Deck 18: Banking

Question 1

A bank's size is measured by its:

A)ownership of securities.
B)number of depositors.
C)number of employees.
D)total assets.

Answer 1

total assets.

Question 2

Subprime lenders do not include:

A)pawn shops.
B)credit unions.
C)payday lenders.
D)loan sharks.

Answer 2

credit unions.

Question 3

Credit unions make:

A)small personal loans.
B)automobile loans.
C)mortgage loans.
D)All of the Answer s are correct.

Answer 3

All of the Answer s are correct.

Question 4

Subprime lenders include:

A)pawn shops.
B)loan sharks.
C)payday lenders.
D)All of the Answer s are correct.

Question 5

Low-income and high-risk borrowers may have to rely on for mortgages.

A)subprime lenders
B)large commercial banks with many assets
C)pawn shops
D)credit unions

Question 6

A finance company:

A)underwrites large capital investments.
B)does not make loans.
C)does not accept deposits.
D)finances takeovers.

Question 7

The original purpose of savings institutions was to accept:

A)savings deposits and make mortgage loans.
B)checking deposits and make household loans.
C)all household deposits and make personal loans.
D)savings deposits and make all household loans.

Question 8

Community banks are in no danger of dying out because:

A)of their trillions of dollars in assets.
B)of their expertise in small-business lending.
C)they generally operate in areas where large banks choose not to.
D)they have considerable economies of scale.

Question 9

Companies that make small loans to people who need cash urgently are called:

A)ATMs.
B)credit unions.
C)payday lenders.
D)community banks.

Question 10

Since 1984, the number of banks in the United States has:

A)been shrinking.
B)been growing.
C)stayed about the same.
D)been moving away from New York City.

Question 11

The three main types of banks are:

A)commercial, investment, and savings.
B)commercial, savings, and credit unions.
C)investment, commercial, and credit unions.
D)savings, finance companies, and commercial.

Question 12

Subprime lenders include:

A)commercial banks.
B)pawn shops.
C)credit unions.
D)All of the Answer s are correct.

Question 13

Community banks have less than in assets.

A)$1 billion
B)$500 thousand
C)$100 million
D)$500 million

Question 14

Finance companies only ; they do not .

A)issue bonds; accept savings
B)accept checking deposits; make loans
C)make loans; accept deposits
D)underwrite pension funds; exchange foreign currency

Question 15

Pawn shops give small short-term loans but require in return.

A)very high collateral
B)high interest rates
C)a payment equal to twice the amount of the loan
D)credit cards

Question 16

An institution that is owned by its depositors is called a:

A)community bank.
B)commercial bank.
C)credit union.
D)finance company.

Question 17

A credit union is different from a savings institution because it:

A)restricts membership to a common group of people.
B)restricts the maximum balance a depositor must have.
C)only makes mortgage loans.
D)will not accept checking deposits.

Question 18

Which of the following states has no payday lenders?

A)Washington
B)Oklahoma
C)New Mexico
D)Georgia

Question 19

A financial holding company is an institution that owns:

A)a group of financial institutions.
B)a mix of financial and manufacturing companies.
C)mutual funds only.
D)large investment banks only.

Question 20

According to a survey of payday lenders, the average annual interest rate charged on payday loans is about:

A)400%.
B)20%.
C)150%.
D)76%.

Question 21

To make it possible for low-income borrowers to obtain mortgages, subprime lenders:

A)lowered the loan payment-income ratio.
B)required proof of income.
C)offered standard 30-year mortgage rates.
D)All of the Answer s are correct.

Question 22

Net worth is:

A)assets minus liabilities.
B)revenues minus costs.
C)profits minus salaries.
D)price minus marginal cost.

Question 23

And are mortgage agencies that raise funds by issuing bonds.

A)First Bank of the United States; Second Bank of the United States
B)The Federal Reserve; National Bank of the United States
C)Fannie Mae; Freddie Mac
D)Washington Mutual; Comptroller of the Currency

Question 24

By 2009, over of all mortgages were securitized.

A)50%
B)35%
C)75%
D)10%

Question 25

A bank's net worth is also called its:

A)revenue.
B)capital.
C)loans.
D)deposits.

Question 26

On a bank's balance sheet, which of the following are assets?

A)checking deposits
B)certificates of deposit
C)savings deposits
D)None of the Answer s is correct.

Question 27

In 2008, the Federal Government Fannie Mae and Freddie Mac.

A)privatized
B)put into conservatorship
C)released from private ownership
D)None of the Answer s is correct.

Question 28

Mortgage-backed securities (MBSs) offered by Fannie Mae and Freddie Mac were an attractive alternative to bonds for many buyers because MBSs:

A)were highly liquid.
B)paid higher interest than other safe assets.
C)appeared to have implicit government backing.
D)All of the above are correct.

Question 29

A reason for "securitizing" mortgages is to allow a bank to:

A)buy other financial assets.
B)consistently generate above-normal profits.
C)maximize its risk.
D)reduce loan default risk to zero.

