Deck 18: Liability and Liquidity Management

Question 1

18-6 In the U.S.,banks can hold cash and government securities to meet reserve requirements.

Answer 1

False

Question 2

18-9 In most countries,regulators often set minimum liquid reserve requirements on FIs.

Answer 2

True

Question 3

18-5 Holding small amounts of liquid assets could cause an FI to be unable to meet the claims of liability holders.

Answer 3

True

Question 4

18-11 In most countries,assets used to satisfy the liquid assets ratio may include liquid government securities.

Question 5

18-7 Excessive illiquidity can result in an FI's inability to meet required payments on liability claims and,at the extreme,in insolvency.

Question 6

18-2 One method of reducing the risk of a liquidity crisis for an FI to efficiently manage liquid asset positions.

Question 7

18-12 Regulators in the U.S.do not allow government securities to perform the role of a required reserve.

Question 8

18-18 The minimum average daily reserves required in a maintenance period is a percentage of the daily average demand deposits held by a bank during the computation period.

Question 9

18-1 To reduce liquidity risk an FI can efficiently manage the liability structure of its portfolio.

Question 10

18-15 By definition,all transaction accounts at U.S.FIs allow account holders to make unlimited withdrawals.

Question 11

18-8 The establishment of minimum required reserves by regulators is a method of extracting taxes from FIs.

Question 12

18-3 One reason FIs such as depository institutions and life insurance companies are exposed to liquidity risk is the relatively illiquid nature of their liabilities.

Question 13

18-14 Managing a bank's reserve position requires knowing only the target reserve ratio and the period over which reserves must be maintained.

Question 14

18-17 Under contemporaneous reserve accounting,there is a seven day reserve maintenance period.

Question 15

18-20 A strategy to increase reservable deposits on a Friday and decrease reservable deposits on the following Monday is called the weekend game.

Question 16

18-4 A liquid asset can be converted to cash quickly,but will require a discount from market value.

Question 17

18-13 In the U.S.,cash reserves necessary to meet deposit reserve requirements typically include vault cash and cash deposits at the Federal Reserve Bank.

Question 18

18-19 A strategy to lower deposits on Fridays can lower reserve requirements for a bank.

Question 19

18-10 In the U.S.,excess reserves held at the central bank pay interest to the DI.

Question 20

18-16 The reserve computation period for determining required reserves covers the 14 days of a two-week period that runs from Monday to Monday.

Question 21

18-27 The Fed discount window is an appropriate place to borrow reserve shortfalls because of its lower than market rates.

Question 22

18-33 Deposits with low withdrawal risk typically are the lowest cost deposits for a DI.

Question 23

18-38 The DI can influence the withdrawal rates of NOW accounts through explicit interest payments,implicit interest payments,or minimum balance requirements.

Question 24

18-22 Currently the reserve maintenance period begins 30 days after the end of the reserve computation period.

Question 25

18-34 Implicit interest involves the process of crediting the interest payment directly to a deposit account as opposed to sending an explicit interest check to the customer.

Question 26

18-29 Excessive amounts of liquid asset holdings can penalize the earnings of a DI.

Question 27

18-31 Funding costs generally are positively related to the period of time the liability remains on the balance sheet.

Question 28

18-32 Demand deposits are a costless source of funds and have a high degree of withdrawal risk.

Question 29

18-23 The penalty for undershooting the minimum reserve requirements may include explicit interest rate charges as well as implicit costs in the form of more frequent monitoring and examinations.

Question 30

18-37 NOW accounts are potentially less prone to withdrawal risk than demand deposits.

Question 31

18-24 One method of increasing reserves to meet a reserve target is to sell liquid assets.

Question 32

18-40 The DI manager can change the pricing on NOW accounts by changing both implicit and explicit interest payments.

Question 33

18-28 Federal Reserve primary credit loans available to DIs are generally at rates lower than the federal funds target rate.

Question 34

18-25 The interbank funds market is a potential source for increasing reserves to meet required reserves.

Question 35

18-39 NOW accounts allow the explicit payment of interest.

