Money and Banking Exam 2 Study Guide Ch. 10
Why is being nosy a desirable trait of a banker
- A banker determines credit risk by learning as much as possible about potential borrowers - A banker has to screen out good credit risk from bad credit risk - To reduce moral hazard, a banker must continually monitor borrowers to ensure that they are complying with restrictive loan covenants
True statement regarding bank's balance sheet
A bank's balance sheet shows that total assets equal total liabilities plus equity capital. Also, A bank's assets are its uses of funds A bank's liabilities are its sources of funds
Of the following, which would be the first choice for a bank facing a reserve deficiency?
Borrow from other banks Most costly, Call in loans
____ may antagonize customers and thus can be a very costly way of acquiring funds to meet unexpected deposit outflow
Calling in loans
Which of the following are reported as liabilities on a bank's balance sheet?
Checkable deposits
If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE
Given the ROA, if bank capital doubles, the ROE will fall by half.
Why do equity holders care more about ROE than about ROA?
ROE measures how much equity holders are earning, while ROA measures how efficiently the bank is being run.
How to find equity multiplier
ROE/ROA =EM
In general, banks make profits by selling _____ liabilities and buying _____ assets
Short-term, longer-term
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then
The liabilities of Citibank increase by $10 Also, The assets of First National Bank increase by $10
Asset transformation can be described as
borrowing short and lending long
A bank with insufficient reserves can increase its reserves by
calling in loans
Holding all else constant, when a bank receives the funds for a deposited check
cash items in the process of collection fall by the amount of the check. Also, bank assets decrease by the amount of the check bank liabilities increase by the amount of the check
As the costs associated with deposit outflows _____, the banks willingness to hold excess reserves will ______
increase, increase
A $5 million deposit outflow from a bank has the immediate effect of
reducing deposits and reserves by $5 million
If, after a deposit outflow, a bank needs a additional $3 million to meet its reserve requirements, the bank can
sell $3 million of securities
Bank capital is equal to ____ minus _____
total assets - total liabilities
