Deck 12: Banking and the Management of Financial Institutions

Question 1

Which of the following statements is true?

A)Chequable deposits are payable on demand.
B)Chequable deposits do not include notice deposits.
C)Chequable deposits are the primary source of bank funds.
D)Chequable deposits are chequable deposits that pay interest.

Answer 1

A

Question 2

Bank loans from the Bank of Canada are called ________ and represent a ________ of funds.

A)advances; use
B)advances; source
C)overnight funds; use
D)overnight funds; source

Answer 2

B

Question 3

Which of the following statements is false?

A)A bank's assets are its uses of funds.
B)A bank issues liabilities to acquire funds.
C)The bank's assets provide the bank with income.
D)Bank capital is recorded as an asset on the bank balance sheet.

Answer 3

D

Question 4

Which of the following are reported as liabilities on a bank's balance sheet?

A)Reserves
B)Demand and notice deposits
C)Loans
D)Deposits with other banks

Question 5

Which of the following bank assets is the most liquid?

A)Consumer loans
B)Reserves
C)Cash items in process of collection
D)Government securities

Question 6

Which of the following statements is false?

A)Chequable deposits are usually the lowest cost source of bank funds.
B)Demand deposits are the primary source of bank funds.
C)Chequable deposits are payable on demand.
D)Chequable deposits include notice deposits.

Question 7

Bank capital is equal to ________ minus ________.

A)total assets; total liabilities
B)total liabilities; total assets
C)total assets; total reserves
D)total liabilities; total borrowings

Question 8

Because ________ are less liquid for the depositor than ________, they earn higher interest rates.

A)savings account; time deposits
B)money market deposit accounts; time deposits
C)money market deposit accounts; savings account
D)time deposits; savings account

Question 9

Through correspondent banking, large banks provide services to small banks, including ________.

A)loan guarantees
B)foreign exchange transactions
C)issuing stock
D)debt reduction

Question 10

Which of the following is not a source of borrowings for a bank?

A)Overnight funds
B)Eurodollars
C)Time deposits
D)Advances

Question 11

Which of the following statements are true?

A)A bank's assets are its sources of funds.
B)A bank's liabilities are its uses of funds.
C)A bank's balance sheet shows that total assets equal total liabilities plus capital.
D)A bank's balance sheet indicates whether or not the bank is profitable.

Question 12

Because of their ________ liquidity, ________ government securities are called secondary reserves.

A)low; short-term
B)low; long-term
C)high; short-term
D)high; long-term

Question 13

Which of the following are reported as assets on a bank's balance sheet?

A)Borrowings
B)Reserves
C)Notice deposits
D)Bank capital

Question 14

The fraction of chequable deposits that banks choose to hold are ________.

A)excess reserves
B)desired reserves
C)vault cash
D)total reserves

Question 15

Bank reserves include ________.

A)deposits at the Bank of Canada and short-term securities
B)vault cash and short-term securities
C)vault cash and deposits at the Bank of Canada
D)deposits at other banks and deposits at the Bank of Canada

Question 16

Which of the following are not reported as assets on a bank's balance sheet?

A)Cash items in the process of collection
B)Loans
C)Securities
D)Demand deposits

Question 17

Bank capital is listed on the ________ side of the bank's balance sheet because it represents a ________ of funds.

A)liability; use
B)liability; source
C)asset; use
D)asset; source

Question 18

Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature.

A)nonnegotiable; secondary
B)nonnegotiable; primary
C)negotiable; secondary
D)negotiable; primary

Question 19

The share of chequable deposits in total bank liabilities has ________.

A)expanded moderately over time
B)expanded dramatically over time
C)shrunk over time
D)remained virtually unchanged since 1960

Question 20

Which of the following are reported as liabilities on a bank's balance sheet?

A)Advances
B)Reserves
C)Securities
D)Loans

Question 21

A T-account represents ________.

