Chapter 12
Depository Institutions: Banks and Bank Management
Multiple-Choice Questions
1. Which of the following correctly portrays a bank’s balance sheet?
a. Total Bank Liabilities = Total Bank Capital + Total Bank Assets
b. Total Bank Assets = Total Bank Capital – Total Bank Liabilities
c. Total Bank Assets = Total Bank Liabilities – Total Bank Capital
d. Total Bank Assets = Total Bank Liabilities + Total Bank Capital
2. Considering a bank’s balance sheet, which of the following statements is true?
a. Total Bank Assets = Total Bank Capital – Total Bank Liabilities
b. Total Bank Assets = Total Bank Liabilities + Total Bank Capital
c. Total Bank Assets + Total Bank Capital = Total Bank Liabilities
d. Total Bank Assets + Total Bank Liabilities =Total Bank Capital
3. Considering a bank’s balance sheet, which of the following statements is false?
a. Total Bank Assets + Total Bank Liabilities = Total Bank Capital
b. Total Bank Assets = Total Bank Liabilities + Total Bank Capital
c. Total Bank Liabilities = Total Bank Assets – Total Bank Capital
d. Total Bank Capital = Total Bank Assets – Total Bank Liabilities
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4. A bank’s net worth is synonymous with its:
a. assets.
b. assets + bank’s liabilities.
c. capital.
d. required reserves.
5. Considering the balance sheet for all commercial banks in the U.S., the largest category of
assets is:
a. cash items.
b. U.S. Government Securities.
c. required reserves.
d. loans.
6. Considering the balance sheet for all commercial banks in the U.S., the largest category of
liabilities is:
a. borrowing from other banks in the U.S.
b. saving’s deposits and time deposits.
c. checkable deposits.
d. borrowings from non-banks in the U.S.
7. Considering the balance sheet for all commercial banks in the U.S., the net worth of banks is:
a. about 5 times the total assets.
b. about 1/11 of total assets.
c. just about the same as total assets.
d. about the same as total liabilities.
8. Considering the balance sheet for all commercial banks in the U.S., the net worth of banks is:
a. about 11% of total liabilities.
b. about 5 times total assets.
c. about the same as total assets.
d. about 4 times total liabilities.
9. The total assets of commercial banks in 2015 amounted to:
a. three times nominal GDP in the U.S.
b. about one-half of nominal GDP in the U.S.
c. about four-fifths of nominal GDP in the U.S.
d. about one-tenth of nominal GDP in the U.S.
10. A bank’s reserves include:
a. U.S. Treasury bills.
b. currency in the bank but not currency in the ATM machines.
c. the bank’s deposits at the Federal Reserve.
d. U.S. Treasury bills and currency in the bank.
11. A bank’s reserves include:
a. vault cash.
b. U.S. Treasury Securities.
c. the bank’s loan portfolio.
d. U.S. Treasury bills and vault cash.
12. A category of assets for banks is cash items in the process of collection. This is:
a. uncollected funds the bank is due to receive from the clearing of checks.
b. currency the bank is due from the Treasury.
c. late fees the bank is owed from loan payments that were not made on time.
d. payments from the FDIC insurance fund due the bank.
13. Banks do not hold a lot of their assets in the form of cash mainly because of:
a. regulation.
b. the fear of being robbed.
c. the opportunity cost of holding cash; cash does not earn interest.
d. it can encourage employee theft.
14. Bank’s hold marketable securities as part of their assets. For U.S. banks these marketable
securities include:
a. stocks and bonds.
b. only the stocks of U.S. corporations.
c. only the bonds of the U.S. treasury.
d. only bonds.
15. Secondary reserves for banks are:
a. the same as the bank’s net worth.
b. mainly the bank’s liquid securities.
c. vault cash.
d. deposits the bank has at the Federal Reserve.
16. Considering U.S. commercial banks, loans account for:
a. about one-third of total assets.
b. more than one-half of total assets.
c. two-thirds of liabilities.
d. three-quarters of total assets.
17. One thing that is common for all bank loans is that they are:
a. securitized.
b. liquid.
c. part of the banks’ assets.
d. unsecured.
18. Savings and loans primarily provide:
a. large commercial loans.
b. unsecured credit card loans.
c. student loans.
d. home mortgages.
19. Commercial banks differ from credit unions in the following way:
a. credit unions focus on consumer loans while commercial banks primarily make loans to
businesses.
b. credit unions make loans and accept deposits while commercial banks just make loans.
c. commercial banks cannot make auto loans to individuals, just to businesses while credit unions
can do both.
d. credit unions do not have to hold reserves while commercial banks do.
20. Commercial banks increased their involvement in mortgages over the years due to:
a. the ability to securitize mortgages which made them more liquid.
b. the demands of regulators.
c. the increase in commercial loans demanded due to the development of the commercial paper
market.
d. the reduced risk of borrowers’ defaulting on mortgage loans.
