Money and Banking
reducing deposits and reserves by $5 million
A $5 million deposit outflow from a bank has the immediate effect of
a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements
A bank failure occurs whenever
its liabilities exceed its assets.
A bank is insolvent when
brokerage commissions on selling bonds increase
A bank will want to hold more excess reserves ( everything else equal) when
calling in loans
A bank with insufficient reserves can increase its reserves by
borrowing short and lending long
Asset transformation can be described as
total assets; total liabilities
Bank capital is equal to ________ minus ________
liability; source
Bank capital is listed on the ________ side of the bank's balance sheet because it represents a ________ of funds
discount loans; source
Bank loans from the Federal Reserve are called ________ and represent a ________ of funds
vault cash and deposits at the Fed
Bank reserves include
liquidity management
Bankersʹ 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
savings accounts
Banks acquire the funds that they use to purchase income-earning assets from such sources as
liabilities; 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
provide for deposit outflows
Banks hold excess and secondary reserves to
borrowing federal funds
Banks that actively manage liabilities will most likely meet a reserve shortfall by
failing to diversity their loan portfolio
Banks that suffered significant losses in the 1980s made the mistake of
their interest payments are tax deductible for federal income taxes
Banksʹ asset portfolios include state and local government securities because
loans
Bankʹs make their profits primarily by issuing ________.
passbook savings; checkable deposits
Because ________ are less liquid for the depositor than ________, they earn higher interest rates
time deposits; passbook savings
Because ________ are less liquid for the depositor than ________, they earn higher interest rates.
more; lower
Because checking accounts are ________ liquid for the depositor than passbook savings, they earn ________ interest rates
high; short-term
Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves.
cash items in the process of collection fall by the amount of the check
Holding all else constant, when a bank receives the funds for a deposited check
it can be used to absorb the losses resulting from bad loans.
Holding large amounts of bank capital helps prevent bank failures because
$1.2 million
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
$25,000
If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is
$50,000
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
deposits and reserves
If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in
sell $3 million of securities
If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can
short-term; longer-term
In general, banks make profits by selling ________ liabilities and buying ________ assets. A) long-term; shorter-term
borrowing from the Fed; reducing loans
In general, banks would prefer to acquire funds quickly by ________ rather than________________
25 percent; 50 percent
In recent years the interest paid on checkable and time deposits has accounted for around ________ of total bank operating expenses, while the costs involved in servicing accounts have been approximately ________ of operating expenses
negotiable; secondary
Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature
increased sales of certificates of deposits to raise funds
Modern liability management has resulted in
return on assets
Net profit after taxes per dollar of assets is a basic measure of bank profitability called
return on equity
Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called
Borrow from the Fed
Of the following , which would be the first choice for a bank facing a reserve deficiency
they can be converted into cash with low transactions cost
Secondary reserves are so called because
short-term Treasury securities
Secondary reserves include
equity multipler
The amount of assets per dollar of equity capital is called the
required reserves
The fraction of checkable deposits that banks are required by regulation to hold are
purchasing securities with high returns and low risk
The goal of bank asset management include
Treasury and government agency securities
The largest percentage of bank's holdings of securities consist of
loans
The most important category of assets on a bankʹs balance sheet is
shrunk over time
The share of checkable deposits in total bank liabilities has
foreign exchange transaction
Through correspondent banking, large banks provide services to small banks, including
the liabilities of the bank increase by $1,000,000
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 bankʹs final balance sheet,
the assets at the bank increase by $1 million
When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bankʹs final balance shee
loses; loses
When Jane Brown writes a $100 check to her nephew (who lives in another state), Ms. Brownʹs bank ________ assets of $100 and ________ liabilities of $100
the liabilities of Citibank increase by $10
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then
the liabilities of the First National Bank decrease by $10
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then
increase;increase
When a new depositor opens a checking account at the First National Bank, the bankʹs assets ________ and its liabilities _______
its liabilities increase by $50
When you deposit $50 in currency at Old National Bank
the reserves at First National fall by $50
When you deposit $50 in your account at First National Bank and a $100 check you have written
its assets increase by $50
When you deposit a $50 bill in the Security Pacific National Bank
the building owned by the bank
Which of the following are bank asset
Checkable deposits
Which of the following are not reported as assets on a bankʹs balance sheet
Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows
Which of the following are primary concerns of the bank manager?
Reserves
Which of the following are reported as assets on a bankʹs balance sheet
Checkable deposits
Which of the following are reported as liabilities on a bankʹs balance sheet
Discount loans
Which of the following are reported as liabilities on a bankʹs balance sheet
Negotiable order of withdraw accounts
Which of the following are transaction deposits
Reserves
Which of the following bank assets is the most liquid
Increased bank holdings of cash items
Which of the following has not resulted from more active liability management on the part of banks
Negotiable order of withdrawal accounts
Which of the following is not a nontransaction deposit
Transaction deposits
Which of the following is not a source of borrowings for a bank
A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital
Which of the following statements are true
Checkable deposits are payable on demand
Which of the following statements are true
Bank capital is recorded as an asset on the bank balance sheet
Which of the following statements is false
Checkable deposits are the primary source of bank funds
Which of the following statements is false
Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity
Which of the following statements most accurately describes the task of bank asset management
Mortgages
Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure
$90
With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is
Calling in loans
____________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow