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72 Cards in this Set
- Front
- Back
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Provisions in loan contracts designed to mitigate the moral hazard problem called A. Liens B. Due-on-sale clauses C. Proscription bonds D. Restrictive covenants |
Restrictive covenants |
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The portion of checkable deposits that banks are required to hold is called: A. Excess reserves B. Required reserves C. Currency outstanding D. Vault cash |
Required reserves |
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Gap analysis measures the difference between a bank's: A. Rate-sensitive liabilities and rate-sensitive assets B. Deposits and loan C. Long-term securities and short-term securities D. Assets and liabilities |
Rate-sensitive liabilities and rate-sensitive assets |
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If borrowers with the most risky investment projects are more likely to seek bank loans as compared to those borrowers with the safest investment projects, banks are said to face the problem of: A. Adverse selection B. Risk satiation C. Moral hazard D. Adverse credit risk |
Adverse selection |
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When investors are involved in trading activities in an attempt to outguess markets, investors are: A. Speculating B. Hedging C. Diversifying D. Engaging in riskless arbitrage |
Speculating |
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Measuring the sensitivity of bank profits to changes in interest rates by calculating the product of the gap and the change in the interest rate is called the: A. Interest-exposure analysis B. Gap-exposure analysis C. Basic gap analysis D. Basic duration analysis |
Basic gap analysis |
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In order to reduce the ______ problem in loan markets, banks often insist on collateral from potential borrowers A. Asymmetric information B. Principal-agent C. Moral Hazard D. Adverse lending |
Moral Hazard |
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Which of the following is not an income producing asset on a bank's balance sheet? A. Consumer loans B. Bank reserves C. Treasury notes D. Treasury bills |
Bank reserves |
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The principal-agent problem that exists for bank trading activities can be reduced by: A. The physical separation of trading activities from bookkeeping activities B. Eliminating internal controls C. Eliminating the regulation of the financial industry D. Combining trading activities with bookkeeping activities |
The physical separation of trading activities from bookkeeping activities |
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Assets of value promised to the lender as compensation if the borrower defaults are called: A. Contingencies B. Deductibles C. Collateral D. Restrictive Covenants |
Collateral |
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A bank with excess reserves can economies on these reserves by: A. Lending reserves in the federal funds market B. Calling in loans C. Buying short-term Treasury securities D. Buying municipal bonds |
Lending reserves in the federal funds market |
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The volume of checkable deposits relative to total bank liabilities has: A. Remained virtually unchanged since 1960 B. Declined over time C. Expanded moderately over time D. Expanded dramatically over time |
Declined over time |
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Why might a bank be willing to borrow funds from other banks at a higher rate rather than borrow from the Fed A. Other bank are willing to lend reserves for free within the banking community B. Borrowing from the Fed might invite greater supervisory scrutiny from the central bank C. Non-member banks can only borrow from the Fed by paying additional loan origination fees D. The Fed charges a lending rate much higher than market rates |
Borrowing from the Fed might invite greater supervisory scrutiny from the central bank |
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Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves? A. The overnight loan market has supplanted the Fed as the lender of the last resort B. Bonds find it more profitable to loan out their excess reserves in the overnight market C. The presence of overnight loan markets reduces the costs associated with deposit outflows |
The presence of overnight loan markets reduces the costs associated with deposit outflows |
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If a bank falling short of meeting its capital requirements by 1 million, what three things can it do to rectify the situation? A. Borrow from other banks corporations B. Issue stock C. Decrease dividend payments to increase retained earnings D. Call in existing loans in attempt to decrease its asset holdings |
Issue stock Decrease dividend payments to increase retained earnings Call in existing loans in attempt to decrease its asset holdings |
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Why do equity holders care more about ROE than about ROA A. ROE measures how efficiently the bank is being run, while ROA measures hoe much equity holders are earnings B. A change in ROE indicates a change in the safety of the investment, while a change in ROA does not C. A higher ROE indicates a higher level of liquidity for the investment, while a higher ROA does not D. ROE measure how much equity holders are earning, while ROA measures how efficiently the bank is being run |