Question 30

The catalyst for the subprime market crisis beginning in 2006 was:

A)increased government regulation.
B)falling interest rates.
C)tighter lending standards.
D)falling housing prices.

Question 31

Credit ratings reduce:

A)credit rationing.
B)moral hazard.
C)adverse selection.
D)venture capital.

Question 32

On a bank's balance sheet, which of the following is(are) an asset(s)?

A)loans
B)checking deposits
C)certificates of deposit
D)equity

Question 33

Traditional mortgages require , while some subprime mortgages were offered with .

A)a substantial down payment; "zero down"
B)high interest rates; low interest rates
C)no down payment; "zero down"
D)low interest rates; substantial down payment

Question 34

A bank's liabilities:

A)must equal its assets.
B)is the amount owed to others.
C)equal zero in the long run.
D)equal its deposits.

Question 35

To compensate for high default risk, payday lenders rely on:

A)credit scoring and very high interest rates.
B)post-dated checks and very high interest rates.
C)very high collateral.
D)very high interest rates and threats to defaulters.

Question 36

Freddie Mac and Fannie Mae raise funds by:

A)issuing bonds.
B)taking savings deposits.
C)borrowing from the Treasury Department.
D)borrowing from the Federal Reserve.

Question 37

As a result of the subprime lending crisis, what happened to Fannie Mae and Freddie Mac?

A)They were privatized.
B)They were put into conservatorship.
C)They were sold to a foreign central bank.
D)The Fed seized their assets and auctioned them off.

Question 38

A financial institution that pools a group of loans for sale to other institutions has the loans.

A)"securitized"
B)"bundled"
C)"mutualized"
D)"sacrificed"

Question 39

On a bank's balance sheet, which of the following are assets?

A)reserves
B)loans
C)securities
D)All of the Answer s are correct.

Question 40

The low introductory interest rates offered by subprime lenders are called:

A)"low-ball rates."
B)"teaser rates."
C)"adjustable rates."
D)"Home Pride rates."

Question 41

Which of the following is the correct equation for a bank's return on assets?

A)ROA = profits - assets
B)ROA = profits/capital
C)ROA = profits/assets
D)ROA = total income - total expense

Question 42

Because the return on equity quantifies how much , bank managers endeavor to maximize ROE, much like other businesses try to produce high returns for their .

A)banks earns after taxes; board of directors
B)a bank profits; owners
C)banks earn per dollar its stockholders own; stockholders
D)banks earn on loans; workers

Question 43

A bank acquires capital by:

A)buying securities from other institutions.
B)issuing stock.
C)making loans.
D)borrowing from the discount window.

Question 44

A bank's reserves are equal to:

A)deposits at the Fed.
B)cash held in bank branches and ATMs.
C)cash held in bank branches and ATMs plus deposits at the Fed.
D)saving deposits plus checkable deposits.

Question 45

Which of the following arranges a bank's assets from most to least liquid?

A)Reserves → Securities → Loans
B)Loans → Checkable deposits → Reserves
C)Checkable deposits → Savings accounts → Federal funds
D)Reserves → Savings accounts → Securities

Question 46

The most liquid form of assets on a bank's balance sheet are:

A)checking deposits.
B)reserves.
C)loans.
D)federal funds.

Question 47

The return on equity is:

A)the ratio of a bank's profits to its capital.
B)the ratio of a bank's profits to its expenses.
C)equal to its after-tax income.
D)equal to net income.

Question 48

Another name for default risk is risk.

A)liquidity
B)interest rate
C)credit
D)income

Question 49

The cost to a bank of holding too many liquid assets is:

A)a very high reserve rate.
B)interest lost on loans and holding securities.
C)not having cash in the vault.
D)leaving it exposed to default risk.

Question 50

Overnight bank-to-bank loans are called:

A)certificates of deposit.
B)federal funds.
C)discount loans.
D)overnight repurchase agreements.

Question 51

When a bank a loan, it removes the loan from its balance sheet.

A)cashes in
B)buys
C)writes off
D)converts

Question 52

To find a bank's return on its equity, we:

A)divide its profits by its total assets.
B)divide its profits by its capital.
C)subtract its bank capital from its total income.
D)subtract its bank capital from its profits.

Question 53

Which of the following is the "cheapest" source of funds for a commercial bank?

A)federal fund borrowing
B)checking deposits
C)issuing bonds
D)reserves

Question 54

Requiring collateral reduces the probability of default by making high-risk borrowers less likely to apply for a loan, which reduces:

A)adverse selection.
B)moral hazard.
C)interest rate risk.
D)bank panics.

Question 55

Banks face considerable risk.

A)insolvency
B)interest rate
C)credit
D)insolvency, interest rate, and credit

Question 56

On a bank's balance sheet, which of the following are liabilities?