A)a simplified balance sheet
B)asset transformation
C)T-bills
D)term deposits

Question 22

When you deposit a $50 bill in the New National Bank, ________.

A)its liabilities decrease by $50
B)its assets increase by $50
C)its reserves decrease by $50
D)its cash items in the process of collection increase by $50

Question 23

Which of the following are bank assets?

A)The building owned by the bank
B)A discount loan
C)A negotiable CD
D)A customer's chequing account

Question 24

When a $10 cheque written on the First National Bank is deposited in an account at CIBC, then ________.

A)the reserves of the First National Bank decrease by $10
B)the reserves of the First National Bank increase by $10
C)the reserves of CIBC decrease by $10
D)the assets of CIBC decrease by $10

Question 25

When Jane Brown writes a $100 cheque to her nephew (who lives in another province), Ms. Brown's bank ________ assets of $100 and ________ liabilities of $100.

A)gains; gains
B)gains; loses
C)loses; gains
D)loses; loses

Question 26

In general, banks make profits by selling ________ liabilities and buying ________ assets.

A)long-term; shorter-term
B)short-term; longer-term
C)illiquid; liquid
D)risky; risk-free

Question 27

Secondary reserves are so called because ________.

A)they can be converted into cash with low transactions costs
B)they are not easily converted into cash, and are, therefore, of secondary importance to banking firms
C)50 percent of these assets count toward meeting desired reserves
D)they rank second to bank vault cash in importance of bank holdings

Question 28

When a $10 cheque written on the First National Bank is deposited in an account at CIBC, then ________.

A)the liabilities of the First National Bank increase by $10
B)the reserves of the First National Bank increase by $ 10
C)the liabilities of CIBC increase by $10
D)the assets of CIBC fall by $10

Question 29

When you deposit $50 in currency at Old National Bank, ________.

A)its assets increase by less than $50 because of reserve requirements
B)its reserves increase by less than $50 because of reserve requirements
C)its liabilities increase by $50
D)its liabilities decrease by $50

Question 30

Bank's make their profits primarily by issuing ________.

A)equity
B)negotiable CDs
C)loans
D)notice deposits

Question 31

With a 10 percent reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is ________.

A)$90
B)$100
C)$10
D)$110

Question 32

When $1 million is deposited at a bank, the desired reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet, ________.

A)the assets at the bank increase by $800,000
B)the liabilities of the bank increase by $1,000,000
C)the liabilities of the bank increase by $800,000
D)reserves increase by $160,000

Question 33

The most important category of assets on a bank's balance sheet is ________.

A)advances
B)securities
C)loans
D)cash items in the process of collection

Question 34

Holding all else constant, when a bank receives the funds for a deposited cheque, ________.

A)cash items in the process of collection fall by the amount of the cheque
B)bank assets increase by the amount of the cheque
C)bank liabilities decrease by the amount of the cheque
D)bank reserves increase by the amount of desired reserves

Question 35

Asset transformation can be described as ________.

A)borrowing long and lending short
B)borrowing short and lending long
C)borrowing and lending only for the short term
D)borrowing and lending for the long term

Question 36

When $1 million is deposited at a bank, the desired reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bank's final balance sheet, ________.

A)the assets at the bank increase by $1 million
B)the liabilities of the bank decrease by $1 million
C)reserves increase by $200,000
D)liabilities increase by $200,000

Question 37

When a new depositor opens a chequing account at the First National Bank, the bank's assets ________ and its liabilities ________.

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

Question 38

Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics.

A)loans; deposits
B)securities; deposits
C)liabilities; assets
D)assets; liabilities

Question 39

When you deposit $50 in your account at First National Bank and a $100 cheque you have written on this account is cashed at Chemical Bank, then ________.

A)the assets of First National rise by $50
B)the assets of Chemical Bank rise by $50
C)the reserves at First National fall by $50
D)the liabilities at Chemical Bank rise by $50

Question 40

What are the main items in a bank's asset side of the balance sheet? Discuss them briefly.

