Deck 13: Commercial Bank Operations

Question 1

Capital notes are a nondeposit liability of banks.

Answer 1

True

Question 2

Matched-funding loan pricing is a practical application of term structure.

Answer 2

False

Question 3

Eurodollars are dollar denominated deposits owned by foreigners.

Answer 3

False

Question 4

Fed Funds sold represent an important source of borrowed funds for commercial banks.

Question 5

Unlike loan sales, the originating bank continues to earn interest on its securitized loans.

Question 6

"Off-balance-sheet" activities are exempt from regulation.

Question 7

A sale of Fed Funds by a bank most likely represents a decrease in its excess reserves.

Question 8

Demand deposits represent the largest deposit source of funds for commercial banks.

Question 9

With interest rates expected to decrease in the future, banks would prefer to make floating-rate loans rather than fixed rate loans.

Question 10

Savings deposits are a larger percent of funding for small banks, compared to large banks.

Question 11

Most banks issue negotiable certificates of deposits.

Question 12

The number of banks in the US has significantly increased from 1980's to 2000's while the number of branches decreased.

Question 13

Fed Funds purchased is an important short-term asset for large banks.

Question 14

Banks usually pay low explicit interest rates on demand deposit accounts.

Question 15

A bank's investment account provides liquidity and income.

Question 16

Loan pricing must attempt a competitive rate of return on bank shareholder's equity.

Question 17

Banks operate under the same regulatory structure as any other financial services firms.

Question 18

The prime rate is the lowest loan rate offered by banks.

Question 19

A bank holding company might apply for a "financial" holding company status from the Fed if it were planning to purchase a life insurance company.

Question 20

Banks hold a substantial volume of low-risk corporate bonds because of their high yields.

Question 21

Small banks tend to have more ________ and fewer ________ compared to large banks.

A) transaction accounts; time deposits
B) borrowed funds; capital stock
C) time deposits; borrowed funds
D) large time deposits > $100,000; transaction accounts

Question 22

The number of bank branches continues to increase because

A) banks have sought to locate close to their customers.
B) states have eased bank branching restrictions.
C) state and federal bank regulators prefer branches to bank holding companies.
D) "a" and "b"

Question 23

Which of the following is NOT characteristic of small banks compared to large banks?

A) they have proportionally more fixed assets
B) they have proportionally more agricultural loans
C) they have proportionally less capital
D) they have proportionally more deposits

Question 24

Most of the assets of a commercial bank can best be described as

A) real assets.
B) the financial liabilities of deficit spending units in the economy.
C) deposits from many sectors of the economy.
D) reserves.

Question 25

Which is the ultimate goal of a commercial bank?

A) long-term growth
B) deposit growth
C) bank safety
D) long-term profit maximization

Question 26

Banks use the holding company form of organization for all the following except

A) reducing taxes
B) expanding geographically
C) diversifying services
D) complying with federal regulations.

Question 27

The major form of organization for commercial banks in the U.S. is the

A) partnership
B) bank holding company
C) single charter
D) branch

Question 28

Since 1990's, due to financial liberalization, both the number and size of commercial banks in the U.S. has been increasing dramatically.

Question 29

All but one of the following is a bank asset.

A) fed funds purchased
B) consumer loans
C) deposits in other banks
D) government securities

Question 30

While most U.S. commercial banks are ____, the ________ dominate in terms of assets.

A) small; large banks.
B) large; large banks.
C) small; small banks.
D) large; bank holding companies

Question 31

Bank holding companies are regulated by the

A) Fed
B) FDIC
C) OCC
D) FTC

Question 32

Bank holding companies were first regulated in a major way in

A) 1933
B) 1935
C) 1956
D) 1980

Question 33

What balance sheet account of commercial banks is a component of M1?

A) U.S. Treasury deposits
B) deposits in other banks
C) demand deposits
D) certificates of deposit

Question 34

Which one of the following is not an interest-bearing deposit account?

A) demand deposit
B) NOW account
C) savings account
D) MMDA

Question 35

Repurchase Agreements (Repos) are the most important non-deposit source of funds for commercial banks, which means banks buy and sell Fed Funds to adjust liquidity.

