Econ 353 Final
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
The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to A) $100,000 B) $40,000 C) $250,000 D) $200,000
$250,000
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
First National Bank Assets vs. Liabilities : Rate-sensitive $20 million vs. $50 million Fixed-rate $80 million vs. $50 million Assuming that the average duration of its assets is five years, while the average duration of its liabilities is three years, then a 5 percentage point increase in interest rates will cause the net worth of First National to decline by ________ of the total original asset value A) 10 percent B) 15 percent C) 25 percent D) 5 percent
10 percent
If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral, the "haircut" is A) 10% B) 50% C) 5% D) 20%
10%
Which of the following statements are TRUE? A) A bank's balance sheet indicates whether or not the bank is profitable B) A bank's assets are its sources of funds C) A bank's liabilities are its uses of funds D) A bank's balance sheet shows that total assets equal total liabilities plus equity capital
A bank's balance sheet shows that total assets equal total liabilities plus equity capital
Which of the following statements are TRUE? A) Checkable deposits are assets for the bank B) Checkable deposits do not include NOW accounts C) Checkable deposits are payable on demand D) Checkable deposits are the primary source of bank funds.
Checkable deposits are payable on demand
Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in A) China B) South America C) Australia D) Europe
Europe
The Dodd-Frank bill created an agency to monitor markets for asset price bubbles and the buildup of systemic risk. This agency is called the A) Financial Stability Oversight Council B) Macroprudential Supervisory Agency C) Resolution Trust Authority D) Board of Governors
Financial Stability Oversight Council
One suggested method of dealing with the too-big-to-fail problem is to reimpose the restrictions that were in place under A) the Edge Act B) the Federal Reserve Act C) McFadden D) Glass-Steagall
Glass-Steagall
Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history? A) Bear Stearns B) Goldman Sachs C) Lehman Brothers D) Merrill Lynch
Lehman Brothers
Of the three players in the money supply process, most observers agree that the most important player is A) the Office of Thrift Supervision B) the FDIC C) the Federal Reserve System D) the United States Treasury
The Federal Reserve System
The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is A) the U.S. Gold Commission B) the Federal Reserve System C) the United States Treasury D) the House of Representatives
The federal reserve system
The government passed the Economic Recovery Act in October 2008 to prevent the financial crisis from continuing to worsen. A controversial component of this act was the A) sale of new subprime mortgage assets B) temporary decrease in the federal deposit insurance limit C) borrowing of $150 million from AIG D) Troubled Asset Relief Program (TARP).
Troubled Asset Relief Program (TARP)
A serious consequence of a financial crisis is A) financial globalization B) an increase in asset prices C) a contraction in economic activity D) financial engineering
a contraction in economic activity
When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in A) a call for government regulation B) an increased opportunity for growth C) a contraction of economic activity D) an economic boom
a contraction of economic activity
A reason why rogue traders have bankrupt their banks is due to A) a failure to maintain proper internal controls B) the separation of trading activities from the bookkeepers C) stringent supervision of trading activities by bank management D) accounting errors
a failure to maintain proper internal controls
Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans A) moral suasion B) intentional fraud C) moral hazard D) adverse selection
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 suasion B) moral hazard C) adverse lending D) adverse selection
adverse selection
Debt deflation occurs when A) corporations pay back their loans before the scheduled maturity date B) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral D) rising interest rates worsen adverse selection and moral hazard problems
an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness
A possible sequence for the three stages of a financial crisis might be ________ leads to ________ leads to ________. A) banking crises; increase in uncertainty; increase in interest rates B) asset price declines; banking crises; unanticipated decline in price level C) banking crises; increase in interest rates; unanticipated decline in price level D) unanticipated decline in price level; banking crises; increase in interest rates
asset price declines; banking crises, unanticipated decline in price level
When asset prices rise above their fundamental economic values, a(n) ________ occurs. A) asset-price bubble B) liability war C) decrease in moral hazard D) decline in lending
asset-price bubble
A deposit outflow results in equal reductions in A) reserves and capital B) assets and capital C) assets and liabilities D) loans and reserves
assets and liabilities
Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________. A) assets; deposit liabilities B) assets; liabilities C) loan portfolio; deposit liabilities D) securities portfolio; non-deposit liabilities
assets; liabilities
In a bank panic, the source of contagion is the A) free-rider problem B) transactions cost problem C) too-big-to-fail problem D) asymmetric information problem
asymmetric information problem
If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n) A) financial recovery B) increase in information available to investors C) banking crisis D) reduction of the adverse selection and moral hazard problems
banking crisis
The three players in the money supply process include A) banks, depositors, and borrowers B) banks, borrowers, and the central bank C) banks, depositors, and the U.S. Treasury D) banks, depositors, and the central bank
banks, depositors, and the central bank
If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could A) increase loans B) buy U.S. Treasury bills C) borrow from another bank in the federal funds market D) buy corporate bonds
borrow from another bank in the federal funds market
Asset transformation can be described as A) borrowing and lending for the long term B) borrowing short and lending long C) borrowing long and lending short D) borrowing and lending only for the short term.
