Idea Transcript
ECON 3303 Money and Banking
Exam 4
Summer 2015
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Critics of nationwide banking fear A) an elimination of community banks. C) banks with economies of scale problems.
1) B) cutthroat competition. D) increased lending to small businesses.
2) The global financial crisis showed the need for increased financial regulation, however, too much or poorly designed regulation could A) increase economic growth. B) increase international financial integration. C) increase the efficiency of the financial system. D) choke off financial innovation.
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3) In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk. A) specialization in lending; rationing B) screening; rationing C) credit rationing; diversifying D) specialization in lending; diversifying
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4) Asset transformation can be described as A) borrowing long and lending short. B) borrowing short and lending long. C) borrowing and lending for the long term. D) borrowing and lending only for the short term.
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5) When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of A) pre-contractual opportunism. B) moral hazard. C) ex ante shirking. D) split incentives.
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6) A bank failure is less likely to occur when A) a bank has more bank capital. B) a bank holds fewer excess reserves. C) a bank suffers large deposit outflows. D) a bank holds less U.S. government securities.
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7) When banks involved in trading activities attempt to outguess markets, they are A) forecasting. B) engaging in riskless arbitrage. C) diversifying. D) speculating.
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8) Sweep accounts A) sweep funds out of deposit accounts into long-term securities. B) enable banks to avoid paying interest to corporate customers. C) reduce banksʹ assets. D) have made reserve requirements nonbinding for many banks.
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9) The goals of bank asset management include A) maximizing risk. B) lending at high interest rates regardless of risk. C) purchasing securities with high returns and low risk. D) minimizing liquidity.
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10) The practice of keeping high-risk assets on a bankʹs books while removing low-risk assets with the same capital requirement is known as A) competition in laxity. B) depositor supervision. C) a dual banking system. D) regulatory arbitrage.
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11) When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the assets of Citibank fall by $10. B) the liabilities of the First National Bank increase by $10. C) the liabilities of Citibank increase by $10. D) the reserves of the First National Bank increase by $ 10.
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12) Because of an expected rise in interest rates in the future, a banker will likely A) buy long-term rather than short-term bonds. B) make either short or long-term loans; expectations of future interest rates are irrelevant. C) buy short-term rather than long-term bonds. D) make long-term rather than short-term loans.
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13) All else the same, if a bankʹs liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. A) a decline; reduce B) an increase; reduce C) a decline; not affect D) an increase; increase
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14) The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from A) purchasing any debt securities. B) issuing equity to finance bank expansion. C) engaging in underwriting and dealing of corporate securities. D) selling new issues of government securities.
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15) Moral hazard problems increased in prominence in the 1980s A) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. B) following a decrease in federal deposit insurance from $100,000 to $40,000. C) as interest rates were sharply decreased to bring down inflation. D) as deregulation required savings and loans and mutual savings banks to be more cautious.
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16) Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets. A) reduces; reduces B) reduces; increases C) increases; increases D) increases; reduces
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17) Which of the following would not be a way to increase the return on equity? A) Buy back bank stock B) Acquire new funds by selling negotiable CDs and increase assets with them C) Sell more bank stock D) Pay higher dividends
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18) Depositors lack of information about the quality of bank assets can lead to A) bank panics. B) asset transformation. D) sequencing. C) bank booms.
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19) Which of the following are transaction deposits? A) Small-denomination time deposits C) Certificates of deposit
19) B) Negotiable order of withdraw accounts D) Savings accounts
20) Loophole mining refers to financial innovation designed to A) hide transactions from the IRS. B) get around regulations. C) conceal transactions from the Treasury Department. D) conceal transactions from the SEC.
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21) Bank reserves include A) vault cash and deposits at the Fed. B) deposits at the Fed and short-term treasury securities. C) vault cash and short-term Treasury securities. D) deposits at other banks and deposits at the Fed.
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22) Which of the following are reported as liabilities on a bankʹs balance sheet? A) U.S. Treasury securities B) Reserves C) Loans D) Discount loans
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23) Property promised to the lender as compensation if the borrower defaults is called A) restrictive covenants. B) deductibles. C) collateral. D) contingencies.
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24) A reason why rogue traders have bankrupt their banks is due to A) the separation of trading activities from the bookkeepers. B) stringent supervision of trading activities by bank management. C) a failure to maintain proper internal controls. D) accounting errors.
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25) Financial innovations occur because of financial institutions search for A) stability. B) fame. C) profits.
25) D) recognition.
26) The principal-agent problem that exists for bank trading activities can be reduced through A) elimination of internal controls. B) creation of internal controls that separate trading activities from bookkeeping. C) creation of internal controls that combine trading activities with bookkeeping. D) elimination of regulation of banking.
