Fin policy MT

Deposit insurance covers deposits up to $100,000, but as part of a doctrine called "too-big-to-fail" the CDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the CDIC does this, it uses the ________.

"purchase and assumption" method.

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 ________.

$1.11 million

Deposit insurance is a guarantee by the CDIC to pay deposits off in full on the first ________ they have deposited in the bank.

$100,000

If a bank has $200,000 of demand deposits, a desired 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 ________.

$50,000

If interest rates rise by 5 percentage points, say, from 10 to 15 percent, bank profits (measured using basic gap analysis) will ________.

(use chart) decline by $1.5 million

Under the Basel Accord, assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________.

4; credit risk

To be considered well capitalized, a bank's leverage ratio must exceed ________.

5 percent

The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets.

8 percent

Which of the following statements most accurately describes the task of bank asset management?

Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity

Which of the following statements is true?

Chequable deposits are payable on demand.

Which of the following are reported as liabilities on a bank's balance sheet?

Demand and notice deposits

Which of the following are not reported as assets on a bank's balance sheet?

Demand deposits

Which of the following is an example of permanent life insurance?

The premium is constant through the life of the policy.

Which of the following has not resulted from more active liability management on the part of banks?

Increased bank holdings of cash items

An insurance management tool to reduce moral hazard is to ________.

charge risk-based premiums

The Greek debt crisis increased ________.

credit default swap spreads

If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in ________.

deposits and reserves

The fraction of chequable deposits that banks choose to hold are ________.

desired reserves

Since depositors, like any lender, only receive fixed payments while the bank managers keep 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, a ________ in interest rates will reduce bank profits, while a ________ in interest rates will raise bank profits.

more; decline; rise

Casualty insurance companies ________.

protect against malpractice exposures

If the CDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.

purchase and assumption; no

The goals of bank asset management include ________.

purchasing securities with high returns and low risk

Which of the following is not a reason financial regulation and supervision is difficult in real life?

Financial institutions are not required to follow the rules

An investment bank helps ________ issue securities.

a corporation

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the ________.

adverse selection problem

The primary assets of a pension fund are ________.

bonds, stock and long term mortgages

The leverage ratio is the ratio of a bank's ________.

capital divided by its total assets.

The process in which people take their funds out of the banking system seeking higher-yielding securities is called ________.

disintermediation

The ability to use one resource to provide different products and services is ________.

economies of scope

Competition between banks ________.

encourages greater risk taking

________ are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms

financial crises

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

Off-balance-sheet activities ________.

generate fee income but increase a bank's risk

Because of their ________ liquidity, ________ government securities are called secondary reserves.

high; short-term

Off-balance sheet activities involving guarantees of securities and back-up credit lines ________.

increase the risk a bank faces

As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________.

increase; increase

When a new depositor opens a chequing account at the First National Bank, the bank's assets ________ and its liabilities ________.

increase; increase

Modern liability management has resulted in ________.

increased sales of certificates of deposits to raise

. A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.

increases; moral hazard

The Canada pension plan ____________

is a government-administered pension plan is a "pay-as-you-go" system is underfunded

Holding large amounts of bank capital helps prevent bank failures because ________.

it can be used to absorb the losses resulting from bad loans

A bank is insolvent when ________.

its liabilities exceed its assets

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.

liabilities; assets

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 ________.

liquidity management

When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of ________.

moral hazard

Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government ________.

regulation

The Basel Accord, an international agreement, requires banks to hold capital based on ________.

risk-weighted assets

The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known as ________.

securitization

If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to ________.

sell bank stock

A defined-benefit plan ________.

sets future income payments in advance

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

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

specialization in lending; diversifying

The business term for economies of scope is ________.

synergies

Although the CDIC was created to prevent bank failures, its existence encourages banks to ________.

take too much risk

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is ________.

that the CDIC guarantees all deposits when it uses the "purchase and assumption" method

A common element in all of the banking crisis episodes in different countries is ________.

the existence of a government safety net

For a given return on assets, the lower the bank capital, ________.

the higher is the return for the owners of the bank

When a $10 cheque written on the First National Bank is deposited in an account at CIBC, then ________.

the liabilities of CIBC increase by $10

If a banker expects interest rates to fall in the future, her best strategy for the present is ________.

to increase the duration of the bank's assets

In the absence of regulation, banks would probably hold ________.

too little capital

Bank capital is equal to ________ minus ________.

total assets; total liabilities

The too-big-to-fail policy ________.

treats large depositors of small banks inequitably when compared to depositors of large banks

In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity.

universal

Bank reserves include ________.

vault cash and deposits at the Bank of Canada

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem.

adverse selection; moral hazard

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

In a defined-contribution plan future benefits ________.

are determined by the contributions into the plan and their earnings

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance ________.

are likely to take on greater risks than they otherwise would

A system of deposit insurance ________.

attracts risk-taking entrepreneurs into the banking industry

In general, banks would prefer to acquire funds quickly by ________ rather than ________.

borrowing from the Bank of Canada; reducing loans

The primary rationale for deposit insurance is ________.

protecting depositors from bank insolvency

Banks hold excess and secondary reserves to ________.

provide for deposit outflows

Moral hazard is an important concern of insurance arrangements because the existence of insurance ________.

provides increased incentives for risk taking

An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is called ________.

underwriting