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21. Which of the following statements is not true?
a. The largest source of funds for banks to lend comes from the owner’s capital.
b. Transaction deposits make up less than 10 percent of banks sources of funds.
c. The largest sources of funds for banks are non-transactions accounts.
d. Borrowing is a larger source of funds for banks than transaction deposits.
22. Checkable deposits have decreased since the 1970’s mainly because:
a. regulators allowed higher rates to be paid on these accounts and banks found them to be highly
unprofitable.
b. people prefer to use credit cards rather than writing checks.
c. these deposit accounts offer little or no interest so depositors find them to be expensive.
d. as banks added fees to these accounts people increased their holdings of currency.
23. The primary difference in certificates of deposit (CDs) that are equal to or less than
$100,000 and those over $100,000 (other than the amount) is:
a. a bank does not have to include CDs equal to or less than $100,000 in its liabilities.
b. CDs greater than $100,000 are negotiable and therefore can be bought and sold.
c. CDs equal to or less than $100,000 are issued for only six months or less.
d. CDs greater than $100,000 are issued for only six months or less.
24. The federal funds market:
a. is the term used for bank borrowing from the Federal Reserve System.
b. is the lending to banks by the U.S. treasury when banks face liquidity emergencies.
c. is the inter-bank market where excess reserves from one bank can be loaned to another bank.
d. is the borrowing by American banks from foreign lenders.
25. Loans made in the federal funds market:
a. are highly collateralized.
b. are made by the Federal Reserve System to the bank within 24 hours.
c. are unsecured loans.
d. are insured by the FDIC.
26. Which of the following statements best completes this sentence: “On a bank’s balance
sheet…“?
a. liabilities show the uses of funds and assets show the sources of funds.
b. assets show the sources of funds and the net worth shows the uses of funds.
c. net worth shows the sources of funds and liabilities show the uses of funds.
d. liabilities show the sources of funds and assets show the uses of funds.
27. Which of the following statements best completes this sentence: “On a bank’s balance
sheet…“?
a. assets show the sources of funds and the net worth shows the uses of funds.
b. net worth shows the sources of funds and liabilities show the uses of funds.
c. assets show the uses of funds and liabilities show the sources of funds.
d. net worth represents both a source and a use of funds.
28. Which of the following is a bank liability?
a. Mortgage loans
b. Demand deposits
c. Reserves
d. U.S. Treasury securities
29. Which of the following is a bank asset?
a. Demand deposits
b. Borrowings from other banks
c. Mortgage loans
d. CDs
30. Which of the following is not a bank liability?
a. Reserves
b. Demand deposits
c. Non-transaction deposits
d. Federal fund borrowings
31. Which of the following is not a bank asset?
a. Securities
b. Mortgage loans
c. Reserves
d. Non-transaction deposits
32. Which of the following statements regarding checkable deposits is most accurate?
a. Checkable deposits are a larger source of bank funds today than in 1970.
b. Checkable deposits are no longer a source of bank funds.
c. Checkable deposits are a less important source of bank funds today than in 1970.
d. Checkable deposits continue to be the largest source of bank funds.
33. A non-transaction deposit would include each of the following, except:
a. a savings account.
b. a checking account.
c. a passbook savings account.
d. a certificate of deposit.
34. A repurchase agreement is:
a. an asset that represents the value of all collateral repossessed by the bank and held for sale.
b. a long-term collateralized loan.
c. an agreement where the parties agree to reverse the transaction on a specific day.
d. only made between two or more banks.
35. Repurchase agreements are usually used by banks that:
a. have a need for long-term financing.
b. need cash for a very short period of time.
c. have negative net worth.
d. cannot obtain financing from any other source.
36. Capital is the cushion banks have against:
a. sudden drops in the value of their assets.
b. an unexpected decrease in liabilities.
c. liquidity risk.
d. moral hazard.
37. Money center banks differ from community banks in all of the following ways except:
a. they are usually much smaller.
b. they obtain their funds primarily through borrowing and not by deposits.
c. they are a much smaller percentage of the total number of banks.
d. they are actively engaged in the money market.
38. Savings and loan institutions:
a. are owned by the depositors.
b. originally were formed primarily to make home mortgages.
c. today offer a much smaller array of services than when originally formed.
d. are owned by depositors who also have a common bond.
39. Of the roughly 6,200 banks in the United States at the end of 2015, by far the greatest
numbers of them were:
a. regional banks.
b. money center banks.
c. community banks.
d. savings banks.
40. Suppose a particular bank is very large in terms of assets, and makes consumer and
residential loans as well as commercial and industrial loan. The bank is probably a:
a. regional or super-regional bank.
b. money center bank.
c. community bank.
d. savings bank.
41. Suppose a particular depository institution that specializes in residential mortgages is owned
by its depositors. The institution is probably a:
a. regional or super-regional bank.
b. money center bank.
c. community bank.
d. savings bank.
42. If a bank sells off all of its assets and pays all of its liabilities, the amount remaining would
be its:
a. net profit.
b. reserves.
c. net worth.
d. excess reserves.