Question 36

The number of U.S. bank charters has been ___ but the number of branches has been __.

A) rising/falling
B) falling/stable
C) falling/rising
D) rising/rising.

Question 37

Commercial banks are

A) often subsidiaries of bank holding companies
B) the largest category of financial institution
C) the main transmitters of monetary policy
D) all of the above

Question 38

Small bank deposits in larger money center banks are called

A) reserves
B) correspondent deposits
C) flexibility accounts
D) fed funds

Question 39

The largest deposit source of funds for commercial banks is

A) time deposits.
B) demand deposits.
C) U.S. Treasury deposits.
D) interest-bearing transaction deposits.

Question 40

The fastest-growing U.S. bank holding companies can attribute most of their growth to

A) an increasing number of branches.
B) the rapid growth of deposits from the growing number of households.
C) improved technological financial innovation.
D) merger of banks and bank holding companies.

Question 41

Banks invest in treasuries for all the following reasons except

A) they are marketable
B) they are liquid
C) they provide capital
D) they provide income

Question 42

Banks hold municipal bonds primarily for

A) high after-tax yields.
B) low default risk.
C) high marketability.
D) service to local communities.

Question 43

In general, which of the following bank investments has the least liquidity?

A) T-bills
B) Fed Funds sold
C) municipal bonds
D) T-bonds

Question 44

In a standby letter of credit,

A) the bank establishes a liability.
B) the bank substitutes its creditworthiness for that of its customer.
C) the bank assures a loan applicant that credit will soon be granted.
D) the bank pays a customer to guarantee the bank's obligations.

Question 45

A form of secured borrowing by banks is

A) Eurodollars
B) fed funds
C) certificate of deposit
D) repurchase agreement

Question 46

Using matched-funding pricing, the major factor determining the loan rate is

A) competitive return to the bank's shareholders
B) administrative costs of making the loan
C) the interest rate on the funding source
D) adjustment for default risk

Question 47

Repurchase agreements used for all following except

A) corporate cash management.
B) a source of funds for banks.
C) to support loan brokerage activities.
D) a method of paying interest to demand depositors.

Question 48

Which of the following is not a borrowed fund account?

A) Fed Funds purchased
B) Eurodollars
C) Banker's acceptances
D) SLC

Question 49

All but one of the following advantages of the bank holding company:

A) economies of scale
B) geographic diversification
C) service diversification
D) largely unregulated

Question 50

A bank expecting interest rates to rise in the future would prefer to make

A) fixed-rate loans
B) long-term, fixed rate loans
C) floating-rate loans adjusted infrequently
D) floating-rate loans adjusted frequently

Question 51

Which of the following describes bank trust operations?

A) Trust operations involve banks acting in a fiduciary capacity
B) Smaller banks tend to offer trust services through correspondent relationships
C) A large portion of bank trust assets are managed for pension funds
D) all of the above

Question 52

All but one of the following are off-balance sheet activities of banks?

A) repurchase agreements
B) standby letters of credit
C) loan brokerage
D) securitization

Question 53

The Financial Services Modernization Act of 1999 permits
A) Any or all of the above

A) Formation of financial holding companies
B) Commercial banking and insurance in the same holding company
C) Insurance and investment banking in the same holding company

Question 54

Banks generate revenue from credit cards from all the following except

A) merchant discount fees
B) sale of credit cards
C) annual fees from credit card customers
D) interest from credit card balances

Question 55

Banker's acceptances are not

A) foreign deposits accepted overseas by branches of American banks.
B) drafts drawn on a bank by a corporation to pay for merchandise.
C) used in international trade.
D) a source of funds for large banks.

Question 56

When a bank increases its fed funds sold, its deposit balance in the Fed will ; when a bank's deposit balance in the Fed increases, the bank has increased its fed funds .

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

Question 57

In loan brokerage, the bank's spread is

A) the difference between the rate earned by the bank and the rate paid by the bank
B) the rate differential between the cost of funds and the loan rate.
C) the discount of the loan at the Window
D) the fee collected at the maturity of the loan

Question 58

While time deposits are banks' major source of funds, their major use is

A) investments
B) consumer loans
C) demand deposits
D) commercial loans

Question 59

All of the following are sources of common equity capital for banks except

A) capital stock
B) undivided profits
C) capital notes
D) special reserve accounts

Question 60

All of the following are characteristic of bank borrowed funds except

A) They are insured by FDIC.
B) They are short-term money market sources of funds.
C) They are an important source of bank liquidity.
D) Some entail pledging collateral; others do not.

