ECON 303 Chapter 9 Study Questions
1) 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
Answer: B
2) In recent years the interest paid on checkable and time deposits has accounted for around
(a) 60 percent of total bank operating expenses.
(b) 45 percent of total bank operating expenses.
(c) 30 percent of total bank operating expenses.
(d) 20 percent of total bank operating expenses.
Answer: C
3) In recent years the costs involved in servicing checkable and time deposit accounts have been approximately
(a) 65 percent of total bank operating expenses.
(b) 75 percent of total bank operating expenses.
(c) 50 percent of total bank operating expenses.
(d) 25 percent of total bank operating expenses.
Answer: C
4) 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: B
5) Which of the following are not reported as assets on a bank’s balance sheet?
(a) Discount loans from the Fed
(b) Loans
(c) Reserves
(d) Only (a) and (b) of the above
Answer: A
6) When Jane Brown writes a $100 check to her nephew (who lives in another state), Ms. Brown’s bank _____ assets of $100 and _____ liabilities of $100.
(a) gains; gains
(b) gains; loses
(c) loses; gains
(d) loses; loses
Answer: D
7) 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 $200,000.
(b) the liabilities of the bank increase by $200,000.
(c) reserves increase by $200,000.
(d) each of the above occurs.
(e) both (a) and (b) of the above occur.
Answer: C
8) In general, banks would prefer to meet deposit outflows by _____ rather than _____.
(a) selling loans; selling securities
(b) selling loans; borrowing from the Fed
(c) borrowing from the Fed; selling loans
(d) “calling in” loans; selling securities
Answer: C
9) 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) none of the above.
Answer: B
10) 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.
(e) all of the above.
Answer: C
11) One way for a bank to assure depositors that it is not taking on too much risk, and so obtain their deposits, is for it to
(a) diversify its loan portfolio.
(b) reduce its equity capital.
(c) lengthen the maturity of its assets.
(d) shorten the maturity of its liabilities.
Answer: A
12) From the standpoint of _____, specialization in lending is surprising but makes perfect sense when one considers the _____ problem.
(a) moral hazard; diversification
(b) diversification; moral hazard
(c) adverse selection; diversification
(d) diversification; adverse selection
Answer: D
13) All else the same, if a bank has more rate-sensitive liabilities than assets, then a(n) _____ in interest rates will _____ bank profits.
(a) increase; increase
(b) increase; reduce
(c) decline; reduce
(d) decline; not affect
Answer: B
First National Bank
|
|
Assets |
Liabilities |
|
Rate-sensitive |
$40 million |
$50 million |
|
Fixed-rate |
$60 million |
$50 million |
14) If interest rates rise by 5 percentage points, say from 10 to 15%, bank profits (measured using gap analysis) will
(a) decline by $0.5 million.
(b) decline by $1.5 million.
(c) decline by $2.5 million.
(d) increase by $2.0 million.
Answer: A
15) A reason why rogue traders have bankrupted their banks is due to
(a) a failure of regulation.
(b) stringent supervision of trading activities by bank management.
(c) accounting errors.
(d) a failure to maintain proper internal controls.
(e) the separation of trading activities from the bookkeepers.
Answer: D
16) The principal-agent problem that exists for bank trading activities can be reduced through
(a) creation of internal controls that combine trading activities with bookkeeping.
(b) creation of internal controls that separate trading activities from bookkeeping.
(c) elimination of regulation of banking.
(d) elimination of internal controls.
(e) increased freedom for traders from managerial supervision.
Answer: B
17) Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the
(a) stress-testing approach.
(b) value-at-risk approach.
(c) probabilistic approach.
(d) doomsday approach.
(e) trading-loss approach.
Answer: B