A)checking deposits
B)certificates of deposit
C)savings deposits
D)All of the Answer s are liabilities.

Question 57

The largest liabilities held by banks are:

A)loans.
B)securities.
C)deposits.
D)reserves.

Question 58

To find a bank's return on its assets, we:

A)divide its profits by its capital.
B)divide its profits by its total assets.
C)subtract its total expenses from its total income.
D)divide its total expenses by its total income.

Question 59

Most short-term bank borrowing is from:

A)other banks.
B)the Fed.
C)large pension funds.
D)depositors.

Question 60

Because generate very little income, banks hold a portion of their assets in this form.

A)securities; large
B)loans; small
C)reserves; small
D)buildings; large

Question 61

The sequence of a bank run is:

A)fear of a run, depositors withdraw, banks sell assets, capital falls below zero.
B)depositors withdraw, banks sell assets, fear of a run, capital falls below zero.
C)capital falls below zero, fear of a run, depositors withdraw, banks sell assets.
D)banks sell assets, capital falls below zero, fear of a run, depositors withdraw.

Question 62

The S&L crisis was caused by the:

A)fall in the price of oil.
B)rise in commercial real estate prices.
C)growing gap between short- and long-term interest rates.
D)All of the Answer s are correct.

Question 63

Is a bank regulator's choice not to shut down an insolvent bank.

A)Forbearance
B)Reassurance
C)Relief
D)Decision

Question 64

Banks reduce credit risk by:

A)lowering interest rates and issuing new stock.
B)borrowing Fed funds and providing ATMs.
C)requiring collateral and selling loans.
D)matching maturities and holding reserves.

Question 65

In the early 1980s, inflation rates soared, pushing up , as explained by the .

A)nominal interest rates; Fisher equation
B)real interest rates; Friedman hypothesis
C)unemployment; Phillips curve
D)mortgage rates; real estate reaction function

Question 66

A bank run is an extreme form of:

A)credit risk.
B)interest rate risk.
C)low bank esteem.
D)liquidity risk.

Question 67

If a rise in short-term interest rates increases the interest a bank pays more than the interest a bank earns, then bank:

A)profits increase.
B)profits decrease.
C)assets increase.
D)assets decrease.

Question 68

Interest rate risk occurs because of:

A)different maturities of bank assets and liabilities.
B)the volatility of short-term interest rates.
C)the short-term nature of bank borrowing.
D)All contribute to interest rate risk.

Question 69

Banks reduce interest-rate risk by:

A)selling loans.
B)making floating interest rate loans.
C)using derivatives.
D)All of the Answer s are correct.

Question 70

Poor information about a bank's balance sheet can lead to:

A)high interest rates.
B)a bank run.
C)high inflation rates.
D)a bank takeover.

Question 71

If bank regulators find evidence of criminal activity in a bank, such as embezzlement, they turn the case over to the:

A)Banking Commission.
B)Secret Service.
C)Federal Reserve Board.
D)FBI.

Question 72

If the interest rate on a bank's liabilities rises without an increase in asset interest rates, the bank's:

A)equity ratio falls.
B)return on assets rises.
C)profits fall.
D)All of the Answer s are correct.

Question 73

If depositors lose faith in a bank, the severity of bank runs can be compounded by the:

A)first-come, first-served nature of bank withdrawals.
B)policy that large depositors can withdraw their deposits before smaller depositors can.
C)existence of deposit insurance.
D)large amounts of bank reserves.

Question 74

Holding the return on assets constant, if the equity ratio rises, the return on equity:

A)is unchanged.
B)rises.
C)falls.
D)There is not enough information provided to Answer the question.

Question 75

Which of the following policies might bank regulators require a bank to take in order to reduce excessive risk taking?

A)cut dividends
B)fire managers
C)slow the growth of assets
D)cut dividends, fire managers, and/or slow the growth of assets

Question 76

Screening borrowers before loans are made reduces and monitoring borrowers after loans are made reduces .

A)interest rate risk; credit risk
B)credit risk; interest rate risk
C)moral hazard; adverse selection
D)adverse selection; moral hazard

Question 77

A bank run is the sudden:

A)accumulation of bank capital.
B)withdrawals by the depositors of all banks.
C)withdrawals by the depositors of a single bank.
D)increase in bank liquidity.

Question 78

One measure of interest rate risk is the:

A)interest rate volatility.
B)rate-sensitivity gap.
C)federal funds rate.
D)unemployment rate.

Question 79

Requiring collateral reduces the probability of default after a loan is made, by giving borrowers the incentive to act prudently in order to avoid the loss of collateral, which reduces:

A)adverse selection.
B)moral hazard.
C)interest rate risk.
D)bank panics.

Question 80

Because shutting it down , bank regulators are tempted to place an insolvent bank in forbearance.

A)is costly to depositors who may lose a portion of their deposits
B)is embarrassing to bank examiners
C)means lost jobs
D)All of the Answer s are correct.