Question 61

Investment in Treasuries provides

A) liquidity
B) low default risk
C) income
D) all of the preceding

Question 62

A contingent item that may eventually be placed on the left hand side of the balance sheet or recognized as income on the income statement is a/an

A) Loan commitment
B) Off balance sheet liability
C) Loan sold without recourse
D) Net charge off
E) Off balance sheet asset

Question 63

Which of the following is not a money market source of bank funds?

A) common stock
B) repurchase agreements
C) commercial paper
D) treasury bonds

Question 64

The largest single category of loans on the typical bank's balance sheet in the recent ten years was:

A) Real estate loans
B) Commercial and industrial loans
C) Consumer loans
D) U.S. government agents loans
E) Inter-bank loans

Question 65

Why has the bank holding company form of organization been so popular?

Question 66

Bank equipment leasing activity involves:

A) A bank leasing its office facilities instead of buying
B) A bank buying equipment and then leasing the item to a customer
C) A customer buying equipment and then leasing it to a bank
D) A bank leasing computer equipment
E) None of the above
ESSAY QUESTIONS

Question 67

All but one of the following is associated with bank loan agreements longer than one year?

A) term loans
B) line of credit
C) revolving credit
D) mortgage loan

Question 68

When Bank A buys fed funds from Bank B,

A) the Fed increases one of their asset accounts and decreases the other
B) Bank A posts an increase in its asset account, federal funds sold
C) Bank B posts an increase in its asset account, federal funds sold
D) the Fed increases the deposit accounts of both Bank A and Bank B

Question 69

A bank loan manager who is expecting declining interest rate levels over the next several years would encourage loan originators to make

A) variable rate loans.
B) loans closely tied to the prime rate.
C) fixed-rate loans.
D) very short-term loans.

Question 70

When a bank is involved in loan brokerage, the bank is

A) selling loan participations to investors.
B) bringing loan customers together to share funds.
C) originating loans, but not funding the complete loan.
D) assisting customers in selling their real estate.

Question 71

Which of the following is least affected by an individual customer's profile?

A) base rate
B) default risk premium
C) term premium
D) nonprice adjustments

Question 72

To earn fee incomes, banks provide banking services to other banks, such as check clearing, foreign exchange trading, etc. The above items are examples of

A) Correspondent banking
B) Trust services
C) Off balance sheet assets
D) Economies of scope
E) Credit derivatives

Question 73

All but one of the following is a balance sheet account associated with check clearing?

A) Fed funds sold
B) reserves at Federal Reserve banks
C) balances at other banks
D) cash items in the process of collection

Question 74

A standby letter of credit (SLC) offers the bank

A) a source of fee income
B) a nondeposit source of funds
C) a contingent liability
D) "a" and "c"

Question 75

Which of the following statement is NOT correct in describing the development of the U.S. banking industry between 1980's to 2010's:

A) there are less banks but more branches
B) there are many community banks but a few very large banks
C) bank holding companies dominate the major market share
D) small banks in general engage more hedging activities than the large banks
E) large banks' major funding sources are non-depository funds

Question 76

All but one of the following is associated with bank loan securitization activity?

A) the bank provides credit enhancements.
B) the bank provides the source of funds for the loan securitization.
C) the bank originates the loans.
D) the value of the securities sold to investors exceeds that of the securitized loans.

Question 77

What are the major economic differences between bank loans and investments? Aren't both intended to generate profits?

Question 78

The largest loan category for commercial banks is

A) commercial loans
B) real estate loans
C) consumer loans
D) agricultural loans.

Question 79

All but one of the following is more associated with the level of a bank's base lending rate:

A) bank cost of funds
B) the commercial paper rate
C) competitor prime rates
D) the federal reserve discount rate

Question 80

Commercial banks borrow from their Federal Reserve Bank at the

A) fed funds rate
B) eurodollar rate
C) discount rate
D) repo rate