Deck 10: Banking and the Management of Financial Institutions

Question 1

The share of checkable deposits in total bank liabilities has

A) expanded moderately over time.
B) expanded dramatically over time.
C) shrunk over time.
D) remained virtually unchanged since 1960.

Answer 1

shrunk over time.

Question 2

Bank capital is listed on the ________ side of the bank's balance sheet because it represents a ________ of funds.

A) liability; use
B) liability; source
C) asset; use
D) asset; source

Answer 2

liability; source

Question 3

Which of the following is not a source of borrowings for a bank?

A) Federal funds
B) Eurodollars
C) Transaction deposits
D) Discount loans

Answer 3

Transaction deposits

Question 4

Which of the following statements is false?

A) A bank's assets are its uses of funds.
B) A bank issues liabilities to acquire funds.
C) The bank's assets provide the bank with income.
D) Bank capital is recorded as an asset on the bank balance sheet.

Question 5

Which of the following are transaction deposits?

A) Savings accounts
B) Small-denomination time deposits
C) Negotiable order of withdraw accounts
D) Certificates of deposit

Question 6

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

A) Reserves
B) Checkable deposits
C) Loans
D) Deposits with other banks

Question 7

Which of the following statements are true?

A) A bank's assets are its sources of funds.
B) A bank's liabilities are its uses of funds.
C) A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
D) A bank's balance sheet indicates whether or not the bank is profitable.

Question 8

Which of the following is not a nontransaction deposit?

A) Savings accounts
B) Small-denomination time deposits
C) Negotiable order of withdrawal accounts
D) Certificate of deposit

Question 9

Which of the following statements is false?

A) Checkable deposits are usually the lowest cost source of bank funds.
B) Checkable deposits are the primary source of bank funds.
C) Checkable deposits are payable on demand.
D) Checkable deposits include NOW accounts.

Question 10

Because ________ are less liquid for the depositor than ________, they earn higher interest rates.

A) passbook savings; time deposits
B) money market deposit accounts; time deposits
C) money market deposit accounts; passbook savings
D) time deposits; passbook savings

Question 11

Which of the following statements are true?

A) Checkable deposits are payable on demand.
B) Checkable deposits do not include NOW accounts.
C) Checkable deposits are the primary source of bank funds.
D) Demand deposits are checkable deposits that pay interest.

Question 12

Banks acquire the funds that they use to purchase income-earning assets from such sources as

A) cash items in the process of collection
B) savings accounts.
C) reserves.
D) deposits at other banks.

Question 13

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

A) Discount loans
B) Reserves
C) U.S. Treasury securities
D) Loans

Question 14

Bank reserves include

A) deposits at the Fed and short-term treasury securities.
B) vault cash and short-term Treasury securities.
C) vault cash and deposits at the Fed.
D) deposits at other banks and deposits at the Fed.

Question 15

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

A) discount loans; use
B) discount loans; source
C) fed funds; use
D) fed funds; source

Question 16

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.

A) 45 percent; 55 percent
B) 55 percent; 4 percent
C) 25 percent; 50 percent
D) 50 percent; 30 percent

Question 17

Because ________ are less liquid for the depositor than ________, they earn higher interest rates.

A) money market deposit accounts; time deposits
B) checkable deposits; passbook savings
C) passbook savings; checkable deposits
D) passbook savings; time deposits

Question 18

Bank capital is equal to ________ minus ________.

A) total assets; total liabilities
B) total liabilities; total assets
C) total assets; total reserves
D) total liabilities; total borrowings

Question 19

Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature.

A) nonnegotiable; secondary
B) nonnegotiable; primary
C) negotiable; secondary
D) negotiable; primary

Question 20

Because checking accounts are ________ liquid for the depositor than passbook savings, they earn ________ interest rates.

A) less; higher
B) less; lower
C) more; higher
D) more; lower

Question 21

The amount of checkable deposits that banks are required by regulation to hold are the

A) excess reserves.
B) required reserves.
C) vault cash.
D) total reserves.

Question 22

In general, banks make profits by selling ________ liabilities and buying ________ assets.

A) long-term; shorter-term
B) short-term; longer-term
C) illiquid; liquid
D) risky; risk-free

Question 23

When you deposit a $50 bill in the Security Pacific National Bank,

A) its liabilities decrease by $50.
B) its assets increase by $50.
C) its reserves decrease by $50.
D) its cash items in the process of collection increase by $50.

Question 24

Secondary reserves include

A) deposits at Federal Reserve Banks.
B) deposits at other large banks.
C) short-term Treasury securities.
D) state and local government securities.

Question 25

Through correspondent banking, large banks provide services to small banks, including

A) loan guarantees.
B) foreign exchange transactions.
C) issuing stock.
D) debt reduction.