43. A bank’s loan loss reserves are:
a. the amount of loans that have defaulted in the past twelve months.
b. the same as equity capital.
c. an amount the bank sets aside to cover potential losses from defaulted loans.
d. a liability of the bank since it is a source of funds.
44. The largest liability for commercial banks in the U.S. is:
a. demand deposits.
b. non-transaction deposits.
c. borrowing from other U.S. banks.
d. borrowing from the Federal Reserve.
45. Suppose that a bank initially has a leverage ratio of 8 to 1. If this bank increases its capital
by $1 million and its assets by $10 million, then the bank’s:
a. risk increases and its leverage decreases.
b. liabilities decrease and its leverage increases.
c. leverage decreases and its liabilities increase.
d. leverage and risk increases.
46. Which of the following bank assets would be categorized as secondary reserves?
a. U.S. Treasury bills
b. Cash
c. Mortgage loans
d. Deposits at the Federal Reserve
47. If a bank has $100 million in assets and a net worth of $10 million, its debt-to-equity ratio is:
a. 10 to 1.
b. 5 to 1.
c. 9 to 1.
d. 0.1 to 1.
48. If a bank has $150 million in assets and a net worth of $20 million, its asset-to-equity ratio
is:
a. 6.5 to 1.
b. 7.5 to 1.
c. 0.13 to 1.
d. 0.15 to 1.
49. If bank with leverage of 8 to 1 increases its assets by adding $1 to capital for every $1 added
to assets:
a. leverage increases.
b. leverage decreases.
c. leverage stays constant.
d. the answer cannot be determined from the information in the question.
50. If bank with $100 million in assets and $10 million in equity increases its assets by adding
$1 to capital for every $1 added to assets:
a. the debt-to-equity ratio will increase.
b. the debt-to-equity ratio will remain constant.
c. the debt-to-equity ratio will decrease.
d. the answer cannot be determined from the information in the question.
51. A bank’s return on assets (ROA) is calculated by dividing:
a. the bank’s assets by its net worth.
b. the bank’s net profits after taxes by its assets.
c. the bank’s net worth by its assets.
d. the bank’s assets less its net profit after taxes by its net worth.
52. A bank’s return on equity (ROE) is calculated by:
a. dividing the bank’s net profit after taxes by the bank’s capital.
b. dividing the banks liabilities by the bank’s capital.
c. taking the bank’s assets plus the net profit after taxes and dividing this sum by the bank’s
capital.
d. dividing the bank’s net profit after taxes by the sum of the bank’s assets and its liabilities.
53. Everything else equal, if the ratio of bank assets to bank capital increases, the bank’s return
on equity should:
a. remain constant.
b. decrease.
c. increase.
d. cannot be determined from the information provided.
54. Everything else equal, if the ratio of bank assets to bank capital decreases, the bank’s return
on equity should:
a. decrease.
b. remain constant.
c. increase.
d. cannot be determined from the information provided.
55. If a bank’s return on equity remains constant, but the ratio of bank assets to bank capital
increases:
a. the bank’s return on assets must have increased.
b. the bank’s return on assets must have decreased.
c. the bank’s assets and capital must have increased by the same percentage.
d. the bank must be unprofitable.
56. If a bank’s return on equity remains constant, but the ratio of bank assets to bank capital
decreases:
a. the bank’s return on assets must have increased.
b. the bank’s return on assets must have decreased.
c. the bank’s assets and capital must have increased by the same percent.
d. the bank must be unprofitable.
57. The tendency for large banks to have a higher return on equity than small banks suggests:
a. small banks have better management than large banks.
b. large banks can charge higher interest rates than small banks.
c. there could be significant economies of scale in banking.
d. larger banks are better able to escape the cost of regulation.
58. Net interest income for a bank is:
a. the difference between gross income and net income after taxes.
b. the interest banks earn from uses of funds.
c. the difference between interest income and interest expense.
d. the difference between interest income and total expenses.
59. A bank’s net interest margin is calculated by taking net interest income and:
a. dividing it by the bank’s capital.
b. dividing it by the bank’s assets.
c. dividing it by the sum of the bank’s assets and capital.
d. subtracting taxes.
60. The weighted average difference between the interest received on assets and the interest rate
paid for liabilities for a bank is the bank’s:
a. interest rate spread.
b. net interest margin.
c. net interest income.
d. return on equity.
61. Which of the following statements is most correct for U.S. commercial banks?
a. Net interest margin is much larger than return on equity.
b. Net interest margin is about equal to return on equity.
c. Net interest margin averages about two times the return on equity.
d. Net interest margin is closely related to the return on assets.
62. A bank’s off-balance-sheet activities usually:
a. increase both its assets and liabilities while reducing net income.
b. increase its net income but do not change its assets or liabilities.
c. increases a bank’s liabilities but not its assets.
d. increases a bank’s assets but not its liabilities.
63. A rumor starts that says a bank has suffered significant losses and may not be able to honor
its promises to depositors. 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:
a. liquidity risk.
b. operational risk.
c. interest rate risk.
d. credit risk.