HW questions Flashcards
A bank failure is less likely to occur when
a bank has more bank capital
A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.
increases; moral hazard
Although the FDIC was created to prevent bank failures, its existence encourages banks to
take too much risk.
Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the
contagion effect.
Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for
liquidity.
When bad drivers line up to purchase collision insurance, automobile insurers are subject to the
adverse selection problem.
The leverage ratio is the ratio of a bank’s
capital divided by its total assets.
The FDIC must take steps to close down banks whose equity capital is less than ________ of assets.
2%
Conditions that likely contributed to a credit crunch during the global financial crisis include
capital shortfalls caused in part by falling real estate prices.
A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and the bank’s ________ by $100.
reserves
A bank is insolvent when
its liabilities exceed its assets.
Asset transformation can be described as
borrowing short and lending long.
Bank’s make their profits primarily by issuing
loans.
Banks hold excess and secondary reserves to
provide for unexpected deposit outflows.
What is the primary concerns of the bank manager?
maintaining sufficient reserves to minimize the cost to the bank of deposit outflows
Which of the following statements is FALSE?
A bank’s assets are its uses of funds.
A bank issues liabilities to acquire funds.
The bank’s assets provide the bank with income.
Correct:
Bank capital is recorded as an asset on the bank balance sheet.
A ________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there are losses on the underlying assets.
CDO
