Question 1

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

Accepted Answer

The required reserve ratio is 20%, so the bank must hold $200,000 as reserves. The remaining $800,000 can be loaned out. Therefore, reserves increase by $200,000.

Question 2

A bank can reduce its total amount of loans outstanding by

Accepted Answer

A bank can reduce its total amount of loans outstanding by "calling in" loans, which means not renewing some loans when they come due, and by selling loans to other banks. Selling loans to the Federal Reserve is not a typical practice for reducing loans outstanding; the Federal Reserve primarily engages in monetary policy operations rather than purchasing individual loans from banks.

Question 3

If a bank has $1 million of deposits,a required reserve ratio of 20 percent,and $300,000 in reserves,it need not rearrange its balance sheet if there is a deposit outflow of

Accepted Answer

The required reserve ratio is 20%, thus the required reserves = 0.2 x $1 million = $200,000.
The current reserves held by the bank is $300,000 - which is in excess of the required reserves by $100,000.
Hence, the bank could sustain a deposit outflow of either A or B ($50,000 or $75,000) without having to rearrange its balance sheet as it currently has excess reserves.

Question 4

Bank failure is less likely to occur when a bank

Accepted Answer

Banks holding more excess reserves have a greater ability to absorb unexpected losses and continue to meet their obligations, making bank failure less likely. Holding fewer U.S. government securities or suffering large deposit outflows could both reduce a bank's ability to meet its obligations and increase the likelihood of failure. Having less bank capital also reduces a bank's ability to absorb losses and maintain solvency.

Question 5

The largest source of bank income is

Accepted Answer

Interest on loans is typically the largest source of bank income, as banks earn interest on the loans they make to customers. This can include everything from mortgages to business loans to credit card debt. While other sources of income, such as interest on securities and service charges on deposit accounts, also contribute to a bank's overall revenue, interest on loans consistently accounts for the largest share. Noninterest income, which can include fees for services like financial advice or ATM usage, is also an important source of revenue for many banks, but typically not as large as interest on loans.

Question 6

If a bank has $200,000 of deposits,a required reserve ratio of 20 percent,and $80,000 in reserves,then the maximum deposit outflow it can sustain without altering its balance sheet is

Accepted Answer

The maximum deposit outflow is equal to the excess reserves, which is equal to the reserves minus the required reserves. In this case, the excess reserves are $80,000 - $40,000 = $40,000. Therefore, the maximum deposit outflow is $40,000.

Question 7

Which of the following statements is an accurate description of modern liability management?

Accepted Answer

Modern liability management has indeed provided banks with greater flexibility, allowing them to increase the proportion of their assets held in loans and to acquire funds quickly through new financial instruments. The introduction of negotiable CDs and other innovations has changed how banks manage their liabilities, but it does not specifically reduce interbank borrowing for loan financing.

Question 8

A bank failure is more likely to occur when

Accepted Answer

A bank failure is more likely to occur when it holds less in U.S. government securities, suffers large deposit outflows, and holds less equity capital. All these factors increase the risk of insolvency.

Question 9

If a bank has $100,000 of deposits,a required reserve ratio of 20 percent,and $40,000 in reserves,then the maximum deposit outflow it can sustain without altering its balance sheet is

Accepted Answer

The bank is required to hold 20% of its deposits as reserves, which would be $20,000 ($100,000 * 20%). Since it currently has $40,000 in reserves, it has $20,000 more than required. If it loses deposits, it can lose up to $25,000 in deposits before its reserves fall to the required level, because losing $25,000 in deposits would reduce the required reserves by $5,000 (20% of $25,000), leaving the bank with the exact required reserve of $20,000.

Question 10

The ________ the costs associated with deposit outflows are,the ________ excess reserves banks will want to hold.

Accepted Answer

Higher costs associated with deposit outflows incentivize banks to hold more excess reserves as a buffer against potential shortfalls, ensuring they can meet withdrawal demands without incurring additional costs.

Question 11

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

Accepted Answer

All three options are primary concerns of a bank manager. Maintaining sufficient reserves helps the bank to be able to meet deposit outflows without incurring high costs or liquidity problems. Extending loans to good credit risks who will pay high interest rates is a source of profitability for the bank. Acquiring funds at a relatively low cost is also beneficial as it enables the bank to lend those funds out profitably.

Question 12

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

Accepted Answer

The liabilities of the bank increase by $1,000,000 because the deposit is a liability to the bank. The bank owes this amount to the depositor.

Question 13

Banks can protect themselves from the disruption caused by deposit outflows by

Accepted Answer

Banks can protect themselves from the disruption caused by deposit outflows by doing all of the above. Holding excess reserves can provide a buffer against unexpected withdrawals, selling securities can help raise additional funds, and "calling in" loans can help reduce the bank's overall liability. By doing all of these actions, banks can minimize the impact of deposit outflows and maintain their stability.

