In this pack of ECO 316 Week 3 Chapter 13 The Business of Banking you will find the next information:

13.1

Multiple Choice Questions

1) In what country were the ten largest banks in the world located during the 1980s and early 1990s?

2) In the mid-1990s to 2000s Japanese banks were experiencing difficulties in which areas?

3) In banking, the spread refers to the difference between the

4) What are the leading financial intermediaries in the United States and most developed countries?

5) Approximately how much in assets did U.S. banks hold in 2006?

6) About what percentage of their financial wealth do households invest in banks?

7) The payments system refers to

8) A balance sheet

9) On a bank’s balance sheet, assets are

10) On a bank’s balance sheet, liabilities are

11) For a bank, net worth is equal to

12) Which of the following things do banks do with the funds they acquire from savers?

13) Which of the following is NOT a bank liability?

14) Which of the following is a bank liability?

15) The difference between a demand deposit and a NOW account is that

16) A checkable deposit that pays no interest is known as a

17) What is a super-NOW account?

18) Which of the following is a checkable deposit?

19) Unsecured loans between banks are called

20) The interest rate on interbank loans is called the

21) Securities that banks sell and agree to repurchase are known as

22) Which of the following statements about checkable deposits is correct?

23) Which of the following represented the largest liability on the balance sheet of U.S.

commercial banks in 2006?

24) All of the following are examples of borrowings by a bank EXCEPT

25) Which of the following helps explain why depositors sometimes put their funds in demand deposits rather than NOW accounts?

26) Which of the following is NOT a nontransaction deposit?

27) The difference between a savings deposit and a time deposit is

28) A key difference between small-denomination and large-denomination time deposits is that

29) What is the current limit on balances that are covered by federal deposit insurance?

30) Which of the following would NOT be covered by federal deposit insurance?

31) On a bank’s balance sheet, “borrowings” are

32) Loans by the Federal Reserve to banks are known as

33) Federal funds are

34) The interest rate on unsecured loans between banks is called the

35) Banks use repurchase agreements to

36) Which of the following is a bank asset?

37) Which of the following is NOT considered a cash item by banks?

38) Required reserves are

39) In what sense can a reserve requirement be said to be a tax on bank intermediation?

40) A cash item in the process of collection is

41) About what percentage of bank assets is made up of cash items in 2006?

42) In which of the following assets are commercial banks in the United States NOT allowed to invest checkable deposits?

43) Which asset is sometimes referred to as a bank’s secondary reserves?

44) Why are U.S. government securities referred to as a bank’s secondary reserves?

45) What percentage of bank assets were in security holdings in 2006?

46) What is the largest category of bank assets?

47) What percentage of bank assets were in loans in 2006?

48) A bank’s equity capital is

49) A bank’s remaining value after it has met all its liabilities is known as a

50) With respect to the period of the last several decades, which of the following statements is true?

51) In 2006, net worth was about what percentage of total funds raised by banks?

52) If a bank decides that it must write off all or part of the value of a loan, what is the corresponding reduction in a liability entry that the bank makes?

53) When a bank issues a checkable deposit and loans the funds out to a business, it has transformed

54) If you have a checking account at First National Bank, the account is

55) If you deposit a $50 check in the bank, before the check has cleared the change in your bank’s balance sheet will be a

56) If you deposit $300 in your bank and the required reserve ratio is 10%, your bank will have

57) Excess reserves equal

58) The threat that savers may withdraw their deposits

59) In managing its liabilities to deal with liquidity problems, banks trade off

60) Banks make use of the federal funds market in part to

61) Credit risk is the risk that

62) Banks use “credit-risk analysis” to

63) Banks in the United States have been prohibited from investing deposits in significant equity holdings since the passage of the

64) A person takes out a car loan at a bank, but actually uses the money to play the lottery. This situation is an example of which problem banks face in lending?

65) When bank loan officers screen loan applicants to eliminate potentially bad risks, they are attempting to mitigate the problem of

66) A loan officer uses a credit scoring system to

67) Which of the following is NOT a consideration when a bank decides the appropriate interest rate to charge on a loan?

68) Why might the Community Reinvestment Act of 1977 backfire in its long-run effects on credit supply?

69) The prime interest rate is the

70) Collateral is

71) Banks use credit rationing rather than simply raising the interest rate charged borrowers with higher default risks because

72) Customers who have long-term relationships with banks

73) Some economists have argued that the competitiveness of Germany and Japan has been improved by

74) Which of the following statements is NOT true of credit cards?

75) Banks experience interest rate risk

76) A bank’s net worth will decline following an increase in interest rates if the value of its

77) The duration of a bank’s assets equals

78) A bank that expects interest rates to fall will

79) The use of floating-rate debt will not entirely eliminate a bank’s exposure to interest rate risk because

80) LIBOR measures

81) Swaps are

82) Which of the following is NOT an example of off-balance-sheet lending?

83) Standby letters of credit

84)

Securitization refers to

13.2 Essay Questions

1) How do banks generate fee income in off-balance-sheet activities?

2) Suppose First National Bank has $200 million of assets and $20 million of equity capital. If First National has a 2% return on assets (ROA), what is its return on equity (ROE)? Suppose First National’s equity capital declines to $10 million, while its assets and ROA are unchanged. What is First National’s ROE now?

3) If the Federal Reserve did not require them to do so, would banks still hold reserves?

4) What steps can a bank take to deal with a significant outflow of deposits?