Chapter 12 – Depository Institutions: Banks and Bank Management
61. The weighted average difference between the interest received on assets and the interest
rate paid for liabilities for a bank is the banks:
D. Return on equity
62. Which of the following statements is most correct for U.S. commercial banks?
A. Net interest margin is much larger than return on equity
63. A bank’s off-balance-sheet activities usually:
D. Increases a bank’s assets but not its liabilities
Chapter 12 – Depository Institutions: Banks and Bank Management
64. The risks that banks are exposed to include each of the following, except:
A. Interest rate risk
65. A late-night news report says the president of a local bank is about to be arrested for
embezzling money from the bank at which he works. This causes most of the depositors to
line up in front of the bank the next morning wanting to withdraw their deposits. This is an
example of:
D. Credit risk
66. A bank that cannot meet its loan commitments is experiencing the results of:
A. Interest rate risk
Chapter 12 – Depository Institutions: Banks and Bank Management
67. Many people believed that when the calendar changed from December 31, 1999 to
January 1, 2000, many bank records were going to be wiped out, so many people planned on
withdrawing their funds. If this were to happen, this would be an example of:
A. Credit risk
68. The difference between a bank’s reserves and its required reserves is:
A. Profits
69. If a bank has $200 million in deposits, the required reserve rate is 10 percent and the bank
has $23 million in reserves:
A. The bank is short of required reserves
Chapter 12 – Depository Institutions: Banks and Bank Management
70. If a bank has deposits of $250 million, reserves that total $30 million and has a required
reserve rate of 10 percent:
A. The bank is short of required reserves
71. If a bank has customer deposits of $150 million, $15 million in reserves and the amount of
D. The bank’s net interest margin is zero (0)
72. Regulators require a bank to hold some of its assets as reserves mainly to address:
D. Operational risk
Chapter 12 – Depository Institutions: Banks and Bank Management
73. Banks tend not to hold a lot of excess reserves because:
D. They can always use the funds to buy stock
74. A bank that does not want to hold a lot of excess reserves but wants to manage liquidity
risk is likely to:
D. Limit withdrawals by customers
75. If Bank A sells some its loans to Bank B for cash, everything else equal:
Chapter 12 – Depository Institutions: Banks and Bank Management
76. A bank that meets deposit withdrawal by borrowing additional funds will alter:
D. The asset and liabilities side of the balance sheet
77. The credit risk a bank faces is the risk resulting specifically from:
A. The economy entering a recession
78. A bank that specializes in granting loans to firms in a specific line of business:
A. May decrease its operating cost and decrease its credit risk
Chapter 12 – Depository Institutions: Banks and Bank Management
79. One way for a bank to deal with credit risk is to:
D. Limit the number of loans made in any year
80. The fact that a bank’s assets tend to be long-term while its liabilities are short-term
creates:
D. Trading risk
81. A bank’s assets tend to be long-term while its liabilities are short-term. Therefore, when
interest rates raise the value of the bank’s assets:
D. Decreases and the value of its liabilities increases
Chapter 12 – Depository Institutions: Banks and Bank Management
82. When interest rates fall a bank’s capital will usually:
A. Not change
83. If a bank has more interest-rate sensitive liabilities than interest-rate sensitive assets, an
increase in the interest rate will cause profits to:
D. Be negative, meaning there will not be profits, only losses
84. For every $100 in assets, a bank has $30 in interest-rate sensitive assets, and the other $70
in non-interest-rate sensitive assets. The same bank has $60 for every $100 in liabilities in
interest-rate sensitive liabilities, the other $40 are in liabilities that are not interest-rate
sensitive. If the interest rate on assets decreases from 6 to 5 percent, and the interest rate on
liabilities decreases from 4 to 3, percent the impact on the bank’s profits per $100 of assets
will be:
D. Zero since the interest rates on assets and liabilities fell by the same amount
Chapter 12 – Depository Institutions: Banks and Bank Management
85. For every $100 in assets, a bank has $40 in interest-rate sensitive assets, and the other $60
in non-interest-rate sensitive assets. The same bank has $50 for every $100 in liabilities in
interest-rate sensitive liabilities, the other $50 are in liabilities that are not interest-rate
sensitive. If the interest rate on assets increases from 5 to 6 percent, and the interest rate on
liabilities increases from 3 to 4, percent the impact on the bank’s profits per $100 of assets
will be:
D. Zero since the interest rates on assets and liabilities increased by the same amount
86. The procedure that estimates the interest-rate sensitivity of a bank’s assets and liabilities is
called:
A. Managing credit risk
87. A bank that makes most of its long-term loans at adjustable interest rates is:
D. Increasing both interest-rate and credit risk
Chapter 12 – Depository Institutions: Banks and Bank Management
88. Trading risk faced by U.S. banks results from:
A. The free-rider problem
89. A bank faces foreign exchange risk when:
D. It has branches in other countries
90. Many Japanese banks are reporting net worth much greater than actual due to the fact
that:
D. Japanese banks cannot buy stock and so pay inflated prices for bonds.
Chapter 12 – Depository Institutions: Banks and Bank Management
91. Mergers resulting from the financial crisis of 2007-2009 have left what percentage of
deposits in the hands of 4 banks?
A. 10%
Short Answer Questions
92. What is the equation that reflects a bank’s balance sheet?
93. If a bank has a net worth that is negative, what do you know about the relationship
between the amounts the bank has in assets and liabilities?
Chapter 12 – Depository Institutions: Banks and Bank Management
94. Identify the four broad categories that make up the asset side of the balance sheet for
banks and which category is usually the largest.
95. One of the cash items included on the asset side of banks’ balance sheets is reserves. What
makes up reserves and what is their purpose?
96. What are the securities that U.S. banks are allowed to own and why are they often referred
to as secondary reserves?
Chapter 12 – Depository Institutions: Banks and Bank Management
97. Explain why non-transactions accounts have become a more important source of funds for
the bank than transaction accounts over the past thirty years?
98. Why would a bank usually want to minimize the amount of excess reserves it has on
hand?