Question 1

Of the following, which would be the first choice for a bank facing a reserve deficiency?

Accepted Answer

Banks typically first choose to borrow from other banks in the interbank market to cover reserve deficiencies because it is often quicker and less costly than other options.

Question 2

The goals of bank asset management include ________.

Accepted Answer

The goals of bank asset management include purchasing securities with high returns and low risk, rather than maximizing risk or minimizing liquidity. Lending at high interest rates regardless of risk is also not a desirable goal for banks as it can result in an increase in non-performing loans and a decline in overall asset quality. Therefore, the best choice is D.

Question 3

If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in ________.

Accepted Answer

Excess reserves are the amount of reserves held by a bank over and above the required reserve ratio. If a bank has excess reserves greater than the amount of a deposit outflow, it means that even after the outflow, the bank will still have enough reserves to meet its reserve requirement. Therefore, the outflow will result in equal reductions in both deposits (as money is leaving the bank) and reserves (as the bank is using some of its excess reserves to cover the outflow).

Question 4

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

Accepted Answer

The answer of Which of the following are primary concerns...

Question 5

A $5 million deposit outflow from a bank has the immediate effect of ________.

Accepted Answer

When a $5 million deposit outflow occurs, the bank's deposit liabilities decrease by $5 million. This reduction in deposits also leads to a reduction in reserves by the same amount, as banks generally hold a fraction of deposits as reserves. Therefore, both deposits and reserves decrease by $5 million. Loans, securities, and capital would not be immediately affected by the deposit outflow.

Question 6

If a bank has $100,000 of demand deposits, a desired reserve ratio of 20 percent, and it holds $40000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is ________.

Accepted Answer

The bank needs to maintain 20% of $100,000 in reserves, which is $20,000. Since it holds $40,000 in reserves, it has $20,000 in excess reserves. Therefore, it can sustain a deposit outflow of $25,000, leaving $15,000 in excess reserves, which is still above the required $20,000.

Question 7

Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Bank of Canada, and borrowings from other banks to deal with deposit outflows is an example of ________.

Accepted Answer

The concerns of the bankers regarding the mix of excess reserves, secondary reserves, and borrowings from different sources to handle deposit outflows fall under the scope of liquidity management, which involves managing the availability of funds to meet the financial obligations of the bank.

Question 8

As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________.

Accepted Answer

As the costs associated with deposit outflows increase, banks face higher risks and uncertainties, leading them to hold more excess reserves as a precautionary measure. This increases their willingness to hold excess reserves to mitigate potential liquidity issues.

Question 9

If a bank has $10 million of demand deposits, a desired reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of ________.

Accepted Answer

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

Question 10

Banks hold excess and secondary reserves to ________.

Accepted Answer

Banks hold excess and secondary reserves primarily to provide for deposit outflows, meaning they keep extra funds on hand in case customers withdraw more funds than expected. This helps to ensure that the bank can always meet its obligations to depositors. While excess reserves can also help to mitigate interest-rate risk, satisfy margin requirements, and potentially earn higher earnings, these are not the primary reasons for holding them.

Question 11

If a bank has $200,000 of demand deposits, a desired reserve ratio of 20 percent, and it holds $80000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is ________.

Accepted Answer

The maximum deposit outflow that the bank can sustain without altering its balance sheet is $50,000. This is because the bank has $80,000 in reserves, and it is required to hold 20% of its demand deposits in reserves. Therefore, the bank can afford to lose up to $50,000 in deposits before it falls below its required reserve ratio.

Question 12

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.

Accepted Answer

Calling in loans can be seen as a sudden and unexpected demand on customers for repayment, potentially causing dissatisfaction and eroding customer loyalty. It may lead to customers withdrawing their deposits and finding another institution, hurting the bank's reputation and resulting in a loss of business in the long run. Selling securities, selling loans, or selling negotiable CDs may also have costs, but they are not as likely to create customer resentment.

Question 13

Banks that suffered significant losses in the 1980s made the mistake of ________.

Accepted Answer

Banks that suffered significant losses in the 1980s made the mistake of failing to diversify their loan portfolio. They concentrated their loans on a few industries and companies, which made them vulnerable to economic downturns and industry-specific problems. Holding too many liquid assets or safe securities would have protected the bank's assets, while minimizing default risk would have reduced the bank's exposure to bad loans. However, none of these factors directly contributed to the losses experienced by banks in the 1980s.

Question 14

Using T-accounts show what happens to reserves at New National Bank if one individual deposits $1000 in cash into her chequing account and another individual withdraws $750 in cash from her chequing account.

Accepted Answer

The answer of Using T-accounts show what happens to reserves...

Question 15

In general, banks would prefer to acquire funds quickly by ________ rather than ________.

Accepted Answer

Banks would prefer to borrow from the Bank of Canada since it is a quicker and more convenient way of acquiring funds compared to reducing loans, which can be a slow process. Selling securities can also be a viable option, but it is often a last resort and is typically only done when the bank needs to raise a significant amount of funds quickly. "Calling in" loans can be disruptive to the borrowers and can damage the bank's reputation, so it is not a preferred method of acquiring funds.

Question 16

If, after a deposit outflow, a bank needs an additional $3 million to meet its desired reserves, the bank can ________.

Accepted Answer

The most appropriate option for a bank to acquire the additional $3 million to meet their desired reserves is to sell $3 million worth of securities. This option helps the bank to maintain the existing level of deposits and loans. Repaying advances from the Bank of Canada or reducing deposits by $3 million will lead to a decrease in the bank's reserves, whereas increasing loans by $3 million will lead to a decline in the bank's liquidity.

Question 17

With a 10 percent reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is ________.

Accepted Answer

With a reserve requirement ratio of 10%, New Bank must hold onto 10% of the $100 deposit, which is $10. Therefore, the maximum amount New Bank could lend is $90 ($100 deposit - $10 reserve requirement).

Question 18

A bank will want to hold more excess reserves (everything else equal) when ________.

Accepted Answer

When brokerage commissions on selling bonds increase, it becomes more expensive for banks to liquidate assets to meet unexpected withdrawals. Therefore, they may hold more excess reserves as a precaution.

Question 19

A bank with insufficient reserves can increase its reserves by ________.

Accepted Answer

Calling in loans increases a bank's reserves because when loans are repaid, the money returns to the bank, thereby increasing its reserves.

Question 20

Which of the following statements most accurately describes the task of bank asset management?

Accepted Answer

Bank asset management involves seeking the highest returns possible on investments while also minimizing risk and ensuring adequate provisions for liquidity to meet short-term obligations such as withdrawals and loan disbursements. This requires striking a balance between profitability and risk management.

Quiz 12: Banking and the Management of Financial Institutions