Question 1

Discuss the recent trends in bank performance measures.

Accepted Answer

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Question 2

Nontransaction deposits are the primary source of bank funds.

Accepted Answer

Nontransaction deposits, such as savings and time deposits, are a major source of bank funds, along with transaction deposits (checking accounts) and borrowing from other banks or the Federal Reserve.

Question 3

The value-at-risk method for estimating a bank's risk exposure measures the losses a bank could incur under a worst-case scenario.

Accepted Answer

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Question 4

What are a bank's major sources and uses of funds?

Accepted Answer

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Question 5

In recent years, the interest paid on checkable and time deposits has accounted for around ________ of total bank operating expenses, while the costs involved in running the bank have been approximately ________ of total operating expenses.

Accepted Answer

The question states that interest paid on checkable and time deposits has accounted for around 30% of total bank operating expenses, while the costs involved in running the bank have been approximately 50% of total operating expenses. Therefore, the best choice is C, as it is the only option that includes these percentages.

Question 6

When a bank receives additional deposits, it gains an equal amount of reserves; when it loses deposits, it loses an equal amount of reserves.

Accepted Answer

This statement is true based on the principles of fractional reserve banking. Banks are required to hold a certain percentage of their deposits as reserves, which can either increase or decrease as a result of changes in deposits.

Question 7

Off-balance-sheet activities consist of trading financial instruments and generating income from fees and loan sales, all of which affect bank profits but are not visible on bank balance sheets.

Accepted Answer

Off-balance-sheet activities are financial transactions and arrangements that are not reflected on a company's balance sheet. Instead, they are listed in the notes to the financial statements or disclosed in other accompanying documentation. These activities can include trading financial instruments, such as derivatives or securitized products, as well as generating income from fees and loan sales. While these activities can have a significant impact on a bank's financial performance and risk profile, they are not reflected on the balance sheet, which only shows a bank's assets, liabilities, and equity.

Question 8

Loan loss reserves are an asset on a bank's balance sheet.

Accepted Answer

Loan loss reserves are a liability or contra-asset account on a bank's balance sheet, representing funds set aside to cover potential future loan losses.

Question 9

Since their introduction in 1961, negotiable CDs have become an important source of bank funds.

Accepted Answer

Negotiable CDs have been an important source of bank funds since their introduction in 1961.

Question 10

Since a bank's assets exceed its equity capital, the return on assets always exceeds the return on equity.

Accepted Answer

The return on assets (ROA) and the return on equity (ROE) measure different things. ROA is net income divided by total assets, showing how efficiently a company uses its assets to generate profit. ROE is net income divided by shareholder equity, indicating how effectively a company uses equity financing to generate profits. A bank's assets exceeding its equity capital does not inherently mean ROA will exceed ROE; in fact, ROE is often higher because equity is a smaller base than total assets.

Question 11

A bank maintains bank capital to lessen the chance that it will become insolvent.

Accepted Answer

Bank capital is the amount of funds that a bank has available to cover losses and meet regulatory requirements. By maintaining sufficient bank capital, a bank can reduce the risk of becoming insolvent and failing to meet its financial obligations.

Question 12

What is the major focus of each of the following bank management concerns: asset management, liability management, liquidity management, and capital adequacy management?

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Question 13

Deposits that banks keep in accounts at the Federal Reserve less vault cash is called reserves.

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Question 14

Required reserves are insurance against the costs associated with deposit outflows. The higher the costs associated with deposit outflows, the more required reserves banks will want to hold.

Accepted Answer

Required reserves are determined by central bank regulations, not by banks' own assessments of the costs associated with deposit outflows. They are meant to ensure liquidity and stability in the banking system, rather than serving as insurance against specific costs.

Question 15

To keep enough cash on hand to meet depositors' demand for withdrawals, banks must engage in liquidity management.

Accepted Answer

Banks must have sufficient funds on hand to meet the demands of depositors who may wish to withdraw their money. This is known as liquidity management, and it is essential for banks to maintain the confidence of their customers and avoid the risk of bank runs or other financial crises.

Question 16

The share of bank operating income earned from off-balance-sheet activities has increased over the past two decades.

Accepted Answer

According to data from the Federal Reserve, the share of bank operating income earned from off-balance-sheet activities has increased from 32% in the early 1990s to 47% in 2018.

Question 17

A loan commitment is an agreement to provide a loan up to a certain dollar amount if a customer requests the loan during a specific time period.

Accepted Answer

A loan commitment is exactly as described - a promise to provide a loan up to a certain amount if requested during a specified time period.

Question 18

Explain the off-balance-sheet activities banks engage in, the risks they face from undertaking these activities, and the controls they put in place to restrict bank employees from taking on too much risk.

Accepted Answer

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Question 19

Owners cannot write checks on nontransaction deposits, but the interest rate paid on these deposits are usually higher than those on checkable deposits.

Accepted Answer

This is correct, owners cannot write checks on nontransaction deposits such as savings accounts, but the interest rate paid on these deposits is usually higher than those on checkable deposits.

Question 20

Given a bank's return on assets, the higher the bank capital, the higher the return for the owners of the bank.

Accepted Answer

A bank's return on assets (ROA) is a measure of how efficiently it uses its assets to generate profit. The return for the owners of the bank (return on equity or ROE) is influenced by the bank's leverage, which is the ratio of its total assets to its equity (capital). Higher bank capital means lower leverage, which can actually lead to a lower return on equity if the return on assets remains constant, because the earnings are spread over a larger amount of equity.

Quiz 17: Banking and the Management of Financial Institutions