47) 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
A) $50,000.
B) $40,000.
C) $30,000.
D) $25,000.
48) 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) $1.2 million.
B) $1.1 million.
C) $1 million.
D) either A or B of the above.
49) Banks can protect themselves from the disruption caused by deposit outflows by
A) holding excess reserves.
B) selling securities.
C) “calling in” loans.
D) doing all of the above.
E) doing only A and B of the above.
50) In general, banks would prefer to meet deposit outflows by ________ rather than ________.
A) selling loans; selling securities
B) selling loans; borrowing from the Fed
C) borrowing from the Fed; selling loans
D) “calling in” loans; selling securities
51) Which of the following do banks hold as insurance against the high cost of deposit outflows?
A) Excess reserves
B) Secondary reserves
C) Bank equity capital
D) All of the above
E) Only A and B of the above
52) Which is the least costly way for a bank to handle deposit outflows?
A) Hold excess reserves.
B) Borrow from other banks.
C) Sell securities.
D) Call in loans.
53) The ________ the costs associated with deposit outflows are, the ________ excess reserves
banks will want to hold.
A) lower; more
B) higher; less
C) higher; more
D) none of the above, since deposit outflows cannot be anticipated
54) A bank can reduce its total amount of loans outstanding by
A) “calling in” loans; that is, by not renewing some loans when they come due.
B) selling loans to other banks.
C) selling loans to the Federal Reserve.
D) doing all of the above.
E) doing only A and B of the above.
55) Which of the following statements is an accurate description of modern liability
management?
A) Greater flexibility in liability management has allowed banks to increase the proportion of
their assets held in loans.
B) New financial instruments enable banks to acquire funds quickly.
C) The introduction of negotiable CDs have significantly reduced the percentage of funds that
banks borrow from one another to finance loans.
D) All of the above have occurred since 1960.
E) Only A and B of the above have occurred since 1960.
56) Banks fail when the value of bank ________ falls below the value of ________, causing the
bank to become insolvent.
A) reserves; required reserves
B) loans; secondary reserves
C) assets; liabilities
D) income; expenses
57) A bank fails when the value of its ________ falls below the value of ________, causing the
bank to become insolvent.
A) reserves; required reserves
B) loans; secondary reserves
C) securities; deposit liabilities
D) assets; liabilities
58) Bank failure is less likely to occur when a bank
A) holds less in U.S. government securities.
B) suffers large deposit outflows.
C) holds more excess reserves.
D) has less bank capital.
59) A bank failure is more likely to occur when
A) a bank holds less in U.S. government securities.
B) a bank suffers large deposit outflows.
C) a bank holds less equity capital.
D) all of the above occur.
E) only A and B of the above occur.
60) The largest source of bank income is
A) interest on loans.
B) interest on securities.
C) service charges on deposit accounts.
D) noninterest income.
61) The largest operating expense for a bank is
A) salaries and employee benefits.
B) interest paid on discount loans.
C) interest paid on federal funds borrowed from other banks.
D) interest paid on deposits.
62) On a bank’s income statement, the provision for loan losses is an ________ item and
represents the amount of ________ in the bank’s loan loss reserves.
A) income; decrease
B) income; increase
C) expense; decrease
D) expense; increase
63) On a bank’s income statement, the amount available to keep as retained earnings or pay to
the stockholders in dividends is the bank’s
A) net income.
B) net operating income.
C) net extraordinary items.
D) net interest margin.
64) Net profit after taxes per dollar of equity capital is a basic measure of bank profitability
called
A) return on assets.
B) return after taxes.
C) return on equity.
D) equity multiplier.
65) Net profit after taxes per dollar of assets is a basic measure of bank profitability called
A) return on assets.
B) return on capital.
C) return on equity.
D) return after taxes.
66) The amount of assets per dollar of equity capital is called the
A) asset ratio.
B) equity ratio.
C) equity multiplier.
D) asset multiplier.
E) return on equity.
67) For a given return on assets, the lower the bank capital is,
A) the lower the return for the owners of the bank will be.
B) the higher the return for the owners of the bank will be.
C) the lower the credit risk for the owners of the bank will be.
D) both A and C of the above will happen.
68) In the absence of regulation, banks would probably hold
A) too much capital, reducing the efficiency of the payments system.
B) too much capital, reducing the profitability of banks.
C) too little capital, increasing the return on equity.
D) none of the above.
69) An argument that supports a regulated minimum capital requirement is that banks that hold
too little capital
A) are unprofitable.
B) impose costs on other banks because they are more likely to fail.
C) have an unfair competitive advantage over savings and loans.
D) includes all of the above.
70) Examples of off-balance-sheet activities include
A) loan sales.
B) foreign exchange market transactions.
C) trading in financial futures.
D) all of the above.
E) only A and B of the above.
71) Examples of off-balance-sheet activities include
A) loan sales.
B) extending loans to depositors.
C) borrowing from other banks.
D) all of the above.
72) The danger of banks engaging in activities such as trading in financial futures and interest-
rate swaps is that these activities allow banks to
A) increase profits.
B) decrease risks.
C) avoid bank regulations.
D) engage in speculation.