borrowing short and lending long
Because of an expected rise in interest rates in the future, a banker will likely A) make long-term rather than short-term loans B) buy long-term rather than short-term bonds C) make either short or long-term loans; expectations of future interest rates are irrelevant D) buy short-term rather than long-term bonds
buy short-term rather than long-term bonds
Banks earn profits from off-balance sheet loan sales A) by foreclosing on delinquent accounts B) by selling the loans at discounted prices C) by calling-in loans before the maturity date D) by selling existing loans for more than the original loan amount
by selling existing loans for more than the original loan amount
A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system A) allows for a more efficient use of funds B) reduces uncertainty in the economy and increases market efficiency C) increases economic activity D) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently
causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently
________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there are losses on the underlying assets. A) adjustable-rate mortgage B) discount bond C) negotiable CD D) collateralized debt obligation (CDO)
collateralized debt obligation (CDO)
The principal-agent problem that exists for bank trading activities can be reduced through A) creation of internal controls that separate trading activities from bookkeeping B) elimination of regulation of banking C) creation of internal controls that combine trading activities with bookkeeping D) elimination of internal controls
creation of internal controls that separate trading activities from bookkeeping
When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a A) credit boom B) market race C) credit bust D) deleveraging
credit boom
The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression. A) adjustable-rate B) credit spread C) credit boom D) default swap
credit spread
A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called A) insolvency B) illiquidity C) moral hazard D) debt deflation
debt deflation
The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression. A) illiquidity B) increases in bond prices C) an improvement in banks' balance sheets D) debt deflation
debt deflation
If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to A) increase by $1.5 million B) decline by $15 million C) decline by $1.5 million D) increase by $15 million
decline by $1.5 million
When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called A) deleveraging B) deflation C) releveraging D) capitulation
deleveraging
Individuals that lend funds to a bank by opening a checking account are called A) partners B) depositors C) debt holders D) policyholders
depositors
Which of the following are reported as liabilities on a bank's balance sheet? A) real estate loans B) discount loans C) U.S. Treasury securities D) reserves
discount loans
Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans; use B) fed funds; use C) discount loans; source D) fed funds; source
discount loans; source
A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a A) free-rider problem B) financial crisis C) fiscal imbalance D) "lemons" problem
financial crisis
_______ are asymmetric information problems that act as a barrier to efficient allocation of capital. A) Financial derivatives B) Financial frictions C) Asset prices D) Credit imbalances
financial frictions
Microprudential supervision does all of the following EXCEPT A) assessing the riskiness of an individual bank's activities B) checking capital ratios of a bank C) focusing on financial system liquidity D) checking a bank's compliance with disclosure requirements
focusing on the financial system liquidity
The difference of rate-sensitive liabilities and rate-sensitive assets is known as the A) duration B) rate-risk index C) gap D) interest-sensitivity index
gap
Most U.S. financial crises have started during periods of ________ either after the start of a recession, a stock market crash, or the failure of a major financial institution A) high financial regulation B) high uncertainty C) low asset prices D) low interest rates
high uncertainty
Agency problems in the subprime mortgage market included all of the following EXCEPT A) homeowners could refinance their houses with larger loans when their homes appreciated in value B) mortgage originators had little incentives to make sure that the mortgagee is a good credit risk C) the evaluators of securities, the credit rating agencies, were subject to conflicts of interest D) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back
homeowners could refinance their houses with larger loans when their homes appreciated in value
Macroprudential supervision policies try to prevent a leverage cycle by changing capital requirements so that they ________ during an expansion and ________ during a downturn. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase
increase; decrease
As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. A) decrease; increase B) increase; increase C) increase; decrease 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) decrease; increase B) decrease; decrease C) increase; decrease D) increase; increase
increase; increase
The growth of the subprime mortgage market led to A) decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages B) a decrease in home ownership as investors chose other assets over housing C) increased demand for houses and helped fuel the boom in housing prices D) a decline in the housing industry because of higher default risk
increased demand for houses and helped fuel the boom in housing prices
Microprudential supervision focuses on the safety and soundness of A) the financial system as a whole B) government credit agencies C) individual financial institutions D) the shadow banking system
individual financial institutions
Firms that are designated as systemically important financial institutions (SIFIs) are subject to all of the following additional Federal Reserve regulations EXCEPT A) higher capital standards B) providing a plan for orderly liquidation if necessary C) stricter liquidity requirements D) interest rate ceilings on time deposits
