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12 Cards in this Set

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In the U.S., cash reserves required to meet deposit reserve requirements typically include U.S. government bonds such as U.S. Treasury Bills, vault cash and cash deposits at the Federal Reserve Bank.
F
Demand deposits are a low-cost, but not costless, source of funds and have a high degree of withdrawal risk.
T
Share deposits at credit unions are insured by the FDIC.
F
Subordinated debt (SD) has been proposed as a means of increasing the degree of overall market discipline at a depository institution (DI). Which of the following objectives will SD help achieve?
a. The expected cost of issuing SD should decrease as the risk of the DI increased.
b. Mandatory SD would reduce transparency at DIs.
c. SD would further emphasize the use of capital forbearance.
d. Secondary market yields on the SD would be inversely related to an increase in the risk of the DI.
e. Issuing SD might reduce the risk of DI insolvency.
e. Issuing SD might reduce the risk of DI insolvency.
The contagion effect
a. occurs when liquidity risk problems at bad banks damages well-run banks.
b. is eliminated by government insurance against bank runs.
c. results when interest rate risk exacerbates credit risk and liquidity risk exposures.
d. stems from the positive correlation in FI returns.
a. occurs when liquidity risk problems at bad banks damages well-run banks.
What is the average implicit interest rate (IIR) on a $15,000 account if the bank's average management costs are $200 and annual fees average $75?
a. 3.0% < IIR < 4.0%
b. 0.0% < IIR < 1.0%
c. 1.0% < IIR < 2.0%
d. 2.0% < IIR < 3.0%
e. 4.0% < IIR
b. 0.0% < IIR < 1.0%
IIR = (200 - 75) / 15,000 = 125 / 15,000 = 0.83%
The process of encouraging owners to be more knowledgeable of the risk profile of the DI is to encourage more
a. depositor discipline
b. regulator discipline
c. regulatory compliance
d. stockholder discipline
e. moral hazard
d. stockholder discipline
Which of the following is not accomplished by asset securitization?
a. Increases the liquidity of assets
b. Provides a new source of funds
c. Increases the costs of monitoring
d. Decreases the duration of assets
e. Decreases the costs of regulation
c. Increases the costs of monitoring
Which of the following is not a primary source of liquidity?
a. Excess cash reserves over and above regulatory reserve requirements.
b. Borrowings in the money/purchased funds market
c. Fed funds borrowed
d. Capital notes and other long-term financing alternatives
e. Cash-type assets that can be sold with little price risk and low transaction costs.
d. Capital notes and other long-term financing alternatives
Requiring minimum reserves to be held at the central bank is the equivalent of
a. mandating buffer reserves.
b. a reserve requirement tax.
c. mandating target reserve ratio.
d. promoting the contagious effects of liquidity risk.
e. none of the above.
b. a reserve requirement tax.
Servicing a pass-through security (e.g. a mortgage-backed security, MBS) refers to
a. an FI processing all payments.
b. an FI provision of clearing services to set up the passthrough.
c. broker/dealer services provided by the FI to the ultimate holders of the passthrough.
d. guarantee by the FI of all principal and interest payments.
e. an FI provision of liquidity services to the ultimate holders of the passthrough.
a. an FI processing all payments.
If AllStar Bank (balance sheet shown below) uses an asset management strategy (as opposed to liability management), what are total assets after its largest customer decides to exercise a $25M loan commitment? (Answer is in $M. Choose the response closest to your answer.)

Assets ($M)
Cash 40
Loans 80
Securities 40

Total Assets 160

Liabilities ($M)
Deposits 100
Borrowed Funds 40
Equity 20

Total Liabilities & Equity 160

a. 100
b. 125
c. 150
d. 175
e. 200
c. 150
Cash goes down by $25M, and loans increase by the same amount. Thus total assets remain $160M.