Problem Sets

If a bank has $100,000 of deposits, a required reserve ratio of 20 percent, and $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is

$ 25,000

Assuming that the average duration of its assets is five years, while the average duration of its liabilities in three years, then 5 percentage point increase in interest rates will cause the net worth of First National to decline by _______ of the total original asset value

10 percent

both ____and_____ were financial innovations that occured because of interest rate volatility.

Adjustable-rate mortages; financial derivatives

Rising intrest-rate risk

Increased the demand for financial innovation

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.

Lengthening; shortening

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________.

assets ; liabilities

In a bank panic, the source of contagion is the

asymmetric information problem

assets transformation can be described as

borrowing short and lending long

A bank with insufficient reserves can increase its reserves by

calling in loans

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

checkable deposits

When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a

credit boom

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

decline by $0.5 million

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.

discount loans ; source

competition between banks

encourages greater risk taking

The amount of assets per dollar of equity capital is called the

equity multiplier

When you deposit $50 in currency at Old National Bank

its liabilities increased by $50

Bankers' 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

liability management

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

reduce the bank's assets by making fewer loans

Adjustable Rate Mortgage

reduce the interest rate risk for financial institutions

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.

reduces ; reduces

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

sell securities the bank owns and put the funds into the reserve account

Although the FDIC was created to prevent bank failures, its existence encourages banks to

take too many risk

Bank reserves include

vault cash and deposits at the Fed

A major controversy involving the banking industry in its early years was

wether the federal government or the states should charter banks