Question 26

Bank's make their profits primarily by issuing

A) equity.
B) negotiable CDs.
C) loans.
D) NOW accounts.

Question 27

When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms. Brown's bank ________ assets of $100 and ________ liabilities of $100.

A) gains; gains
B) gains; loses
C) loses; gains
D) loses; loses

Question 28

The most important category of assets on a bank's balance sheet is

A) discount loans.
B) securities.
C) loans.
D) cash items in the process of collection.

Question 29

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

A) low; short-term
B) low; long-term
C) high; short-term
D) high; long-term

Question 30

Secondary reserves are so called because

A) they can be converted into cash with low transactions costs.
B) they are not easily converted into cash, and are, therefore, of secondary importance to banking firms.
C) 50% of these assets count toward meeting required reserves.
D) they rank second to bank vault cash in importance of bank holdings.

Question 31

Which of the following bank assets is the most liquid?

A) Consumer loans
B) Reserves
C) Cash items in process of collection
D) U.S. government securities

Question 32

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) loans; deposits
B) securities; deposits
C) liabilities; assets
D) assets; liabilities

Question 33

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

A) Cash items in the process of collection
B) Deposits with other banks
C) U.S. Treasury securities
D) Checkable deposits

Question 34

Which of the following are bank assets?

A) the building owned by the bank
B) a discount loan
C) a negotiable CD
D) a customer's checking account

Question 35

Asset transformation can be described as

A) borrowing long and lending short.
B) borrowing short and lending long.
C) borrowing and lending only for the short term.
D) borrowing and lending for the long term.

Question 36

Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n) ________ for the borrowing bank and a(n) ________ for the lending bank.

A) asset; asset
B) asset; liability
C) liability; liability
D) liability; asset

Question 37

Banks' asset portfolios include state and local government securities because

A) they help to attract business from these government entities.
B) banks consider them helpful in attracting accounts of Federal employees.
C) the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts.
D) there is no default-risk with state and local government securities.

Question 38

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

A) Borrowings
B) Reserves
C) Savings deposits
D) Bank capital

Question 39

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

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 40

The largest percentage of banks' holdings of securities consist of

A) Treasury and government agency securities.
B) tax-exempt municipal securities.
C) state and local government securities.
D) corporate securities.

Question 41

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

A) deposits and reserves.
B) deposits and loans.
C) capital and reserves.
D) capital and loans.

Question 42

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then

A) the liabilities of the First National Bank increase by $10.
B) the reserves of the First National Bank increase by $10.
C) the liabilities of Citibank increase by $10.
D) the assets of Citibank fall by $10.

Question 43

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

A) $30,000.
B) $25,000.
C) $20,000.
D) $10,000.

Question 44

Which of the following are primary concerns of the bank manager?

A) Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows
B) Extending loans to borrowers who will pay low interest rates, but who are poor credit risks
C) Acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized
D) Maintaining high levels of capital and thus maximizing the returns to the owners.

Question 45

Using T-accounts show what happens to reserves at Security National Bank if one individual deposits $1000 in cash into her checking account and another individual withdraws $750 in cash from her checking account.

Question 46

Of the following, which would be the first choice for a bank facing a reserve deficiency?

A) Call in loans
B) Borrow from the Fed
C) Sell securities
D) Borrow from other banks

Question 47

Holding all else constant, when a bank receives the funds for a deposited check,

A) cash items in the process of collection fall by the amount of the check.
B) bank assets increase by the amount of the check.
C) bank liabilities decrease by the amount of the check.
D) bank reserves increase by the amount of required reserves.

Question 48

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

A) $1.2 million.
B) $1.1 million.
C) $1 million.
D) $900,000.

Question 49

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 bank's final balance sheet,

A) the assets at the bank increase by $800,000.
B) the liabilities of the bank increase by $1,000,000.
C) the liabilities of the bank increase by $800,000.
D) reserves increase by $160,000.

Question 50

With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is

A) $90.
B) $100.
C) $10.
D) $110.

Question 51

When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then

A) the assets of First National rise by $50.
B) the assets of Chemical Bank rise by $50.
C) the reserves at First National fall by $50.
D) the liabilities at Chemical Bank rise by $50.

Question 52

A deposit outflow results in equal reductions in

A) loans and reserves.
B) assets and liabilities.
C) reserves and capital.
D) assets and capital.

Question 53

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

A) liability management.
B) liquidity management.
C) managing interest rate risk.
D) managing credit risk.

Question 54

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can

A) reduce deposits by $3 million.
B) increase loans by $3 million.
C) sell $3 million of securities.
D) repay its discount loans from the Fed.

