Deck 9: Bank Management

Question 1

If a bank is not meeting the reserve requirement, it must take a loan from the Fed or another bank.

Answer 1

False

Question 2

On a bank balance sheet, equity and capital are the same thing.

Answer 2

True

Question 3

There is an opportunity cost to hold reserves and capital.

Answer 3

True

Question 4

Bonds are an asset of a bank.

Question 5

Employees of a bank in liquidity management are primarily concerned with the level of reserves.

Question 6

The gap is the difference between interest-rate-sensitive liabilities and interest-rate-sensitive assets.

Question 7

Banks should strive to raise their level of equity as high as possible.

Question 8

To ensure solvency in case of defaults, a bank could issue stock.

Question 9

Employees in asset management would decide what type of CDs a bank should offer.

Question 10

Banks specialize to help decrease the problems of adverse selection.

Question 11

The fraction of excess reserves is a measure of capital adequacy.

Question 12

Banks use third party verification of application information to help decrease the problems of adverse selection.

Question 13

If a bank is not meeting the reserve requirement, it could sell bonds as a remedy.

Question 14

Interest rate risk is the chance that interest rates may increase, decreasing the value of bank assets.

Question 15

Required reserves are liabilities of a bank.

Question 16

Bank capital is the difference between the values of its assets and liabilities.

Question 17

Loans from the Fed are assets of a bank.

Question 18

Banks use third party verification of application information to manage credit risk and moral hazard issues.

Question 19

Banks establish long-term commitments as a way of managing credit risk.

Question 20

If there were no defaults, there would be no reason for banks to have positive capital.

Question 21

A typical bank has a positive gap.

Question 22

A bank takes deposits and uses the funds to make home loans. Hence, the _____ increases.

A) level of capital
B) ROA
C) quantity of reserves
D) none of the above

Question 23

Gross spread is the sum of what a bank earns on its assets and what it pays for its liabilities.

Question 24

Which of the following balance sheet entries is not sensitive to changes in market interest rates?

A) bonds
B) reserves
C) mortgages
D) borrowings

Question 25

Banks that borrow short and lend long have a negative gap.

Question 26

If a bank has a positive gap, interest rate declines improve profitability.

Question 27

Mortgages are a type of off-balance-sheet activity.

Question 28

A bank increases its level of required reserves by

A) selling securities.
B) increasing borrowings.
C) calling loans.
D) none of the above.

Question 29

Off-balance-sheet activities are a way for banks to make consistent profits.

Question 30

A bank can increase its level of reserves by

A) selling securities.
B) increasing borrowings.
C) calling loans.
D) all of the above.

Question 31

Which of the following is NOT a method banks use to control credit risk?

A) specialization
B) credit rationing
C) gap analysis
D) collateral requirements

Question 32

Bank sales of mortgage backed securities are a type of off-balance-sheet activity.

Question 33

If a bank borrows short and lends long, interest rate increases improve profitability.

Question 34

Liabilities include

A) borrowings.
B) net worth.
C) savings deposits.
D) all of the above.

Question 35

Bank reserves are a combination of required reserves and excess reserves.

Question 36

A bank increases its level of required reserves by

A) selling securities.
B) increasing borrowings.
C) taking checkable deposits.
D) none of the above.

Question 37

A bank takes deposits and uses the funds to make commercial loans. Hence, the _____ increases.

A) level of capital
B) ROA
C) ROE
D) all of the above

Question 38

A bank suffers defaults on some loans. Hence, the _____ decreases.

A) level of capital
B) quantity of excess reserves
C) ROA
D) all of the above

Question 39

The gross spread is the most important aspect of bank profitability.

Question 40

Off-balance-sheet activities increase the risk of banks.

Question 41

The two main categories of profit making assets on a bank's balance sheet are

A) loans and securities.
B) reserves and loans.
C) bonds and deposits
D) borrowings and deposits

Question 42

Which of the following is NOT a method banks use to control credit risk?

A) credit rationing
B) restrictive covenants
C) specialization
D) all of the above.

Question 43

Which of the following is a method banks use to deal with interest rate risk?

A) gap analysis
B) restrictive covenants
C) specialization
D) compensating balances

Question 44

An employee who is primarily concerned with making sure the bank has enough reserves is involved in

A) liquidity.
B) liability.
C) asset.
D) capital adequacy.

Question 45

When a bank requires that a borrower deposit some of a loan, the bank is

A) requiring collateral.
B) requiring compensating balances.
C) credit rationing.
D) none of the above.

Question 46

Which of the following are off-balance-sheet activities?

A) taking loans from the Fed
B) issuing mortgage backed securities
C) both of the above
D) neither of the above

Question 47

For the following seven questions, use the following bank balance sheet. Values are millions of dollars.

If $100 in transaction deposits were withdrawn and the bank sold the minimum amount of bonds to meet the reserve requirement, what is the value of the bonds remaining on the balance sheet if there were no other changes?

