Question 1

A bank maintains an average clearing balance of $1,000,000 with the Federal Reserve.The Federal funds rate is currently 4.5 percent.What amount of credit will the bank earn over the reserve maintenance period that can be used to offset any fees charged by the Federal Reserve?

Accepted Answer

The credit earned is calculated by multiplying the average balance by the Federal funds rate: $1,000,000 * 4.5% = $45,000 annually. To find the amount for the reserve maintenance period (typically 14 days), divide by 365 and multiply by 14: ($45,000 / 365) * 14 = $1,750.

Question 2

The Fed funds rate usually hovers around the Fed's:

Accepted Answer

The Fed funds rate is the interest rate at which one bank lends funds to another bank overnight to meet the reserve requirement. The Federal Reserve sets a target for this rate, and the actual rate usually hovers around this target rate. Therefore, the best choice is A, target rate.

Question 3

A financial institution has estimated that its growth rate in deposits over the last ten years has averaged 6 percent per year.This is the _________________________ of estimating future deposits.

Accepted Answer

The growth rate in deposits over the last ten years represents a consistent trend component, as it has averaged 6 percent per year. This can be used to estimate future deposits based on the expectation that the trend will continue. The other options do not apply, as there is no indication of a repeating seasonal pattern or cyclical fluctuations, and the term stationary component is not relevant in this context.

Question 4

Which of the following statements is correct?

Accepted Answer

Liquidity problems in the banking system are often caused by external factors such as market disruptions, sudden changes in interest rates, or economic recessions. Banks depend on the availability of short-term funding from money markets or interbank lending to meet their obligations, and a disruption in these markets can lead to liquidity problems. Therefore, option B is correct. Option A is incorrect because the demand for liquidity may exceed the sources of liquidity, especially during a financial crisis. Option C is incorrect because some liabilities, such as demand deposits, are subject to immediate repayment. Option D is incorrect because a bank that is very liquid may not necessarily be very profitable since holding excess liquidity can lower its profitability.

Question 5

A bank money manager estimates that the bank will experience a liquidity deficit of $400 million with a probability of 10 percent,a liquidity deficit of $900 million with a probability of 20 percent,a liquidity surplus of $600 million with a probability of 30 percent,and a liquidity surplus of $1,200 with a probability of 40 percent over the next month.What is this bank's expected liquidity deficit or surplus next month?

Accepted Answer

Expected liquidity = (Probability of liquidity deficit * Amount of liquidity deficit) + (Probability of liquidity surplus * Amount of liquidity surplus)
Expected liquidity = (0.1 * -400) + (0.2 * -900) + (0.3 * 600) + (0.4 * 1200)
Expected liquidity = -40 - 180 + 180 + 480
Expected liquidity = 440
Therefore, the bank's expected liquidity next month is a surplus of $440 million, which is option C.

Question 6

A bank currently has $150 million in "hot money" deposits against which it wants to hold an 80 percent reserve and $90 million in vulnerable deposits against which it wants to hold a 30 percent reserve.It also has $45 million in stable deposits against which it wants to hold a 5 percent reserve.Legal reserves for the bank are 5 percent of all deposits.What is the bank's liability liquidity reserve?

Accepted Answer

The answer of A bank currently has $150 million in...

Question 7

A bank maintains an average clearing balance of $5,000,000 with the Federal Reserve.The Federal funds rate is currently 6.5 percent.What amount of credit will the bank earn over the reserve maintenance period that can be used to offset any fees charged by the Federal Reserve?

Accepted Answer

The answer of A bank maintains an average clearing balance...

Question 8

A manager that looks at loans and deposits increases and decreases among other things to measure the bank's liquidity position is using:

Accepted Answer

The sources and uses of funds approach involves analyzing increases and decreases in loans and deposits, among other factors, to assess a bank's liquidity position. This method helps in understanding how funds flow into and out of the bank, which is crucial for liquidity management.

Question 9

The Shirley State Bank has $90 million in transaction deposits subject to legal reserves.The bank must hold 3 percent legal reserves up to $43.9 million of transaction deposits and 10 percent legal reserves on any amount above this.What is the bank's total legal reserve requirement?

Accepted Answer

First, we calculate the legal reserve requirement for the first $43.9 million of transaction deposits:

Legal reserve requirement = $43.9 million x 0.03 = $1.317 million

Then, we calculate the legal reserve requirement for the remaining transaction deposits:

Remaining deposits = $90 million - $43.9 million = $46.1 million

Legal reserve requirement for remaining deposits = $46.1 million x 0.10 = $4.61 million

Finally, we add the two legal reserve requirements together:

Total legal reserve requirement = $1.317 million + $4.61 million = $5.927 million

Therefore, the answer is C) $5.927 million.

Question 10

A bank currently has $50 million in stable deposits against which they want to keep 10% reserves,$100 in vulnerable deposits against which they want to keep 40% reserves,and they have $50 million in "hot money" deposits against which they want to keep 90% reserves.The legal reserves for this bank are 10% of all deposits.What is the bank's liability liquidity reserve?

Accepted Answer

To calculate the bank's liability liquidity reserve, we need to find the total amount of reserves required for all types of deposits.

For stable deposits, the bank needs to keep 10% of $50 million, which is $5 million.

For vulnerable deposits, the bank needs to keep 40% of $100, which is $40.

For "hot money" deposits, the bank needs to keep 90% of $50 million, which is $45 million.

