Deck 4: Managing Noninterest Income and Noninterest Expense

Question 1

______________ transactions are the highest-cost type of transaction for a bank.

A) Web-based
B) ATM
C) Work station
D) Live teller
E) After-hours

Answer 1

D

Question 2

Return on risk-adjusted capital is defined as:

A) Income/Allocated Risk Capital.
B) Allocated Risk Capital/Adjusted Income.
C) (Risk - Adjusted Income)/Capital.
D) Capital/Allocated Risk Capital.
E) Expenses + Target Profit.

Answer 2

A

Question 3

The operating risk ratio measures:

A) cost controls versus fee generation.
B) fee income versus net interest margin.
C) noninterest expense versus non-interest income.
D) depositors versus employees.
E) depreciation versus required reserves.

Answer 3

A

Question 4

Which of the following is considered a measure of bank productivity?

A) Return on assets
B) Return on equity
C) Assets per depositor
D) Assets per employee
E) All of the above are measures of bank productivity

Question 5

Increased competition, following deregulation, has led to an increase in bank's net interest margin.

Question 6

Profitable bank customers:

A) make up a small fraction of all bank customers.
B) generally shop for the bank with the lowest price.
C) have small loan balances.
D) always avoid service charges.
E) are the most sensitive to changes in price.

Question 7

When two banks that merge have a significant duplication of bank offices such that the merger leads to the elimination of branches and personnel, this is known as a(n):

A) out-of-market merger.
B) in-market merger.
C) new-market merger.
D) reduced-branch merger.
E) goodwill merger.

Question 8

Banks can increase their operating efficiencies by:

A) reducing costs and maintaining the existing level of products and services.
B) reducing costs and reducing the existing level of products and services.
C) decreasing the level of output while maintaining the current level of expenses.
D) increasing the level of output while increasing the level of expenses.
E) decreasing workflow.

Question 9

From the following list, which two are the biggest contributors to non-interest income? Fiduciary Activities
Deposit Service Charges
Trading Revenue
Investment Bankin:
Insurance Commisssion Fees and Income
Other Non-Interest Income

A) Fiduciary Activities & Deposit Service Charges
B) Trading Revenue & Investment Banking
C) Insurance Commission Fees and Income & Other Non-Interest Income
D) Depository Service Charges and Other Non-Interest Income
E) Fiduciary Activities and Investment Banking

Question 10

Which of the following is not considered a non-interest expense?

A) Wages and salaries
B) Rent
C) Required reserves held at the Federal Reserve
D) Electricity
E) Employee benefits

Question 11

Which of the following is not a cost management strategy?

A) Investing in resources to improve long-term profitability
B) Changing pricing such that total revenues increase
C) Identify operating efficiencies
D) Burden identification
E) Expense reduction

Question 12

In general, _______________ are the major non-credit cost for commercial customers.

A) personnel expenses
B) check-processing costs
C) loan administration expenses
D) fraud costs
E) default costs

Question 13

All of the following are components of a bank's non-interest expense except:

A) deposit service fees.
B) occupancy expense.
C) goodwill impairment.
D) personnel expense.
E) other intangible amortization.

Question 14

______________ is/are the primary revenue source for a majority of banks.

A) Check-processing fees
B) Investment income from deposit balances
C) Loan interest
D) Earnings credits
E) Swaps

Question 15

__________ is not a measure of bank productivity?

A) Assets per employee
B) Average personnel expense
C) Loans per employee
D) Net income per employee
E) Number of customers per employee

Question 16

For most banks, which of the following is the largest component of non-interest expense?

A) Personnel expenses
B) Rent
C) Required reserves held at the Federal Reserve
D) Electricity
E) Depreciation on buildings and equipment

Question 17

Banks experience diseconomies of scale when:

A) marginal costs increase as total costs decrease.
B) total costs decrease as output decreases.
C) total costs increase as output increases.
D) average unit costs increase as output increases.
E) average unit costs decrease as output increases.

Question 18

Which of the following is not listed on a bank's UBPR as noninterest income?

A) Deposit service charges
B) Insurance commission fees
C) Goodwill impairment
D) Net gains on sales of loans.
E) Investment banking fees

Question 19

If a bank pays 62 cents in non-interest expense per dollar of income, its _______ is equal to 0.62.

A) burden
B) net non-interest margin
C) efficiency ratio
D) overhead ratio
E) noninterest expense ratio

Question 20

Banks experience economies of scale when:

A) marginal costs increase as total costs decrease.
B) total costs decrease as output decreases.
C) total costs increase as output increases.
D) average unit costs increase as output increases.
E) average unit costs decrease as output increases.

Question 21

Offering remote deposit capture is high cost but low risk for a bank.

Question 22

Trading revenue for banks is highly cyclical.

Question 23

Discuss why the net interest margin for banks has generally been declining for the past several years.

Question 24

Mortgage origination is countercyclical to a bank's net interest margin business.

Question 25

Larger banks have lower efficiency ratios, on average, than smaller banks.

Question 26

Relative to larger banks, smaller banks rely more on non-interest income as a source of revenue.

Question 27

Deposit service charges are a stable source of bank revenue.

Question 28

Banks with the highest efficiency ratios are presumed to be the most efficient.

Question 29

Community banks relied more on investment banking, relative to larger banks, to increase non-interest income.

Question 30

Discuss how banks can reduce the number of unprofitable customers.

Question 31

Discuss two ways that a bank can decrease its noninterest expense.

Question 32

Discuss why non-interest income has become more important to a bank's profitability since deregulation in the 1980's.

Question 33

Demand for checking accounts is generally considered to be price inelastic.

Question 34

Discuss two ways that a bank can increase its noninterest income.