Quiz 1

Question 1

A situation in which a bank cannot satisfy its obligation to pay its depositors and other creditors and so goes out of business.

Answer 1

bank failure

Question 2

The simultaneous failure of many banks, as during a financial crisis.

Answer 2

bank panic

Question 3

An agreement that requires that banks hold as capital at least 8% of their risk-weighted assets.

Answer 3

Basel Accord

Question 4

A committee that meets under the auspices of the Bank for International Settlements in Basel, Switzerland, and that sets bank regulatory standards.

Answer 4

Basel Committee on Banking

Supervision

Question 5

An accounting principle in which assets are valued in the balance sheet at what they would sell for in the market.

Answer 5

fair-value accounting

Question 6

Instruments that have payoffs that are linked to previously issued securities and are extremely useful risk-reduction tools.

Answer 6

financial derivatives

Question 7

Oversight of who operates financial institutions and how they are operated.

Answer 7

financial supervision (prudential
supervision)

Question 8

A lending boom and then a lending crash.

Answer 8

leverage cycle

Question 9

A bank’s capital divided by its assets.

Answer 9

leverage ratio

Question 10

Supervision that focuses on the safety and soundness of the financial system in the aggregate.

Answer 10

macroprudential supervision

Question 11

An accounting method in which assets are valued in the balance sheets at what they would sell for in the market.

Answer 11

mark-to-market accounting

Question 12

Supervision that focuses on the safety and soundness of individual financial institutions.

Answer 12

microprudential supervision

Question 13

Bank activities that involve trading financial instruments and the generation of income from fees and loan sales, all of which affect bank profits but are not visible on bank balance sheets.

Answer 13

off-balance-sheet activities

Question 14

Financial institutions that trade with their own money.

Answer 14

proprietary trading

Question 15

An attempt to avoid regulatory capital requirements by keeping assets on banks’ books that have the same risk-based capital requirement but are relatively risky, while taking off their books low-risk assets.

Answer 15

regulatory arbitrage

Question 16

Calculating losses under dire scenarios.

Answer 16

stress testing

Question 17

Financial firms who pose a risk to the over-all financial system because their failure would cause widespread damage.

Answer 17

systemic

Question 18

Firms designated by the Financial Stability Over-sight Council as systematically important that are subject to additional regulation by the Federal Reserve.

Answer 18

systemically important financial

institutions (SIFIs)

Question 19

Quandary in which regulators are reluctant to close down large financial institutions and impose losses on their depositors and creditors because doing so might precipitate a financial crisis.

Answer 19

too-big-to-fail problem

Question 20

Measurements of the size of the loss on a trading portfolio that might happen, say, 1% of the time, over a particular period such as two weeks.

Answer 20

value-at-risk (VaR) calculations

Question 21

The acquisition of assets that have a low rate of default and diversification of asset holdings to increase profits.

Answer 21

asset management

Question 22

A list of the assets and liabilities of a bank (or firm) that balances: Total assets equal total liabilities plus capital.

Answer 22

balance sheet

Question 23

Managing the amount of capital the bank should maintain and then acquiring the needed capital.

Answer 23

capital adequacy management

Question 24

The risk arising from the possibility that the borrower will default.

Answer 24

credit risk

Question 25

Losses of deposits when depositors make withdrawals or demand payment.

Answer 25

deposit outflows

Question 26

A bank’s borrowings from the Federal Reserve System. (Also known as advances.)

Answer 26

discount loans

Question 27

The interest rate that the Federal Reserve charges banks on discount loans.

Answer 27

discount rate

Question 28

The amount of assets per dollar of equity capital.

Answer 28

equity multiplier (EM)

Question 29

Reserves in excess of required reserves.

Answer 29

excess reserves

Question 30

The possible reduction in returns that is associated with changes in interest rates.

Answer 30

interest-rate risk

Question 31

The acquisition of funds at low cost to increase profits.

Answer 31

liability management

Question 32

The decision made by a bank to maintain sufficient liquid assets to meet the bank’s obligations to depositors.

Answer 32

liquidity management

Question 33

A bank’s commitment (for a specified future period of time) to provide a firm with loans up to a given amount at an interest rate that is tied to some market interest rate.

Answer 33

loan commitment

Question 34

The sale under a contract (also called a secondary loan participation) of all or part of the cash stream from a specific loan, thereby removing the loan from the bank’s balance sheet.

Answer 34

loan sale

Question 35

Large banks in key financial centers.

Answer 35

money center banks

Question 36

The difference between interest income and interest expense as a percentage of assets.

Answer 36

net interest margin (NIM)

Question 37

Bank activities that involve trading financial instruments and the generation of income from fees and loan sales, all of which affect bank profits but are not visible on bank balance sheets.

Answer 37

off-balance-sheet activities

Question 38

The expenses incurred from a bank’s ongoing operations.

Answer 38

operating expenses

Question 39

The income earned on a bank’s ongoing operations.

Answer 39

operating income

Question 40

The fraction of deposits that the Fed requires to be kept as reserves.

Answer 40

required reserve ratio

Question 41

Reserves that are held to meet Fed requirements that a certain fraction of bank deposits be kept as reserves.

Answer 41

required reserves

Question 42

Regulations making it obligatory for depository institutions to keep a certain fraction of their deposits in accounts with the Fed.

Answer 42

reserve requirements

Question 43

Banks’ holding of deposits in accounts with the Fed, plus currency that is physically held by banks (vault cash).

Answer 43

reserves

Question 44

Net profit after taxes per dollar of assets.

Answer 44

return on assets (ROA)

Question 45

Net profit after taxes per dollar of equity capital.

Answer 45

return on equity (ROE)

Question 46

U.S. government and agency securities held by banks.

Answer 46

secondary reserves

Question 47

Currency that is physically held by banks and stored in vaults overnight.

Answer 47

vault cash