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27) The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to A) $200,000. B) $100,000. C) $250,000. D) $40,000.
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28) If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to A) increase by $1.5 million. B) decline by $15 million. C) increase by $15 million. D) decline by $1.5 million.
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29) If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse credit risk. B) adverse selection. C) lemon lenders. D) moral hazard.
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30) Prior to 1863, all commercial banks in the United States A) were regulated by the central bank. B) were regulated by the Federal Reserve. C) were chartered by the U.S. Treasury Department. D) were chartered by the banking commission of the state in which they operated.
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31) Although the FDIC was created to prevent bank failures, its existence encourages banks to A) open too many branches. B) hold too much capital. C) take too much risk. D) buy too much stock.
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32) An instrument developed to help investors and institutions hedge risk is A) a financial derivative. B) a mortgage-backed security. C) a call option. D) a put option.
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33) When banks offer borrowers smaller loans than they have requested, banks are said to A) shave credit. B) ration credit. C) rediscount the loan. D) raze credit.
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34) Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as A) Yankee bonds. B) municipal bonds. D) ʺfallen angels.ʺ C) junk bonds.
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35) If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $25,000. B) $20,000. C) $30,000. D) $10,000.
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36) The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance A) are placed at a competitive disadvantage in acquiring funds. B) are likely to regard deposits as an unattractive source of funds due to depositorsʹ demands for safety. C) are likely to take on greater risks than they otherwise would. D) are likely to be too conservative, reducing the probability of turning a profit.
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37) The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known as A) program trading. B) securitization. C) internationalization. D) arbitrage.
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38) Currency circulated by banks that could be redeemed for gold was called B) junk bonds. C) gold bills. A) banknotes.
38) D) state money.
39) Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a A) last-in, first-out constraint. B) everyone-shares-equally constraint. C) sequential service constraint. D) double-coincidence of wants constraint.
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40) Adjustable rate mortgages A) allow borrowers to avoid paying interest on portions of their mortgage loans. B) benefit homeowners when interest rates rise. C) reduce the interest-rate risk for financial institutions. D) generally have higher initial interest rates than conventional fixed-rate mortgages.
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41) Which of the following statements are true? A) A bankʹs liabilities are its uses of funds. B) A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital. C) A bankʹs balance sheet indicates whether or not the bank is profitable. D) A bankʹs assets are its sources of funds.
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First National Bank Assets Rate-sensitive $40 million $60 million Fixed-rate
Liabilities $50 million $50 million
42) If interest rates rise by 5 percentage points, say from 10 to 15%, bank profits (measured using gap analysis) will A) decline by $0.5 million. B) decline by $2.5 million. C) decline by $1.5 million. D) increase by $2.0 million.
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43) Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) fed funds; source B) discount loans; use C) fed funds; use D) discount loans; source
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44) The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as a B) two-tiered regulatory system. A) bilateral regulatory system. C) tiered regulatory system. D) dual banking system.
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45) The government safety net creates ________ problem because risk -loving entrepreneurs might find banking an attractive industry. A) an adverse selection B) a lemons C) a moral hazard D) a revenue
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46) The process in which people take their funds out of the banking system seeking higher-yielding securities is called A) deposit jumping. B) loophole mining. C) capital mobility. D) disintermediation.
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47) Banks that actively manage liabilities will most likely meet a reserve shortfall by B) seeking new deposits. A) borrowing federal funds. C) calling in loans. D) selling municipal bonds.
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48) In general, banks would prefer to acquire funds quickly by ________ rather than ________. A) reducing loans; selling securities B) reducing loans; borrowing from the Fed C) ʺcalling inʺ loans; selling securities D) borrowing from the Fed; reducing loans
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49) Regulations that reduced competition between banks included A) interest-rate ceilings. B) bank reserve requirements. C) the dual system of granting bank charters. D) branching restrictions.
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50) To be considered well capitalized, a bankʹs leverage ratio must exceed A) 10%. B) 8%. C) 5%.
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50) D) 3%.
Answer Key Testname: ECON3303_EXAM4_SUMMER2015
1) A 2) D 3) D 4) B 5) B 6) A 7) D 8) D 9) C 10) D 11) C 12) C 13) B 14) C 15) A 16) A 17) C 18) A 19) B 20) B 21) A 22) D 23) C 24) C 25) C 26) B 27) C 28) D 29) B 30) D 31) C 32) A 33) B 34) C 35) A 36) C 37) B 38) A 39) C 40) C 41) B 42) A 43) D 44) D 45) A 46) D 47) A 48) D 49) D 50) C 7