Question 41

Using T-accounts show what happens to reserves at New National Bank if one individual deposits $1000 in cash into her chequing account and another individual withdraws $750 in cash from her chequing account.

Question 42

A bank will want to hold more excess reserves (everything else equal)when ________.

A)it expects to have deposit inflows in the near future
B)brokerage commissions on selling bonds increase
C)the cost of selling loans falls
D)the discount rate decreases

Question 43

If a bank has $10 million of demand deposits, a desired reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of ________.

A)$1.2 million
B)$1.1 million
C)$1 million
D)$900,000

Question 44

Which of the following statements most accurately describes the task of bank asset management?

A)Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity.
B)Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations.
C)Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits.
D)Banks seek to acquire funds in the least costly way.

Question 45

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure?

A)Excess reserves
B)Secondary reserves
C)Bank capital
D)Mortgages

Question 46

As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________.

A)decrease; increase
B)increase; decrease
C)increase; increase
D)decrease; not be affected

Question 47

Of the following, which would be the first choice for a bank facing a reserve deficiency?

A)Call in loans
B)Borrow from the Bank of Canada
C)Sell securities
D)Borrow from other banks

Question 48

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.

A)Selling securities
B)Selling loans
C)Calling in loans
D)Selling negotiable CDs

Question 49

Banks hold excess and secondary reserves to ________.

A)reduce the interest-rate risk problem
B)provide for deposit outflows
C)satisfy margin requirements
D)achieve higher earnings than they can with loans

Question 50

Banks that suffered significant losses in the 1980s made the mistake of ________.

A)holding too many liquid assets
B)minimizing default risk
C)failing to diversify their loan portfolio
D)holding only safe securities

Question 51

Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Bank of Canada, and borrowings from other banks to deal with deposit outflows is an example of ________.

A)liability management
B)liquidity management
C)managing interest rate risk
D)managing credit risk

Question 52

If a bank has $100,000 of demand deposits, a desired reserve ratio of 20 percent, and it holds $40000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is ________.

A)$30000
B)$25000
C)$20000
D)$10000

Question 53

A bank with insufficient reserves can increase its reserves by ________.

A)lending overnight funds
B)calling in loans
C)buying short-term securities
D)buying provincial bonds

Question 54

If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in ________.

A)deposits and reserves
B)deposits and loans
C)capital and reserves
D)capital and loans

Question 55

The goals of bank asset management include ________.

A)maximizing risk
B)minimizing liquidity
C)lending at high interest rates regardless of risk
D)purchasing securities with high returns and low risk

Question 56

A $5 million deposit outflow from a bank has the immediate effect of ________.

A)reducing deposits and reserves by $5 million
B)reducing deposits and loans by $5 million
C)reducing deposits and securities by $5 million
D)reducing deposits and capital by $5 million

Question 57

In general, banks would prefer to acquire funds quickly by ________ rather than ________.

A)reducing loans; selling securities
B)reducing loans; borrowing from the Bank of Canada
C)borrowing from the Bank of Canada; reducing loans
D)"calling in" loans; selling securities

Question 58

If, after a deposit outflow, a bank needs an additional $3 million to meet its desired reserves, the bank can ________.

A)reduce deposits by $3 million
B)increase loans by $3 million
C)sell $3 million of securities
D)repay its advances from the Bank of Canada

Question 59

Which of the following are primary concerns of the bank manager?

A)Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows
B)Extending loans to borrowers who will pay low interest rates, but who are poor credit risks
C)Acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized
D)Maintaining high levels of capital and thus maximizing the returns to the owners

Question 60

If a bank has $200,000 of demand deposits, a desired reserve ratio of 20 percent, and it holds $80000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is ________.

A)$50000
B)$40000
C)$30000
D)$25000

Question 61

The amount of assets per dollar of equity capital is called the ________.