So, the total amount of reserves required is:

$5 million + $40 + $45 million = $50.04 million

Since the legal reserves for this bank are 10% of all deposits, we can calculate the total amount of deposits as:

Reserves / Legal Reserve Ratio = Total Deposits

$50.04 million / 0.1 = $500.4 million

Therefore, the bank's liability liquidity reserve is the difference between total deposits and stable deposits:

$500.4 million - $50 million = $450.4 million

$450.4 million - $5 million = $445.4 million

Therefore, the bank's liability liquidity reserve is $81 million (B).

Question 11

John Camey,the money manager of the First State Bank,has estimated that the bank has a 20 percent chance of a liquidity deficit of $700 million,a 30 percent chance of a liquidity deficit of $200 million,a 30 percent chance of a liquidity surplus of $400 million and a 20 percent chance of a liquidity surplus of $900 million over the next week.What is the bank's expected liquidity deficit or surplus over the next week?

Accepted Answer

The expected liquidity is calculated by multiplying each outcome by its probability and summing these products: (0.2 * -$700M) + (0.3 * -$200M) + (0.3 * $400M) + (0.2 * $900M) = -$140M + -$60M + $120M + $180M = $100M liquidity surplus.

Question 12

The Hollingsworth National Bank maintains an average clearing balance of $7,000,000 with the Federal Reserve.The Federal Funds rate is currently 5.25 percent.What is the credit the bank will earn over the maintenance period that can be used to offset any fees charged by the Federal Reserve?

Accepted Answer

The credit earned is calculated by multiplying the average balance by the Federal Funds rate: $7,000,000 * 5.25% = $367,500 annually. To find the credit for the maintenance period (usually 14 days), divide by 365 and multiply by 14: ($367,500 / 365) * 14 = $14,292.

Question 13

A bank currently holds $105 million in transaction deposits subject to legal reserves but has managed to enter into sweep account arrangements affecting $55 million of these accounts.Given that the bank must hold 3 percent legal reserves up to $47.8 million of transaction deposits and 10 percent legal reserves on any amount above that,how much has this bank reduced its total legal reserves as a result of these sweep arrangements?

Accepted Answer

The bank has reduced its total legal reserves by $5.500 million as a result of these sweep arrangements.The bank is required to hold 3 percent legal reserves up to $47.8 million of transaction deposits and 10 percent legal reserves on any amount above that.Before the sweep arrangements, the bank was required to hold $1.434 million in legal reserves on the $47.8 million of transaction deposits subject to the 3 percent reserve requirement and $5.500 million in legal reserves on the remaining $57.2 million of transaction deposits subject to the 10 percent reserve requirement.After the sweep arrangements, the bank is only required to hold $1.434 million in legal reserves on the $47.8 million of transaction deposits subject to the 3 percent reserve requirement and $1.449 million in legal reserves on the remaining $8.2 million of transaction deposits subject to the 10 percent reserve requirement.Therefore, the bank has reduced its total legal reserves by $5.500 million as a result of these sweep arrangements.

Question 14

A manager that examines the bank's stock price behavior and risk premium on the CDs to measure liquidity position is using:

Accepted Answer

Examining the bank's stock price behavior and risk premium on CDs to measure liquidity position involves analyzing external market signals. These signals from the marketplace provide insights into how investors view the bank's liquidity and financial health.

Question 15

A bank or financial service institution can generally meet reserve requirements using all of the following except:

Accepted Answer

Selling new shares is not a viable option for a bank or financial service institution to meet reserve requirements, as they are not equity issuers and cannot sell equity shares to the public. The other options listed, such as selling liquid investments, borrowing in the fed funds market, drawing on excess correspondent balances, and borrowing in the repo market, are all viable methods for meeting reserve requirements.

Question 16

A manager that uses ratios such as cash and deposits due from banks to total assets and U.S.government securities to total assets to measure a firm's liquidity position is using:

Accepted Answer

The manager is using the liquidity indicator approach, which involves analyzing ratios and indicators that measure a company's ability to meet its short-term financial obligations. The other options do not accurately describe the approach being used.

Question 17

Which of the following is a guideline for liquidity managers of banks?

Accepted Answer

All of the options listed are guidelines for liquidity managers of banks. A liquidity manager must keep track of all activities within the bank to effectively manage liquidity, they must have knowledge of the plans of major creditors and depositors, and they must continuously analyze the liquidity needs of the bank. Additionally, it is important for the liquidity manager to ensure that the bank has clear priorities and objectives for liquidity management.

Question 18

In the week to come,a bank expects $55 million in incoming deposits,$75 million in acceptable loan requests,$35 million in money market borrowings,$10 million in deposit withdrawals,and $30 million in loan repayments.The bank is expecting a:

Accepted Answer

The bank is expecting more incoming deposits and acceptable loan requests compared to withdrawals and loan repayments. Therefore, the bank is expecting a surplus in liquidity.

Question 19

The Fed funds market is most volatile on a bank:

Accepted Answer

Settlement day is when banks are most likely to experience volatility in the Fed funds market as they ensure they meet reserve requirements by the end of the maintenance period, leading to increased borrowing or lending activity.

Question 20

A financial institution has estimated that over the last ten years the deposit withdrawals during Christmas time is about 25% higher than during any other time of the year.This is the _________________________ of estimating future deposits.

Accepted Answer

The 25% increase in deposit withdrawals during Christmas time compared to any other time of the year is a recurring pattern or seasonality, making it the seasonal component of estimating future deposits.

Quiz 11: Liquidity and Reserves Management: Strategies and Policies