Question 36

18-35 If the fees charged on demand deposit accounts do not cover the cost of providing demand deposit services,the bank receives a subsidy or implicit interest payment.

Question 37

18-26 Up to six percent of excess reserves may be carried forward to the next reserve maintenance period.

Question 38

18-30 Managing liabilities as a means of managing liquidity risk involves the tradeoff between lower funding cost and higher risk of withdrawals.

Question 39

18-36 One cost of demand deposits to DIs is the reserve requirement placed on the bank by the Federal Reserve.

Question 40

18-21 The contemporaneous reserve accounting system requires the maintenance period to occur simultaneously with the computation period.

Question 41

18-49 Short-term CDs often are priced competitively with T-bills of similar maturity.

Question 42

18-51 Because the minimum amount of a negotiable wholesale CD is $100,000,holders of these CDs are fully covered by FDIC insurance.

Question 43

18-54 Fed funds are subject to settlement risk,but have little or no early withdrawal risk.

Question 44

18-46 Because MMDAs are in direct competition with MMMFs,the withdrawal rate is affected by the relative amount of explicit interest paid on these accounts.

Question 45

18-59 Banks often convert on-balance-sheet bankers acceptances into off-balance-sheet letters of credit for the purpose of minimizing total assets and thus improving performance ratios such as ROA.

Question 46

18-58 In the U.S.,a subsidiary bank can issue commercial paper to meet short-term liquidity needs,but the bank's parent holding company cannot.

Question 47

18-44 MMDAs are considered to be more liquid than demand deposits and NOW accounts.

Question 48

18-60 Most large banks in the U.S.directly issue commercial paper to meet their liquidity needs.

Question 49

18-41 Passbook savings accounts normally receive a lower interest rate than NOW accounts.

Question 50

18-45 In the U.S.,MMDAs typically are transaction accounts without limitations on the size or number of checks or transfers that can occur each month.

Question 51

18-50 The negotiable instrument characteristic of large wholesale CDs effectively eliminates the adverse withdrawal risk for the bank.

Question 52

18-57 Because of the collateral feature,RPs typically have a higher interest rate than fed funds.

Question 53

18-43 The interest rate paid on money market deposit accounts by U.S.DIs must directly reflect the rates earned on investments in commercial paper,bankers acceptances,repurchase agreement,and T-bills.

Question 54

18-53 Fed funds are short-term uncollateralized loans with maturities that typically do not exceed one day.

Question 55

18-56 The advantage to a lender in a repurchase agreement transaction versus a fed funds sale is the collateral of government securities or other acceptable liquid assets provided by the borrowing FI.

Question 56

18-42 Passbook savings accounts are less liquid than demand deposit accounts.

Question 57

18-52 Federal funds are excess reserves held by the Federal Reserve Banks that are loaned to banks that have liquidity needs.

Question 58

18-48 Because of penalties imposed for early withdrawal,a CD depositor is unlikely to withdrawal the CD funds from the bank before maturity.

Question 59

18-55 FIs participating in the fed funds market,either buying or selling,are usually able to do so without amount or maturity restrictions.

Question 60

18-47 Because retail CDs have fixed maturities,FI managers always should have perfect information regarding the scheduling of interest and principal payments.

Question 61

18-80 For reserve calculation purposes,the period that begins on a Tuesday and ends on a Monday 14 days later is known as

A)the reserve maintenance period.
B)the reserve allocation period.
C)the reserve computation period.
D)the contemporaneous accounting period.
E)None of the above.

Question 62

18-74 Requiring minimum reserves to be held at the central bank is the equivalent of

A)buffer reserves.
B)a reserve requirement tax.
C)the target reserve ratio.
D)contagious effects of liquidity risk.
E)None of the above.

Question 63

18-68 Which of the following observations is NOT true of a liquid asset?

A)It can be turned into cash quickly.
B)Conversion to cash entails low transaction costs.
C)Conversion to cash happens with little or no loss in principal value.
D)It is traded in an active market.
E)Large transactions may move its market price substantially.

Question 64

18-66 Property-casualty insurance companies can reduce their exposure to liquidity risk by diversifying coverage across different types of disasters.