Question 14

If a bank has $10 million of deposits,a required reserve ratio of 10 percent,and $2 million in reserves,then it does not have enough reserves to support a deposit outflow of

Accepted Answer

The bank needs to maintain $1 million in reserves (10% of $10 million). With $2 million in reserves, it can support a $1 million outflow. A $1.2 million outflow would leave it with only $0.8 million in reserves, which is below the required $1 million.

Question 15

A bank fails when the value of its ________ falls below the value of ________,causing the bank to become insolvent.

Accepted Answer

A bank fails when the value of its assets falls below the value of its liabilities, which means the bank does not have enough money to pay off its debts. The other options are incorrect because reserves and securities are types of assets, and loans and secondary reserves are not directly tied to insolvency.

Question 16

Banks fail when the value of bank ________ falls below the value of ________,causing the bank to become insolvent.

Accepted Answer

Banks fail when the value of their assets falls below the value of their liabilities. This means that the bank owes more money than it has in assets, leading to insolvency. The other options listed are important elements of a bank's financial health, but they do not directly lead to insolvency.

Question 17

Which of the following do banks hold as insurance against the high cost of deposit outflows?

Accepted Answer

The answer of Which of the following do banks hold...

Question 18

Which is the least costly way for a bank to handle deposit outflows?

Accepted Answer

Holding excess reserves is the least costly way for a bank to handle deposit outflows. This is because it does not involve any additional costs such as interest payments or selling off assets. By holding excess reserves, the bank can easily meet any withdrawal requests without having to rely on borrowing from other banks or selling securities. However, holding excess reserves does come with an opportunity cost as the bank could have used those funds to generate profits through loans or investments.

Question 19

In general,banks would prefer to meet deposit outflows by ________ rather than ________.

Accepted Answer

Banks prefer borrowing from the Fed rather than selling loans because selling loans would decrease their asset base, which could hurt their ability to earn revenue and maintain liquidity. On the other hand, borrowing from the Fed does not impact their asset base and allows them to easily meet deposit outflows. Selling securities may also impact their asset base and potentially lead to losses if the securities are sold at a lower price than their acquisition cost. "Calling in" loans could also hurt their relationship with customers and may not be a viable option in all situations.

Question 20

Bankers' concern regarding the optimal mix of excess reserves,secondary reserves,borrowings from the Fed,and borrowings from other banks to deal with deposit outflows is an example of

Accepted Answer

Liquidity management refers to the process of ensuring that a bank has adequate liquid assets to meet its obligations as they come due, including deposit outflows. The concern over the optimal mix of reserves and borrowings is a key aspect of liquidity management, as it helps a bank to maintain sufficient liquidity while minimizing the cost of holding excess reserves or borrowing from the Fed. Liability management, on the other hand, refers to the process of managing a bank's funding sources and costs, while managing interest-rate risk involves strategies to manage the impact of changes in interest rates on a bank's earnings and capital.

Quiz 17: Banking and the Management of Financial Institutions

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

A bank can reduce its total amount of loans outstanding by

If a bank has $1 million of deposits,a required reserve ratio of 20 percent,and $300,000 in reserves,it need not rearrange its balance sheet if there is a deposit outflow of

Bank failure is less likely to occur when a bank

The largest source of bank income is

If a bank has $200,000 of deposits,a required reserve ratio of 20 percent,and $80,000 in reserves,then the maximum deposit outflow it can sustain without altering its balance sheet is

Which of the following statements is an accurate description of modern liability management?

A bank failure is more likely to occur when

If a bank has $100,000 of deposits,a required reserve ratio of 20 percent,and $40,000 in reserves,then the maximum deposit outflow it can sustain without altering its balance sheet is

The the costs associated with deposit outflows are,the excess reserves banks will want to hold.

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

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

Banks can protect themselves from the disruption caused by deposit outflows by

If a bank has $10 million of deposits,a required reserve ratio of 10 percent,and $2 million in reserves,then it does not have enough reserves to support a deposit outflow of

A bank fails when the value of its falls below the value of ,causing the bank to become insolvent.

Banks fail when the value of bank falls below the value of ,causing the bank to become insolvent.

Which of the following do banks hold as insurance against the high cost of deposit outflows?

Which is the least costly way for a bank to handle deposit outflows?

In general,banks would prefer to meet deposit outflows by rather than .

Bankers' concern regarding the optimal mix of excess reserves,secondary reserves,borrowings from the Fed,and borrowings from other banks to deal with deposit outflows is an example of