A) $320
B) $340
C) $400
D) none of the above

Question 48

When a bank refuses to lend at high interest rates, it is

A) requiring collateral.
B) requiring compensating balances.
C) credit rationing.
D) none of the above.

Question 49

For the following seven questions, use the following bank balance sheet. Values are millions of dollars.

If $100 in transaction deposits were withdrawn, what is the minimum amount the bank would have to borrow to meet the reserve requirement, if there were no other changes to the balance sheet?

A) $30
B) $50
C) $80
D) $100

Question 50

_____ risk and _____ risk for bank loans are essentially the same.

A) Credit, interest rate
B) Default, credit
C) Interest rate, default
D) None of the above

Question 51

Which of the following is NOT a method banks use to deal with moral hazard?

A) monitoring
B) specialization
C) restrictive covenants
D) all of the above

Question 52

What is the maximum amount of write-downs (defaults) the bank could sustain without becoming insolvent (bankrupt)?

A) $0
B) $260
C) $600
D) $1060

Question 53

If the bank made a 10% return on all interest-paying assets, then the ROE would be

A) 10%.
B) 38.5%.
C) 40.8%.
D) None of the above.

Question 54

Which of the following is NOT a method banks use to deal with adverse selection?

A) compensating balances
B) credit rationing
C) restrictive covenants
D) all of the above

Question 55

An employee who is primarily concerned with making sure the bank has enough capital to cover potential loan defaults is involved in _____ management.

A) liquidity
B) liability
C) asset
D) capital adequacy

Question 56

Which of the following is NOT a method banks use to control credit risk?

A) gap analysis
B) restrictive covenants
C) specialization
D) compensating balances

Question 57

Asset managers try to maximize profitability and minimize

A) defaults.
B) write-downs.
C) credit risk.
D) all of the above.

Question 58

For the following seven questions, use the following bank balance sheet. Values are millions of dollars.

If $100 in transaction deposits were withdrawn and the bank called the minimum amount of loans to meet the reserve requirement, what is the value of the loans remaining on the balance sheet if there were no other changes?

A) $400
B) $500
C) $520
D) $540

Question 59

A bank holding company

A) owns one or more banks.
B) specializes in derivatives.
C) specializes in NCDs.
D) all of the above.

Question 60

For the following seven questions, use the following bank balance sheet. Values are millions of dollars.

If the reserve requirement is 10%, the bank has _____ in excess reserves.

A) $0
B) $5
C) $10
D) $50

Question 61

For the balance sheet below, find the level of equity and the level of excess reserves. If there is a deposit outflow of $100 and the bank sells the minimum amount of bonds to meet the reserve requirement, show the new balance sheet.

Question 62

When a bank uses reserves to buy short maturity bonds, how does the gap change?

Question 63

When a bank turns short-term deposits into long-term loans it is creating:

A) liquidity risk.
B) credit risk.
C) interest rate risk.
D) contingency risk.

Question 64

What are the four types of bank management?

Question 65

If the gap on a bank's balance sheet is $10,000 and interest rates rise by 5%, then bank profits

A) rise by $50,000.
B) rise by $500.
C) fall by $50,000.
D) fall by $500.

Question 66

The end of the 1970s and the early 1980s were a particularly difficult time for banks. Explain why in terms of the gap.

Question 67

In banking, the gross spread is:

A) the difference between the rate a bank borrows at and the difference a bank lends at.
B) the difference between the federal funds rate and the discount rate.
C) the difference between a bank's checking deposits and its reserves.
D) the difference between the rate a bank lends at and the rate of inflation.

Question 68

For the bank balance sheet below, find the gap. If market interest rates rise by 4%, find the change in profit for the bank.

Question 69

When a bank decides to issue CDs and use the funds to buy corporate bonds, what are the pros and cons related to capital adequacy?

Question 70

How do bankers manage interest rate risk?

Question 71

If the value of a bank's liabilities exceeds the value of its assets, the bank is:

A) undervalued.
B) bankrupt.
C) viable.
D) marginal.

Question 72

Which of the following are off-balance sheet activities?

A) calling loan
B) buying bonds
C) selling loans
D) none of the above

Question 73

When a bank uses reserves to make typical home loans, how does the gap change?

Question 74

When a bank issues relatively safe debt and uses it to fund relatively risky assets it is creating:

A) liquidity risk.
B) credit risk.
C) interest rate risk.
D) contingency risk.

Question 75

For the balance sheet below, what is the maximum amount of loan defaults the bank could sustain before becoming insolvent?

Question 76

If the gap on a bank's balance sheet is -$10,000 and interest rates rise by 4%, then bank profits

A) rise by $40,000.
B) rise by $400.
C) fall by $40,000.
D) fall by $400.

Question 77

When the bank uses reserves to make a loan, does ROA or equity change or do both change? Explain briefly.

Question 78

For the bank balance sheet below, find the gap. If market interest rates rise by 3%, find the change in profit for the bank.

Question 79

Off-balance sheets activities include

A) derivatives trading.
B) fees.
C) both of the above.
D) neither of the above.

Question 80

What is the reserve requirement?