Question 65

18-67 Because investment banks typically buy and sell securities on a regular basis; they have no need for a liability management plan.

Question 66

18-69 Why do FIs face a return or interest earnings penalty by holding large amounts of assets such as cash,T-bills,and T-bonds to reduce liquidity risk?

A)These assets carry a reserve requirement tax.
B)These assets offer low returns.
C)These assets offer higher returns that reflect their risk.
D)Inflation increases the purchasing power value of these assets.
E)All of the above.

Question 67

18-64 Reliance on purchased or borrowed funds will largely eliminate the liquidity risk faced by a bank.

Question 68

18-75 Required reserve ratios in the U.S.for demand deposits are

A)0 percent,3 percent,and 10 percent.
B)10 percent on all deposits.
C)3 percent on all deposits.
D)0 percent on all deposits.
E)0 percent and 3 percent.

Question 69

18-78 Buffer reserves at DIs are

A)reserves in excess of the minimum required reserves.
B)government securities that do not qualify as required reserves,but that can be converted to cash quickly.
C)the portion of reserves that are calculated at a rate of ten percent of deposits.
D)non-government securities and loans that must be converted into cash.
E)the portion of life insurance company assets that require minimum reserves.

Question 70

18-73 Which of the following is an outcome of a decrease in the reserve requirement ratio?

A)DIs must hold more reserves against the transaction accounts on their balance sheets.
B)DIs are able to lend a smaller percentage of their deposits.
C)Decreased credit availability in the economy.
D)A multiple contraction in deposits and a decrease in the money supply.
E)A multiplier effect on the supply of DI deposits and thus,the money supply.

Question 71

18-79 Managing the reserve position of a U.S.bank requires knowing

A)the target reserve ratio.
B)the time period over which average deposits are calculated.
C)the time period over which average reserves must be maintained.
D)the asset and liability methods that may be used to meet required reserves.
E)All of the above.

Question 72

18-65 Property-casualty insurance companies typically have greater liquidity risk than life insurance companies.

Question 73

18-70 Which of the following is considered to be the most liquid asset?

A)T-notes.
B)T-bills.
C)Cash.
D)T-bonds.
E)Wholesale CDs.

Question 74

18-61 Although they are subject to reserve requirements,many DIs have begun to issue medium-term notes because they are a stable source of funds.

Question 75

18-62 The increased securitization of bank loans has reduced the liquidity of bank assets.

Question 76

18-71 The concept of constrained optimization facing an FI manager involving the minimum amount of liquid reserve assets required by regulators may

A)penalize the FI if the minimum amount is less than the amount warranted by the actual withdrawal risk.
B)benefit the FI if the minimum amount is more than is warranted by actual withdrawal risk.
C)lead to increased withdrawals by depositors that do not meet the minimum requirement.
D)assist the FI manager by providing an optimal target amount of reserves that will exactly match withdrawal expectations.
E)None of the above.

Question 77

18-77 Many states in the U.S.impose liquid asset ratios on insurance companies which may be met by

A)cash and excess reserves.
B)cash and municipal bonds from within the state of operation.
C)cash and government securities.
D)cash and policyholder reserves.
E)cash only.

Question 78

18-76 For a DI in the U.S with $200 in assets and $180 in deposits,a liquid assets ratio of 15 percent

A)would require $27.00 in cash and liquid government securities.
B)would require $27.00 in liquid government securities.
C)would require $30.00 in cash and liquid government securities.
D)would require $30.00 in liquid government securities.
E)None of the above.

Question 79

18-63 Recently banks have changed the liability structure towards instruments that have less withdrawal risk and higher explicit interest costs.

Question 80

18-72 Which of the following is an outcome of an increase in the reserve requirement ratio?

A)DIs may hold fewer reserves against their transaction accounts.
B)DIs are able to lend out a greater percentage of their deposits.
C)Increased credit availability in the economy.
D)DIs are only able to lend a smaller percentage of their deposits than before.
E)A multiplier effect on the supply of DI deposits and thus the money supply.