ROE measure how much equity holders are earning, while ROA measures how efficiently the bank is being run |
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Which of the following is a cost for a bank when it decides to increase the amount of its bank capital A. The return on equity decreases B. The return on assets decreases C. The safety of its loans decrease D. The liquidity of its loans and other assets falls |
The return on equity decreases |
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If the president of a bank told you that the bank was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy stock in that bank? A. No, the bank must be earning more from deposits than from loans, and this is not possible B. Yes, the bank must be offering low-interest rate loans, thereby reducing the moral hazard problem C. No, the bank is holding too many excess reserves, and bank profits may be low |
No, the bank is holding too many excess reserves, and bank profits may be low |
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Why is being nosy a desirable trait for a banker? A. A banker determines credit risk by learning as much as possible about potential borrowers B. To reduce moral hazard, a banker must continually monitor borrowers to ensure that they are complying with restrictive loan covenants C. A banker has to screen out good credit risks from bad credit risks D. All of the above are correct |
All of the above are correct |
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"Bank managers should always seek the highest return possible on their assets." Is this statement true, false, or uncertain? A. True. Seeking the highest return possible will always prevent a bank failure B. False. A bank must also consider an asset's risk and liquidity when deciding which assets to hold C. True. The highest return possible on assets will guarantee the highest income for the bank. D. Uncertain. This statement is true only if the bank has more rate-sensitive liabilities than assets |
False. A bank must also consider an asset's risk and liquidity when deciding which assets to hold |
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Why has non-interest income been growing as a source of bank operating income? A. Banks can increase profits by engaging in non-interest income, or off-balance-sheet activities B. Banks are able to reduce the principal-agent problem by engaging in off-balance-sheet activities C. Banks are able to offer their employees higher salaries and bonuses, which reduces the moral hazard problem D. Banks are more likely to engage in speculation, it can be risky but the profits are worth the risk |
Banks can increase profits by engaging in non-interest income, or off-balance-sheet activities |
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When investors are involved in trading activities in an attempt to outguess markets, investors are: A. Hedging B. Diversifying C. Engaging in riskless arbitrage D. Speculating |
Speculating |
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Rank the followng bank assets from most liquid (1) to least liquid (4) Commercial Loans Securities Reserves Physical Capital |
3 2 1 4 |
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A bank finds that ROE is too because it has too much bank capital. Which of the following will not raise its ROE? A. The bank can increase the amount of its assets by acquiring new funds B. The bank can sell part of its holdings of securities and hold more excess reserves C. The bank can pay out more dividends D. The bank can buy back some of its shares |
The bank can sell part of its holdings of securities and hold more excess reserves |
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Which of the following is NOT asset on bank's balance sheet A. Loans B. Checkable Deposits C. Government Securities D. Reserves |
Checkable Deposits |
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Using T accounts for both First National Bank and the Second National Bank. What happens when Jane writes a check for $50 on her account at the First National Bank to her in friend who in turn Deposits the check to Second National Bank T-Account For 1st National T-Account for 2nd National |
Assets = -50 Liabilities = -50 Second National Assets= 50 Liabilities = 50 |
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What is the Excess Reserves Formula |
Checkable Deposits + Bank Capital - Required Reserves - T Bills |
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What percentage of weight do mortgage loans carry? |
50% |
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The bank you own has the following balance sheet Assets - Reserves 75 million Loans 525 million Liabilities Deposits - 500 million Bank Capital - 100million If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, what actions can you take to keep your bank from failing? A. You can go to the discount window B. You can call in or sell off loans C. You can borrow reserves in the federal funds market D. Any of the above are appropriate actions to take |
Any of the above are appropriate actions to take |