Question 55

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then

A) the liabilities of the First National Bank decrease by $10.
B) the reserves of the First National Bank increase by $10.
C) the liabilities of Citibank decrease by $10.
D) the assets of Citibank decrease by $10.

Question 56

A bank with insufficient reserves can increase its reserves by

A) lending federal funds.
B) calling in loans.
C) buying short-term Treasury securities.
D) buying municipal bonds.

Question 57

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

A) $50,000.
B) $40,000.
C) $30,000.
D) $25,000.

Question 58

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 bank's final balance sheet,

A) the assets at the bank increase by $1 million.
B) the liabilities of the bank decrease by $1 million.
C) reserves increase by $200,000.
D) liabilities increase by $200,000.

Question 59

A $5 million deposit outflow from a bank has the immediate effect of

A) reducing deposits and reserves by $5 million.
B) reducing deposits and loans by $5 million.
C) reducing deposits and securities by $5 million.
D) reducing deposits and capital by $5 million.

Question 60

When you deposit $50 in currency at Old National Bank,

A) its assets increase by less than $50 because of reserve requirements.
B) its reserves increase by less than $50 because of reserve requirements.
C) its liabilities increase by $50.
D) its liabilities decrease by $50.

Question 61

If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could

A) borrow from another bank in the federal funds market.
B) buy U.S. Treasury bills.
C) increase loans.
D) buy corporate bonds.

Question 62

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called

A) return on assets.
B) return on capital.
C) return on equity.
D) return on investment.

Question 63

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.

A) Selling securities
B) Selling loans
C) Calling in loans
D) Selling negotiable CDs

Question 64

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

A) decrease; increase
B) increase; decrease
C) increase; increase
D) decrease; not be affected

Question 65

A bank will want to hold more excess reserves (everything else equal) when

A) it expects to have deposit inflows in the near future.
B) brokerage commissions on selling bonds increase.
C) the cost of selling loans falls.
D) the discount rate decreases.

Question 66

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

A) reducing loans; selling securities
B) reducing loans; borrowing from the Fed
C) borrowing from the Fed; reducing loans
D) "calling in" loans; selling securities

Question 67

Modern liability management has resulted in

A) increased sales of certificates of deposits to raise funds.
B) increase importance of deposits as a source of funds.
C) reduced borrowing by banks in the overnight loan market.
D) failure by banks to coordinate management of assets and liabilities.

Question 68

For a given return on assets, the lower is bank capital,

A) the lower is the return for the owners of the bank.
B) the higher is the return for the owners of the bank.
C) the lower is the credit risk for the owners of the bank.
D) the lower the possibility of bank failure.

Question 69

The goals of bank asset management include

A) maximizing risk.
B) minimizing liquidity.
C) lending at high interest rates regardless of risk.
D) purchasing securities with high returns and low risk.

Question 70

Net profit after taxes per dollar of assets is a basic measure of bank profitability called

A) return on assets.
B) return on capital.
C) return on equity.
D) return on investment.

Question 71

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

A) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity.
B) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations.
C) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits.
D) Banks seek to acquire funds in the least costly way.

Question 72

Banks that actively manage liabilities will most likely meet a reserve shortfall by

A) calling in loans.
B) borrowing federal funds.
C) selling municipal bonds.
D) seeking new deposits.

Question 73

Holding large amounts of bank capital helps prevent bank failures because

A) it means that the bank has a higher income.
B) it makes loans easier to sell.
C) it can be used to absorb the losses resulting from bad loans.
D) it makes it easier to call in loans.

Question 74

A bank failure occurs whenever

A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements.
B) a bank suffers a large deposit outflow.
C) a bank has to call in a large volume of loans.
D) a bank is not allowed to borrow from the Fed.

Question 75

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

A) asset ratio.
B) equity ratio.
C) equity multiplier.
D) asset multiplier.

Question 76

A bank is insolvent when

A) its liabilities exceed its assets.
B) its assets exceed its liabilities.
C) its capital exceeds its liabilities.
D) its assets increase in value.

Question 77

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

A) Increased bank holdings of cash items
B) Aggressive targeting of goals for asset growth by banks
C) Increased use of negotiable CDs to raise funds
D) An increased proportion of bank assets held in loans

Question 78

Banks hold excess and secondary reserves to

A) reduce the interest-rate risk problem.
B) provide for deposit outflows.
C) satisfy margin requirements.
D) achieve higher earnings than they can with loans.

Question 79

Banks that suffered significant losses in the 1980s made the mistake of

A) holding too many liquid assets.
B) minimizing default risk.
C) failing to diversify their loan portfolio.
D) holding only safe securities.

Question 80

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure?

A) Excess reserves
B) Secondary reserves
C) Bank capital
D) Mortgages