Financial Institutions Chapter 14 Questions

Front 1

Bank managers must balance a trade-off between __________ and ____________.

Back 1

safety; profitability

Front 2

The loan loss reserve is a “_______” account deducted from gross loans

Back 2

contra

Front 3

For purposes of liquidity management, vault cash is an example of ______ reserves

Back 3

primary

Front 4

If RSA < RSL the maturity GAP is _________ and net interest income will _________ if interest rates rise.

Back 4

negative; decrease

Front 5

Undivided profits are part of _________ capital.

Back 5

“Tier 1” or “core”

Front 6

Banks purchase financial futures to hedge against effects of a _____ in interest rates.

Back 6

decrease

Front 7

______ management theory assumes funds can be readily obtained in the money market by offering more than the market rate.

Back 7

liability

Front 8

Matched-funding is _____ -hedging. Buying futures to hedge a whole balance sheet is _____ -hedging

Back 8

micro; macro

Front 9

A positive maturity GAP implies a ________ duration GAP

Back 9

negative

Front 10

Total capital must be at least 8% of ________________ assets.

Back 10

risk-weighted

Front 11

T F
A high positive GAP is more risky than a high negative GAP

Back 11

F
A large GAP in either direction subjects the bank to significant interest rate risk.

Front 12

T F
“Primary reserves” and “required reserves” are essentially the same thing.

Back 12

F
Primary reserves are a financial classification of assets for liquidity management purposes; required reserves are a regulatory classification. There is significant overlap between them in terms of the assets qualifying, but they are not the same thing.

Front 13

T F
Excess reserves may be used to meet liquidity needs.

Back 13

T
By definition, excess reserves are among the most liquid bank assets.

Front 14

T F
Bank capital is a cash reserve to pay depositors in case of failure.

Back 14

F
Bank capital is an ultimate “cushion” but not an immediate cash reserve. Bank capital is a set of credit balances on the right side of the balance sheet, not an asset.

Front 15

T F
Tier 1” capital is more permanent than “Tier 2” capital.

Back 15

T
“Tier 2” capital will not ultimately absorb losses for the going concern.

Front 16

T F
Banks need liquidity for both deposit withdrawals and loan demand.

Back 16

T
A bank has to supply liquidity on both sides of the balance sheet

Front 17

T F
A bank with a positive duration GAP expects interest rates to fall.

Back 17

T
A drop in interest rates would increase the value of both assets and liabilities, but if the duration of assets were greater than that of liabilities, the value of assets would increase more than that of liabilities and the value of the bank’s equity would increase.

Front 18

T F
Primary reserves maximize liquidity but also earn income

Back 18

F
Primary reserves (cash and deposits in banks) are almost always nonearning assets.

Front 19

T F
Liability management has superseded asset management in managing liquidity.

Back 19

F
Most banks still rely on asset management; liability management is more feasible for large banks with access to the money markets.

Front 20

T F
A bank with a negative maturity GAP expects interest rates to rise

Back 20

F
As interest rates rise, more RSLs reprice upward than RSAs. Net interest income falls

Front 21

Bank capital standards are expressed in terms of percentages of
a. assets.
b. deposits.
c. risk-weighted assets.
d. industry averages.

Back 21

c.Capital standards are in terms of percentages of risk-weighted assets.

Front 22

The major source of bank revenue is from
a. loans.
b. investments.
c. service charges.
d. “off-balance-sheet” activities.

Back 22

a. Loans are the major source of revenue.

Front 23

The major noninterest expense for banks is
a. occupancy expense.
b. income taxes.
c. salaries and wages.
d. provision for loan losses

Back 23

c. Salaries and wages are the major operating expense of banks.

Front 24

A bank profit ratio measuring the performance of total assets is called
a. margin.
b. ROAE.
c. capital/asset ratio.
d. ROAA.

Back 24

d. The return on average assets (ROAA) tells how well management uses assets

Front 25

Balancing profitability and safety for banks is more difficult than for other businesses because
a.banks have low capital/asset ratios.
b.banks make very risky loans.
c.most bank liabilities are short term.
d.both a and c.

Back 25

d.both a and c.
Lower equity and deposit variability mean that banks must be liquid and safe but still provide income.

Front 26

A bank can fail either of two ways:
a. too much GAP or too little GAP.
b. insufficient leverage or insufficient market share.
c. insufficient risk or insufficient return.
d. illiquidity or insolvency.

Back 26

d. A bank can fail from either illiquidity or insolvency

Front 27

The major sources of bank liquidity are _____ and _____; the major uses are _____ and _____.
a.loans and deposits; borrowed funds and selling assets
b.borrowed funds and loans; deposits and selling assets
c.selling assets and borrowed funds; loans and deposit withdrawal
d.borrowed funds and loans; securities and deposit withdrawal

Back 27

c.selling assets and borrowed funds; loans and deposit withdrawal

Liquidity may be observed from a sources/uses perspective.

Front 28

The important characteristics of secondary reserves are
a.low cost and immediate availability.
b.excellent liquidity while earning some interest.
c.nonearning asset with immediate liquidity.
d.high income with low risk.

Back 28

b.excellent liquidity while earning some interest.

Secondary reserves are liquid, earning assets such as Treasury bills.

Front 29

Liability management assumes
a.asset management has been utilized to the fullest extent possible.
b.the bank is adequately capitalized.
c.the bank can finance in money markets any time.
d.primary and secondary reserves are sufficient for any liquidity needs.

Back 29

c. the bank can finance in money markets any time.

Liability management assumes the market will always lend to the bank if the bank pays the market price or more.

Front 30

Maturity GAP is defined as
a.rate sensitive assets divided by rate sensitive liabilities.
b.fixed rate assets minus rate sensitive liabilities.
c.rate sensitive liabilities plus rate sensitive assets.
d.rate sensitive assets minus rate sensitive liabilities.

Back 30

d.rate sensitive assets minus rate sensitive liabilities.
GAP = RSA - RSL