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When a bank has a deposit outflow of Q$50 million with a RR on deposits of 10% which balance sheet would the bank rather have: A. Balance Sheet A because the excess reserves are adequate to cover the deposit outflow without the bank needing to alter its balance sheet. Moreover, This balance sheet has more income-producing assets. B. Since acquiring reserves is nearly costless, Because Balance sheet A is more desirable because it can take advantage of holding more income-producing assets until the deposit outflow C. You would obtain the balance sheet that contains the adequate excess reserves to cover the deposit outflow without the bank need to alter its balance sheet |
You would obtain the balance sheet that contains the adequate excess reserves to cover the deposit outflow without the bank need to alter its balance sheet |
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If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to lend out? Why or why not? What options are available for you to provide funds your customer needs? A. No. There are several ways that reserves can be acquired. For example, the bank can borrow at the discount window or in the federal funds market, or it can acquire funds by issuing negotiable CDs. B. No. There are only two sources of funds that can be used to acquire reserves. The bank can borrow at the discount window or in the federal funds market C. Yes. Although excess reserves are not the only source of new lending, the cost of acquiring the excess reserves for lending are higher than the expected return on the loan |
No. There are several ways that reserves can be acquired. For example, the bank can borrow at the discount window or in the federal funds market, or it can acquire funds by issuing negotiable CDs. |
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If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation? A. Call in existing loans in an attempt to decrease its asset holding B. Borrow from other banks or corporations C. Decrease dividend payments to increase retained earnings D. Issue Stock |
Issue Stock Decrease dividend payments to increase retained earnings Call in existing loans in an attempt to decrease its asset holding |
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If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE? A. Given the ROA, if bank capital doubles, the ROE will fall by half B. Given the ROA, if bank capital doubles, then ROE will also double C. Even if the bank doubles its amount of capital, if ROA is constant, the ROE will remain unchanged D. The effect on ROE cannot be determined based on the information provided |
Given the ROA, if bank capital doubles, the ROE will fall by half |
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Which of the following is a benefit for a bank when it decides to increase the amount of its bank capital? A. The return on equity increases B. The liquidity of its loans and other assets rises C. The safety of its loans increases D. The return on assets rises |
The safety of its loans increases |
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How do you calculate the Equity Multiplier EM = ROA/ROE X-bank reported an ROE of 14% and an ROA = 1.22% How well capitalized is this bank? A. This is a well capitalized bank because its equity/asset ratio exceeds for the minimum required level B. This is a poorly-capitalized bank because its ROA is lower than its ROE C. There is not enough information to answer the question |
This is a well capitalized bank because its equity/asset ratio exceeds for the minimum required level |
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A bank almost always insists the firms it lends to keep compensating balances at the bank. Why? A. Compensating balances help establish long-term customer relationships, which make it easier for the bank to collect information about prospective borrowers, thus reducing the adverse selection problem B. Compensating balances help the bank monitor the activities of a borrowing firm, which reduces the moral hazard problem C. Compensating balances may be converted into income-producing assets, which raises bank profitability D. Compensating balances can be used as a substitute for a revolving line of credit E. Compensating balances can act as collateral |
Compensating balances help establish long-term customer relationships, which make it easier for the bank to collect information about prospective borrowers, thus reducing the adverse selection problem Compensating balances help the bank monitor the activities of a borrowing firm, which reduces the moral hazard problem Compensating balances can act as collateral |
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"Because diversification is a desirable strategy for avoiding risk, it never makes sense for a bank to specialize in making specific types of loans." Is this statement true or false? Explain A. True. A bank can reduce its risk by using diversification just like individuals can B. False. A bank does not gain anything by diversifying; the bank only raises its costs when it diversifies C. False. A bank may have developed expertise in screening and monitoring a particular type of loan, thus improving its ability to handle problems of adverse selection and moral hazard D. True. Diversification is a desirable strategy for a bank, so it does not make sense for a bank to specialize in certain types of lending |
False. A bank may have developed expertise in screening and monitoring a particular type of loan, thus improving its ability to handle problems of adverse selection and moral hazard |