interest rate ceilings on time deposits
When you deposit a $50 bill in the Security Pacific National Bank A) its assets increase by $50 B) its cash items in the process of collection increase by $50 C) its liabilities decrease by $50 D) its reserves decrease by $50
its assets increase by $50
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 decrease by $50 D) its liabilities increase 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 reduced, will require borrowers to A) purchase the bank's CDs B) place a bank officer on their board of directors C) place a corporate officer on the bank's board of directors D) keep compensating balances in a checking account at the bank
keep compensating balances in a checking account at the bank
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) pre-credit loan line B) an adjustable portfolio loan C) an adjustable gap loan D) loan commitment
loan commitment
Financial crises in advanced economies might start from a A) mismanagement of financial innovations B) currency mismatch C) debt deflation D) currency crisis
mismanagement of financial innovations
As "haircuts" increased during 2007-2009, financial institutions found that to borrow the same loan amount now required ________ collateral. A) no B) default-free C) more D) less
more
If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits. A) fewer; an increase B) fewer; a surge C) more; a decline D) more; an increase
more; an increase
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. A) fewer; decline; decline B) more; decline; rise C) fewer; rise; rise D) more; rise; decline
more; decline; rise
One suggested method of reducing excessive risk-taking by SIFIs is to require them to hold ________ capital when credit is expanding rapidly and ________ capital when credit is contracting. A) less; more B) more; less C) less; no D) more; no
more; less
Because checking accounts are ________ liquid for the depositor than savings accounts, they earn ________ interest rates. A) more; lower B) less; lower C) less; higher D) more; higher
more; lower
Which of the following is NOT an example of a backup line of credit? A) loan commitments B) mortgages C) overdraft privileges D) standby letters of credit
mortgages
The recession caused by the global financial crisis was severe, but much smaller in magnitude than the Great Depression. because A) the larger world population B) of massive intervention by governments to prop up financial markets C) modern technological inventions makes sustaining a crisis difficult D) the Federal Reserve stayed out of the way during the most recent crisis
of massive intervention by governments to prop up financial markets
During the banking crisis of the Great Depression, more than ________ of all commercial banks in the United States failed. A) one-fifth B) one-tenth C) one-third D) one-half
one-third
During the "Great Recession" unemployment rates in the United States increased to A) over 25% B) over 10% C) 7.5% D) 5%
over 10%
The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk A) collateralized debt B) principal-agent C) debt deflation D) democratization of credit
principal-agent
Traders working for banks are subject to the A) double-jeopardy problem B) free-rider problem C) principal-agent problem D) exchange-risk problem
principal-agent problem
When banks offer borrowers smaller loans than they have requested, banks are said to A) ration credit B) raze credit C) shave credit D) rediscount the loan
ration credit
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) reduce the bank's assets by making fewer loans C) pay higher dividends D) sell securities the bank owns and put the funds into the reserve account
reduce the bank's assets by making fewer loans
Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. A) increase; screen B) reduce; increase C) increase; increase D) reduce; screen
reduce; screen
A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and loans by $5 million B) reducing deposits and securities by $5 million C) reducing deposits and reserves by $5 million D) reducing deposits and capital by $5 million
reducing deposits and reserves by $5 million
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) requirement that individuals provide detailed credit histories to bank loan officers D) inclusion of restrictive covenants in loan contracts
requirement that firms place on their board of directors an officer from the bank
A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and the bank's ________ by $100. A) reserves B) securities C) capital D) loans
reserves
Which of the following bank assets is the most liquid? A) U.S. government securities B) state and local government securities C) consumer loans D) reserves
reserves
Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on investment B) return on assets C) return on capital D) return on equity
return on assets
Banks acquire the funds that they use to purchase income-earning assets from such sources as A) reserves B) cash items in the process of collection C) deposits at other banks D) savings accounts
savings accounts
________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. A) Distribution B) Securitization C) Debt deflation D) Origination
securitization
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) repay its discount loans from the Fed C) increase loans by $3 million D) sell $3 million of securities that the bank currently owns
sell $3 million of securities that the bank currently owns
One way for banks to reduce the principal-agent problems associated with trading activities is to A) reduce the regulations on the traders so that they have more flexibility in conducting trades B) encourage traders to take on more risk if the potential rewards are higher C) set limits on the total amount of a traders' transactions D) make sure that the person conducting the trades is also the person responsible for recording the transactions
set limits on the total amount of a traders' transaction
If mortgage brokers do not make a strong effort to evaluate whether the borrower can pay off a loan, this creates a A) decline in mortgage applications. B) severe adverse selection problem C) call to deregulate the industry D) decrease in the demand for houses.
