Econ305 Chapter12
51) Which of the following statements is false? A) Bank capital is recorded as an asset on the bank balance sheet. B) The bank's assets provide the bank with income. C) A bank's assets are its uses of funds. D) A bank issues liabilities to acquire funds.
A
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. A) reduces; reduces B) increases; reduces C) reduces; increases D) increases; increases
A
Bank loans from the Bank of Canada are called ________ and represent a ________ of funds. A) advances; source B) overnight funds; source C) overnight funds; use D) advances; use
A
Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Bank of Canada, and borrowings from other banks to deal with deposit outflows is an example of ________. A) liquidity management B) managing interest rate risk C) managing credit risk D) liability management
A
Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the ________. A) value-at-risk approach B) trading-loss approach C) stress-testing approach D) doomsday approach
A
The fraction of chequable deposits that banks choose to hold are ________. A) desired reserves B) total reserves C) excess reserves D) vault cash
A
Which of the following are reported as liabilities on a bank's balance sheet? A) Advances B) Loans C) Reserves D) Securities
A
Traders working for banks are subject to the ________. A) double-jeopardy problem B) exchange-risk problem C) principal-agent problem D) free-rider problem
C
Of the following, which would be the first choice for a bank facing a reserve deficiency? _____ A) Borrow from other banks B) Call in loans C) Sell securities D) Borrow from the Bank of Canada
A
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 reserves by $5 million C) reducing deposits and securities by $5 million D) reducing deposits and capital by $5 million
B
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) adverse selection C) intentional fraud D) moral hazard
B
The principal-agent problem that exists for bank trading activities can be reduced through ________. A) elimination of regulation of banking B) creation of internal controls that separate trading activities from bookkeeping C) elimination of internal controls D) creation of internal controls that combine trading activities with bookkeeping
B
When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach. A) maximum value B) stress-test C) trading-loss D) value-at-risk
B
When banks offer borrowers smaller loans than they have requested, banks are said to ________. A) raze credit B) ration credit C) rediscount the loan D) shave credit
B
Asset transformation can be described as ________. A) borrowing and lending only for the short term B) borrowing and lending for the long term C) borrowing short and lending long D) borrowing long and lending short
C
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) securities; deposits B) assets; liabilities C) liabilities; assets D) loans; deposits
C
Property promised to the lender as compensation if the borrower defaults is called ________. A) deductibles B) contingencies C) collateral D) restrictive covenants
C
A bank failure occurs whenever ________. A) a bank suffers a large deposit outflow B) a bank is not allowed to borrow from the Bank of Canada C) a bank has to call in a large volume of loans D) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements
D
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. A) an increase; increase B) a decline; reduce C) a decline; not affect D) an increase; reduce
D
A bank is insolvent when ________. A) its assets exceed its liabilities B) its assets increase in value C) its liabilities exceed its assets D) its capital exceeds its liabilities
C
Which of the following would not be a way to increase the return on equity? A) Buy back bank stock B) Acquire new funds by selling negotiable CDs and increase assets with them C) Sell more bank stock D) Pay higher dividends
C
As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. A) decrease; increase B) increase; decrease C) decrease; not be affected D) increase; increase
D
Assuming that the average duration of its assets is four 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 ________ by ________ of the total original asset value. A) increase; 20 percent B) decline; 15 percent C) decline; 10 percent D) decline; 5 percent
D
Holding large amounts of bank capital helps prevent bank failures because ________. A) it makes loans easier to sell B) it means that the bank has a higher income C) it makes it easier to call in loans D) it can be used to absorb the losses resulting from bad loans
D
If, after a deposit outflow, a bank needs an additional $3 million to meet its desired reserves, the bank can ________. A) repay its advances from the Bank of Canada B) reduce deposits by $3 million C) increase loans by $3 million D) sell $3 million of securities
D
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) screening; rationing B) credit rationing; diversifying C) specialization in lending; rationing D) specialization in lending; diversifying
D
Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the ________. A) adverse selection problem B) moral hazard problem C) lemon problem D) adverse credit risk problem
B
Because of their ________ liquidity, ________ government securities are called secondary reserves. A) high; long-term B) high; short-term C) low; short-term D) low; long-term
B
If a bank has $10 million of demand deposits, a desired 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) $1.1 million B) $1.2 million C) $1 million D) $900,000
B
If you have (1) Assets with rate-sensitive $40 and fixed-rate $60 million (2) Liabilities with rate-sensitive $50 and fixed-rate $50 million If interest rates rise by 5 percentage points, say from 10 to 15 percent, bank profits (measured using basic gap analysis) will ________. A) increase by $2.0 million B) decline by $0.5 million C) decline by $2.5 million D) decline by $1.5 million
B
The difference of rate-sensitive liabilities and rate-sensitive assets is known as the ________. A) duration B) gap C) rate-risk index D) interest-sensitivity index
B
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) more; decline; rise B) fewer; rise; rise C) fewer; decline; decline D) more; rise; decline
A
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) decline by $1.5 million B) increase by $1.5 million C) decline by $15 million D) increase by $15 million
A
Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature. A) negotiable; secondary B) nonnegotiable; primary C) nonnegotiable; secondary D) negotiable; primary
A
With a 10 percent reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is ________. A) $100 B) $90 C) $10 D) $110
B
When you deposit a $50 bill in the New National Bank, ________. A) its reserves decrease by $50 B) its cash items in the process of collection increase by $50 C) its liabilities decrease by $50 D) its assets increase by $50
D
Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called ________. A) due-on-sale clauses B) liens C) proscription bonds D) restrictive covenants
D
Which of the following are not reported as assets on a bank's balance sheet? A) Cash items in the process of collection B) Demand deposits C) Loans D) Securities
B
Which of the following statements most accurately describes the task of bank asset management? A) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. B) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. C) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. D) Banks seek to acquire funds in the least costly way.
B
Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. A) reduce; screen B) reduce; increase C) increase; screen D) increase; increase
A
Secondary reserves are so called because ________. A) 50 percent of these assets count toward meeting desired reserves B) they rank second to bank vault cash in importance of bank holdings C) they are not easily converted into cash, and are, therefore, of secondary importance to banking firms D) they can be converted into cash with low transactions costs
D
When $1 million is deposited at a bank, the desired 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) reserves increase by $160,000 B) the liabilities of the bank increase by $800,000 C) the assets at the bank increase by $800,000 D) the liabilities of the bank increase by $1,000,000
D
When Jane Brown writes a $100 cheque to her nephew (who lives in another province), Ms. Brown's bank ________ assets of $100 and ________ liabilities of $100. A) gains; loses B) gains; gains C) loses; gains D) loses; loses
D
________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow._ A) Selling loans B) Selling negotiable CDs C) Selling securities D) Calling in loans
D