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If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans A. You would want to make Long-term loans to secure the higher interest rate for an extended period of time B. You would want to make short-term loans so you can reinvest the funds at a higher interest rates after maturity C. You would want to make short-term loans since there is no guarantee that the interest rate will rise as expected D. Both short-term and long-term loans will be profitable with an expected interest rate increase |
You would want to make short-term loans so you can reinvest the funds at a higher interest rates after maturity |
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Suppose that you are the manager of a bank whose $100 billion of assets have an average duration of four years and whose $90 billion of liabilities have an average duration of six years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest rates raise by 2% points Assets fall in value by ____ billion Liabilities fall in value by ____ billion Net worth (increases or decreases) by ____ billion |
8 billlion 10.8 billion 10.8 - 8 = 2.8 |
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Suppose that you are the manager of a bank that has $15 million of fixed rate assets, $30 million of rate-sensitive assets, $25 million of fixed rates liabilities, and $20 million of rate sensitive liabilities. Conduct a gap analysis for the bank, and show what will happen to bank profits if interest rates rise by 5% points. Gap = (rate sensitive assets - rate sensitive liabilities) = 30 million - 20 million = 10 million Change in bank profits = (5% * 10 million) |
0.5 million |
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Examples of off-balance-sheet activities include: A. Extending loans to depositors B. Selling negotiable CDs C. Selling loan portfolios D. Borrowing from other banks |
Selling loan portfolios |
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Which of the following may not be used as a back up line of credit? A. Mortgages B. Loan Commitments C. Standby letters of credit D. Overdraft privileges |
Mortgages |
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When investors are involved in trading activities in an attempt to outguess markets, investors are: A. Diversifying B. Speculating C. Helping D. Engaging in riskless arbitrage |
Speculating |
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If a bank has $200,000 of checkable deposits, a required reserve ratio of 20%, and it holds $80,000 in reserves, then the maximum outflow it can sustain withoout altering its balance sheet is A. $50,000 B. $40,000 C. $30,000 D. $25,000 |
$50,000 |
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Because of their (high or low) liquidity, (short or long-term) U.S. government securities are called secondary reserves |
High; short-term |
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A $5 million deposit outflow from a bank has the immediate effect of A. Reducing deposits and capital by $5 million B. Reducing deposits and reserves by $5 million C. Reducing deposits and loans by $5million D. Reducing deposits and securities by $5 million |
Reducing deposits and reserves by $5 million |
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Which of the following statements is false A. Checkable deposits include NOW accounts B. Checkable deposits are payable on demand C. Checkable deposits are the primary source of bank funds D. Checkable deposits are usually the lowest cost source of bank funds |
Checkable deposits are the primary source of bank funds |
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The volume of checkable deposits relative to total liabilities has A. Declined over time B. Expanded moderately over time C. Expanded dramatically over time D. Remained virtually unchanged since 1960 |
Declined over time |
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Transformation of assets can be accomplished by: A. Borrowing and lending only for the long-term B. Borrowing short and lending long C. Borrowing long and lending short D. Borrowing and lending only for the short term |
Borrowing short and lending long |
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Which of the following statements false? A. The bank's assets provide the bank with income B. A bank's assets are its uses of funds C. A bank issues liabilities to acquire funds D. Bank capital is recorded as an asset on the bank balance sheet |
Bank capital is recorded as an asset on the bank balance sheet |
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Conditions that likely contributed to a credit crunch during the global financial crisis include A. capital shortfalls cause in part by falling real estate prices B. Regulated hikes in bank capital requirements C. Increase in Reserve requirements |
capital shortfalls cause in part by falling real estate prices |
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A bank failure occurs whenever A. A bank has to call in a large volume of loans B. A bank suffers a large deposit outflow C. A bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements |
A bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements |
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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 |
Calling in loans |
