Deck 4: Managing Noninterest Income and Noninterest Expense

Question 1

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.

Answer 1

E

Question 2

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.

Answer 2

B

Question 3

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

Answer 3

B

Question 4

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 5

From the following list, which two are the biggest contributors to 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 6

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 7

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

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

Question 8

The operating risk ratio measures:

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

Question 9

__________ 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 10

______________ 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

Question 11

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 12

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 13

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 14

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 15

______________ 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 16

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.

Question 17

Customer profitability data can be beneficial in helping bank management:

A)develop new products.
B)identify profitable target niches.
C)determine changes in product pricing.
D)All of the above
E)a.and b.only

Question 18

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 19

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

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

Question 20

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 21

There is no systematic link between a bank's market value of equity and reported expenses.

Question 22

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

Question 23

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

Question 24

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

Question 25

Trading revenue for banks is highly cyclical.

Question 26

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

Question 27

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

Question 28

Discuss how bank's can reduce the number of unprofitable customers.

Question 29

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

Question 30

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

Question 31

Discuss two ways that a bank can decrease its non-interest expense.

Question 32

Discuss two ways that a bank can increase its non-interest income.

Question 33

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

Question 34

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

Question 35

Deposit service charges are a stable source of bank revenue.