01:220:301 Lecture 10: Chapter10 Banking and the Management of Financial Institutions

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7 Apr 2016

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Chapter10 banking and the management of financial institutions. Reserves: reserves are these deposits plus currency that is physically held by banks (called vault cash because it is stored in bank vaults overnight). Securities: the u. s. government and agency securities are the most liquid because they can be easily traded and converted into cash with low transaction costs. Because of their high liquidity, short-term u. s. government securities are called secondary reserves. Other assets: the physical capital (bank buildings, computers, and other equip- ment) owned by banks is included in this category. Balance sheet of all commercial banks (items as a percentage of the total, june (cid:1) (cid:1) To make our analysis of the operation of a bank more concrete, we use a tool called a. A t-account is a simplified balance sheet, with lines in the form of a t, that lists only the changes that occur in balance sheet items starting from some initial balance sheet position. (cid:1) (cid:1)

Related Questions

6. we noted that in ancient times money was normally created by government. However, under the modern banking system in the U.S. and other developed countries, money is normally created by Banks. The process begins when a depositor brings, letâs say, $100 in M1 into the bank for deposit. The bank accepts the deposit and creates a Demand Deposit (DD) for the customer in the amount of $100. The bank now has $100 in liquid funds it did not have before. As discussed in class, there are three things the bank can do with this new money: 1) It can keep the money as Vault Cash (a lot of it inside of ATM machines), 2) It can place the money on deposit at the Federal Reserve Bank (Fed) to be held as Reserves, 3) It can purchase securities for the bankâs securities portfolio. The contents of the bankâs security portfolio will not be included in M1. What is it about the definition of M1 that precludes the inclusion of the bankâs securities portfolio?

7. As discussed in class, all bank deposits at the Federal Reserve Bank (Fed) qualify as Reserves. However, not all Reserves are the same. The Fed makes a distinction between Required Reserves, and Excess Reserves. What is the difference between Required Reserves and Excess Reserves?

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QUESTION 31

The Board of Governors of the Federal Reserve System is

		composed of seven members who are appointed by the President and approved by the Senate.
		composed of 12 members of the Senate and the U.S. House of Representatives.
		elected by the general public.
		composed of representatives from the country's 12 largest commercial banks.

1.11 points

QUESTION 32

The Fed is said to be the "lender of last resort" in that

		it charges a higher interest rate to borrowers than does any other bank.
		it functions as the government's bank only when commercial banks fail to do so.
		it makes loans to individuals whom commercial banks do not believe are credit-worthy.
		it stands ready to lend to any depository institution that it has decided should not fail.

1.11 points

QUESTION 33

The Federal Reserve System acts as the government's fiscal agent by

		providing checking account services for the government.
		preparing the budget the President presents to Congress every year.
		determining how to finance a deficit.
		auditing taxpayers.

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QUESTION 34

The Federal Reserve System was established in which year?

		1913.
		1929.
		1865.
		1941.

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QUESTION 35

By serving as the lender of last resort,

		the Fed provides check clearing services.
		the Fed aids in the sale of government securities.
		the Fed supervises depository institutions.
		the Fed can prevent bank failures.

1.11 points

QUESTION 36

Depository institutions must

		use and pay for the services of the Federal Reserve System.
		set their interest rates according to schedules established by the Federal Reserve System.
		keep a certain percentage of their deposits as reserves.
		turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed.

1.11 points

QUESTION 37

The Federal Reserve System has

		50 district banks.
		24 district banks.
		12 district banks.
		7 district banks.

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QUESTION 38

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is

		the Board of Governors.
		the Federal Advisory Committee.
		the Federal Open Market Committee.
		the Federal Reserve district banks.

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QUESTION 39

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a

		systemic risk.
		liquidity risk.
		lending risk.
		moral hazard.

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QUESTION 40

A system in which depository institutions hold reserves that are less than the amount of total deposits is called

		fiat money banking.
		required reserve banking.
		fractional reserve banking.
		central banking system.

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QUESTION 41

Total reserves of private banks are

		all customer deposits.
		the minimum amount banks need to hold against time deposits.
		federal reserve notes.
		deposits held at the Fed and vault cash.

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QUESTION 42

A statement of assets and liabilities of any business entity is called

		a cash flow statement.
		an income statement.
		a balance sheet.
		a statement of net worth.

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QUESTION 43

Which of the following actions has no effect on the total money supply?

		The Federal Open Market Committee buys government securities.
		There is a transfer of deposits from one bank to another bank.
		There is change in the money multiplier.
		The Federal Open Market Committee sells government securities.

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QUESTION 44

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

		$80.
		$0.
		$400.
		$20.

1.11 points

QUESTION 45

The Federal Open Market Committee has responsibility for

		appointing members to the Board of Governors of the Federal Reserve system.
		issuing orders to buy or sell government securities for the Fed.
		advising the Treasury Department on monetary policy.
		printing money.

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1. The money supply will be ____ than the monetary base when reserves are ___ than

deposits.

A) smaller; less

B) smaller; greater

C) bigger; less

D) There is not enough information provided to answer the question.

2. Which of the following include liabilities of the Fed?

A) bank reserves

B) loans to commercial banks in the 10th district

C) government bonds

D) loans to commercial banks in the 8th district

3. Which of the following are assets of the Fed?

A) bank reserves

B) coins

C) government bonds

4.Without a banking system, the monetary base and money supply are equal to:

A) deposits.

B) reserves.

C) currency in circulation.

D) None of the answers are correct.

D) federal reserve notes

5.M1 is:

A) currency + traveler's checks + checking deposits

B) currency +coins

C) currency + checking deposits

D) currency

6.If a bank's assets are $200 and the value of its weighted assets is $125, which is the

more restrictive capital requirement: the U.S. minimum equity ratio or the Basel Accord

requirement?

A) They are the same.

B) The United States ratio is the most restrictive.

C) The Basel Accord is the most restrictive.

D) There is not enough information provided to answer the question.

7. Which of the following includes consequences of the purchase and assumption method

of dealing with an insolvent bank?

A) The FDIC sells most of the assets and liabilities of the insolvent bank to another

bank.

B) Depositors lose their deposits and bank branches close.

C) The FDIC sells the insolvent bank's liabilities and earns a profit.

D) The bank keeps its original name.

8. Which of the following is a consequence of the payoff method of dealing with an

insolvent bank?

A) The FDIC sells the bank's assets for as much as it can get to pay off depositors.

B) The insolvent bank remains open under a new management.

C) The FDIC fund is not affected.

D) Small depositors lose 50 percent of their deposits.

9. Deposit insurance creates a moral hazard because it:

A) eliminates depositors' incentives to monitor banks.

B) reduces the cost of a bank failure for depositors.

C) encourages depositors to leave their funds in a weak bank.

D) All of the answers are correct.

10. The Basel Accord set international standards for:

A) interest rate volatility.

B) reserve ratios.

C) bank capital requirements.

D) loan risk.

11. U.S. capital requirements mandate a ________ minimum capitalâassets ratio.

A) 0 percent

B) 10 percent

C) 5 percent

D) 50 percent

12. Which of the following securities are banks not allowed to hold?

A) high-rated corporate bonds

B) stocks

C) municipal bonds

D) Treasury bonds

13. A bank run is an extreme form of:

A) credit risk.

B) interest rate risk.

C) low bank esteem.

D) liquidity risk.

14. One explanation for a bank run is:

A) adaptive expectations.

B) self-fulfilling expectations.

C) poor bank management.

D) that rising oil prices mean depositors require more cash.

01:220:301 Lecture 10: Chapter10 Banking and the Management of Financial Institutions

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