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Which of the following is not an income-producing asset on a bank's balance sheet A. Treasury notes B. Consumer loans C. Bank Reserves D. Treasury bills |
Bank Reserves |
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Because ______ are less liquid for the depositor than ______, they earn higher interest rates. A. Money market deposit accounts; time deposits B. Time deposits; passbook savings C. passbook savings; time deposits D. Money market deposit accounts; passbook savings |
Time deposits; passbook savings |
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Banks hold excess and secondary reserves to A. Provide for deposit outflows B. Achieve higher earnings than they can with loans C. Reduce the interest-rate risk problem D. Satisfy margin requirements |
Provide for deposit outflows |
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Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure A. Secondary reserves B. Mortgages C. Excess Reserves D. Bank Capital |
Mortgages |
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In general, banks make profits by selling ______ liabilities and buying _____ assets. A. Long-term; shorter-term B. Risky; risk-free C. Short-term; longer-term |
Short-term; longer-term |
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Net profit after taxes per dollar of equity is a basic measure of bank profitability called A. return on investment B. Return on capital C. Return on equity D. Return on assets |
Return on equity |
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Off-balance sheet activities involving guarantees of securities and back-up credit lines A. Greatly reduce the risk a bank faces B. Have no impact on the risk a bank faces C. Increase the risk a bank faces |
Increase the risk a bank faces |
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If a bank has_____ rate-sensitive assets than liabilities, then ______ in interest rates will increase bank profits A. More; an increase B. Fewer; a surge C. Fewer; an increase |
More; an increase |
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Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called A. The segmented maturity approach to gap analysis B. Basic gap analysis C. The maturity bucket approach to gap analysis |
The maturity bucket approach to gap analysis |
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When bank offer borrowers smaller loans than they have requested, banks are said to A. Shave credit B. Rediscount the loan C. Ration credit D. Raze credit |
Ration credit |
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Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the A. Trading-loss approach B. Stress-testing approach C. Value-at-risk approach D. Doomsday approach |
Value-at-risk approach |
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If a banker expects interest rates to fall in the future, her best strategy for the present is A. To sell long-term certificates of deposit B. To increase the duration of the bank's liabilities C. To buy short-term bonds D. To increase the duration of the bank's assets |
To increase the duration of the bank's assets |
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A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to A. Purchase the bank's board of directors B. Place a corporate officer on the bank's board of directors C. Keep compensating balances in a checking account at the bank |
Keep compensating balances in a checking account at the bank |
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Provisions in loan contracts designed to mitigate the moral hazard problem are called A. Restrictive covenants B. Proscription bonds C. Due-on-sale clauses D. Liens |
Restrictive covenants |
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One way for banks to reduce the principal-agent problems associated with trading activities is to A. Reduce the regulations on the traders so that they have more flexibility in conducting trades B. Set limits on the total amount of a trader's transactions. C. Make sure that the person conducting the trades is also the person responsible for recording the transactions |
Set limits on the total amount of a trader's transactions. |
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Unanticipated moral hazard contingencies can be reduced by A. Long-term customer relationships B. Screening C. Specialization in lending D. Credit rationing |
Long-term customer relationships |
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All of the following are examples of off-balance activities that generate fee income for banks except A. Foreign exchange trades B. Selling negotiable CDs C. Guaranteeing debt securities D. Back-up lines of credit |
Selling negotiable CDs |
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If a bank has$50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then A. Interest rate changes will not impact bank profits B. A decrease in interest rates will reduce bank profits C. A decrease in interest rates will increase bank profits |
A decrease in interest rates will reduce bank profits |
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To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective banks must also A. Monitor and enforce them B.. Be willing to rewrite the contract if the borrower cannot comply with the restrictions C. Trust the borrower to do the right thing |
Monitor and enforce them |