A)asset ratio
B)equity ratio
C)equity multiplier
D)asset multiplier

Question 62

Conditions that likely contributed to a credit crunch in 2008 include ________.

A)capital shortfalls caused in part by falling real estate prices
B)regulated hikes in bank capital requirements
C)falling interest rates that raised interest rate risk, causing banks to choose to hold more capital
D)increases in reserve requirements

Question 63

Credit Atlantic Bank has the following balance sheet:

The bank's desired reserve ratio is 10 percent and there is a withdrawal of cash from chequable deposits equal to $20. Describe what is likely to happen in the bank's balance sheet and produce the new balance sheet for Credit Atlantic Bank.

Question 64

Which of the following would not be a way to increase the return on equity?

A)Buy back bank stock
B)Pay higher dividends
C)Acquire new funds by selling negotiable CDs and increase assets with them
D)Sell more bank stock

Question 65

Assume that a customer deposits $1000 in her bank. Show in a T-account the effect of this deposit. If the bank is subject to reserve requirements (as some bank in other countries are), show in a second T-account the banks balance sheet indicating required and excess reserves, assuming a 5 percent required reserve ratio. In a third T-account, show the change in the bank's balance sheet when the bank makes loans with the excess reserves.

Question 66

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called ________.

A)return on assets
B)return on capital
C)return on equity
D)return on investment

Question 67

Which of the following has not resulted from more active liability management on the part of banks?

A)Increased bank holdings of cash items
B)Aggressive targeting of goals for asset growth by banks
C)Increased use of negotiable CDs to raise funds
D)An increased proportion of bank assets held in loans

Question 68

Your bank has the following balance sheet:
Assets Liabilities
Reserves $50 million Deposits $200 million
Securities 50 million
Loans 150 million Bank capital 50 million
If the desired reserve ratio is 10 percent, what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?

Question 69

Explain the relationship between return on assets and return on equity. What incentives does this relationship give a bank manager? Is this the desired outcome preferred by regulators? Discuss.

Question 70

Holding large amounts of bank capital helps prevent bank failures because ________.

A)it means that the bank has a higher income
B)it makes loans easier to sell
C)it can be used to absorb the losses resulting from bad loans
D)it makes it easier to call in loans

Question 71

Net profit after taxes per dollar of assets is a basic measure of bank profitability called ________.

A)return on assets
B)return on capital
C)return on equity
D)return on investment

Question 72

In the absence of regulation, banks would probably hold ________.

A)too much capital, reducing the efficiency of the payments system
B)too much capital, reducing the profitability of banks
C)too little capital
D)too much capital, making it more difficult to obtain loans

Question 73

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.

A)adverse selection
B)moral hazard
C)moral suasion
D)intentional fraud

Question 74

Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets.

A)reduces; reduces
B)increases; increases
C)reduces; increases
D)increases; reduces

Question 75

If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to ________.

A)buy back bank stock
B)pay higher dividends
C)sell bank stock
D)sell securities the bank owns and put the funds into the reserve account

Question 76

A bank failure occurs whenever ________.

A)a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements
B)a bank suffers a large deposit outflow
C)a bank has to call in a large volume of loans
D)a bank is not allowed to borrow from the Bank of Canada

Question 77

A bank is insolvent when ________.

A)its liabilities exceed its assets
B)its assets exceed its liabilities
C)its capital exceeds its liabilities
D)its assets increase in value

Question 78

For a given return on assets, the lower is bank capital, ________.

A)the lower is the return for the owners of the bank
B)the higher is the return for the owners of the bank
C)the lower is the credit risk for the owners of the bank
D)the lower the possibility of bank failure

Question 79

Explain using an example the statement that "given the return on assets, the lower the bank capital, the higher the return for the owners of the bank."

Question 80

Modern liability management has resulted in ________.

A)increased sales of certificates of deposits to raise funds
B)increase importance of deposits as a source of funds
C)reduced borrowing by banks in the overnight loan market
D)failure by banks to coordinate management of assets and liabilities