more; an increase C. fewer; an increase D. fewer; a surge

B

If a​ bank's liabilities are more sensitive to interest rate movements than are its​ assets, then A. an increase in interest rates will increase bank profits. B. an increase in interest rates will reduce bank profits. C. a decrease in interest rates will reduce bank profits. D. interest rates changes will not impact bank profits.

B

If you are a banker and expect interest rates to rise in the​ future, would you want to make​ short-term or​ long-term loans? A. You would want to make​ short-term loans since there is no guarantee that the interest rate will rise as expected. B. You would want to make​ short-term loans so you can reinvest the funds at higher interest rates after their maturity. C. You would want to make​ long-term loans to secure the higher interest rate for an extended period of time. D. Both​ short-term and​ long-term loans will be profitable with an expected interest rate increase.

B

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. credit​ rationing; diversifying B. specialization in​ lending; diversifying C. screening; rationing D. specialization in​ lending; rationing

B

In order to reduce the​ ________ problem in loan​ markets, banks often insist on collateral from potential borrowers. A. asymmetric information B. moral hazard C. principal-agent D. adverse lending

B

Traders working for banks are subject to the A. double−jeopardy problem. B. principal−agent problem. C. free−rider problem. D. exchange−risk problem.

B

Which of the following are primary concerns of the bank​ manager? A. Acquiring funds at a relatively high​ cost, so that profitable lending opportunities can be realized B. Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows C. Maintaining high levels of capital and thus maximizing the returns to the owners. D. Extending loans to borrowers who will pay low interest​ rates, but who are poor credit risks

B

Which of the following is not an​ income-producing asset on a​ bank's balance​ sheet? A. Treasury bills. B. Bank reserves. C. Treasury notes. D. Consumer loans.

B

Why has noninterest income been growing as a source of bank operating​ income? A. Banks are able to offer their employees higher salaries and​ bonuses, which reduces the moral hazard problem. B. Banks can increase profits by engaging in noninterest​ income, or​ off-balance-sheet activities. C. Banks are able to reduce the​ principal-agent problem by engaging in​ off-balance-sheet activities. D. Banks are more likely to engage in​ speculation; it can be risky but the profits are worth the risk.

B

​Reserves, cash items in process of​ collection, and deposits at other banks are collectively called A. bank capital B. cash items C. discount loans D. secondary reserves

B

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. assets; liabilities C. liabilities; assets D. securities; deposits

C

Gap analysis measures the difference between a​ bank's: A. deposits and loans B. long-term securities and​ short-term securities C. rate-sensitive liabilities and​ rate-sensitive assets D. assets and liabilities

C

If the bank you own has no excess reserves and a sound customer comes in asking for a​ loan, should you automatically turn the customer​ down, explaining that you​ don't have any excess reserves to lend​ out? Why or why​ not? What options are available for you to provide the funds your customer​ needs? A. Yes. Although excess reserve are not the only source of new​ lending, the cost of acquiring the excess reserves for lending are higher than the expected return on the loan. B. No. There are only two sources of funds that can used to acquire reserves. The bank can borrow at the discount window or in the federal funds market. C. No. There are several ways that reserves can be acquired. For​ example, the bank can borrow at the discount window or in the federal funds​ market, or it can acquire funds by issuing negotiable CDs. D. Yes. In response to the subprime mortgage​ meltdown, the Federal Lending Act of 2008 stipulates that excess reserves are the only source of new lending.

C

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 you deposit​ $50 in currency at Old National​ Bank, A. its reserves increase by less than​ $50 because of reserve requirements. B. its assets increase by less than​ $50 because of reserve requirements. C. its liabilities increase by​ $50. D. its liabilities decrease by​ $50.

C

Which of the following is the greatest source of funds to commercial banks in the pastin the past​? A. bank capital B. borrowings C. checkable deposits D. nontransaction deposits

C

Which of the following is true regarding how banks manage their assets? Banks seek assets that A. Have no default risk B. Do not provide diversification C. Generate high returns D. Are not liquid

C

Which of the following statements are​ true? A. A​ bank's liabilities are its uses of funds. B. A​ bank's assets are its sources of funds. C. A​ bank's balance sheet shows that total assets equal total liabilities plus equity capital. D. A​ bank's balance sheet indicates whether or not the bank is profitable.

C

Rank the following bank assets from most liquid ​(1) to least liquid​ (4). Commercial Loans Securities Reserves Physical Capital

Commercial Loans: 3 Securities: 2 Reserves: 1 Physical Capital: 4

Off−balance sheet activities involving guarantees of securities and back−up credit lines A. greatly reduce the risk a bank faces. B. slightly reduce the risk a bank faces. C. have no impact on the risk a bank faces. D. increase the risk a bank faces.

D

The bank you own has the following balance sheet 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? A. You can call in or sell off loans. B. You can borrow reserves in the federal funds market. C. You can go to the discount window. D. Any of the above are appropriate actions to take.

D

The principal-agent problem that exists for bank trading activities can be reduced​ by: A. combining trading activities with bookkeeping activities B. eliminating internal controls C. eliminating the regulation of the financial industry D. the physical separation of trading activities from bookkeeping activities

D

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; loses B. loses; gains C. gains; gains D. loses; loses

D

Which of the following may not be used as a backup line of​ credit? A. Loan commitments B. Overdraft privileges C. Standby letters of credit D. Mortgages

D

​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. managing credit risk. C. managing interest rate risk. D. liquidity management.

D

Using the​ T-accounts of the First National Bank and the Second National​ Bank, describe what happens when Jane Brown writes a check for ​$45 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

First National Bank Assets: -45 Liabilities: -45 Second National Bank Reserves: 45 Checkable Deposits: 45

NewBank started its first day of operations with ​$102 million in capital. A total of ​$105 million in checkable deposits is received. The bank makes a ​$25 million commercial loan and another ​$23 million in mortgage loans. The required reserve ratio is 5.8​%. ​(​Note: Information is based on​ NewBank's first month of​ operations.)

Required Reserves: 6 Excess Reserves: 153 Loans: 48 Checkable Deposits: 105 Bank Capital: 102

Short-term U.S. government securities are called _______ because of their high liquidity.

Secondary reserves

Banks also obtain funds by borrowing from the Federal Reserve System. These borrowings are known as

discount loans