severe adverse selection problem
In general, banks make profits by selling ________ liabilities and buying ________ assets. A) risky; risk-free B) illiquid; liquid C) short-term; longer-term D) long-term; shorter-term
short term; longer term
Secondary reserves include A) state and local government securities B) deposits at other large banks C) short-term U.S. government securities D) deposits at Federal Reserve Banks
short-term U.S. government securities
The global financial crisis of 2007-2009 not only led to a worldwide recession, but also a ________ in the European nations that use the euro currency. A) budget surplus B) sovereign debt crisis C) tax cut D) currency devaluation
sovereign debt crisis
Each year banks with assets over $10 billion are subject to an assessment of the sufficiency of their bank capital under severe macroeconomic conditions called a A) nuclear test B) disclosure test C) stress test D) liability test
stress test
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent. A) ten B) twenty C) eighty D) ninety
ten
The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within A) the Treasury Department B) the IRS C) the Federal Reserve D) the SEC
the Federal Reserve
Which of the following are bank assets? A) a customer's checking account B) the building owned by the bank C) a discount loan D) a negotiable CD
the building owned by the bank
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the reserves of the First National Bank increase by $10 B) the assets of Citibank decrease by $10 C) the liabilities of the First National Bank decrease by $10 D) the liabilities of Citibank decrease by $10.
the liabilities of the First National bank decreases 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 liabilities of the bank increase by $800,000 B) the assets at the bank increase by $800,000 C) reserves increase by $160,000 D) the liabilities of the bank increase by $1,000,000
the liabilities of the bank increase by $1,000,000
Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called A) the segmented maturity approach to interest-exposure analysis B) the maturity bucket approach to gap analysis C) the segmented maturity approach to gap analysis D) basic gap analysis
the maturity bucket approach to gap analysis
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 Chemical Bank rise by $50 B) the liabilities at Chemical Bank rise by $50 C) the reserves at First National fall by $50 D) the assets of First National rise by $50
the reserves at First National fall by $50
When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that A) the roof leaked during a rainstorm B) the value of the house fell below the amount of the mortgage C) the basement flooded since they could not afford to fix the leaky plumbing D) the amount that they owed on their mortgage was less than the value of their house
the value of the house fell below the amount of the mortgage
Banks hold capital because A) higher capital increases the returns to the owners B) they are required to by regulatory authorities C) higher capital increases the return on equity D) it increases the likelihood of bankruptcy
they are required to by regulatory authorities
The Volcker Rule addresses the off-balance-sheet problem involving A) interest rate risks B) loan guarantees C) selling loans D) trading risks
trading risks
Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the A) stress-testing approach B) doomsday approach C) value-at-risk approach D) trading-loss approach
value-at-risk approach
In order to ensure that borrowers have an ability to repay residential mortgages, the new consumer protection legislation requires lenders to do all of the following EXCEPT A) verify the income of the borrower B) check the credit history of the borrower. C) verify that the borrower can read and understand a loan contract D) verify the borrower's job status
verify that the borrower can read and understand a loan contract
