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Money and Banking
MB- Test 2- Ch. 10
54
Business
Undergraduate 4
11/07/2010

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Cards

Term
What is the sheet this is on: Total assets = total liabilities + capital
Definition
Balance sheet
Term
This is a list of a bank's sources of funds (liabilities) and uses to which the funds are put (assets)
Definition
A bank's balance sheet
Term
Banks obtain funds by ______________ and ________________ other liabilities such as deposits
Definition
Borrowing, issuing
Term
Assets are the ______________ of funds
Definition
Uses
Term
Liabilities are the ____________ of funds
Definition
Sources
Term
T/F: MMDAs (Money Market Deposit Accounts) are not subject to reserve requirements as checkable deposits are and are not included in the M1 definition of money
Definition
True
Term
Bank accounts that allow the owner of the account to write checks to third parties
Definition
Checkable deposits
Term
The bank then uses these borrowed and issued funds (deposits) to acquire assets such as ___________ and ______________
Definition
Securities and loans
Term
How to banks make a profit?
Definition
They charge an interest rate on their loans that is higher than the expenses on their liabilities
Term
What are these examples of: non-interest-bearing checking accounts, interest bearing NOW accounts, and money market deposit accounts
Definition
Checkable deposits
Term
Checkable deposits and money market deposit accounts are payable when?
Definition
On demand
Term
A checkable deposit (because it is a part of their wealth) is an __________ for the depositor and a _______________ for the bank
Definition
Asset, liability
Term
What is the primary source of bank funds?
Definition
Non-transaction deposits
Term
What are the two types of non-transaction deposits?
Definition
Savings accounts and time deposits or CD's
Term
T/F: The interest rate is higher on non-transaction deposits than checkable deposits
Definition
True
Term
What is the term for "borrowing from the Fed" or "Advances?"
Definition
Discount loans
Term
Bank capital is raised by selling new __________ or from retained earnings
Definition
Equity- Bank capital also serves as a cushion against a drop in the value of its assets which could force the bank into insolvency
Term
Deposits and currency that is physically held by banks
Definition
Reserves
Term
Banks hold additional reserves _______ __________ because they are the MOST liquid of all bank assets and a bank can use them to meet its obligations when funds are withdrawn
Definition
Excess reserves
Term
The fraction of reserve requirements is called
Definition
Required reserve ratio
Term
Many small banks hold deposits in larger banks in exchange for a variety of services, including check collection, foreign exchange transactions, and help with securities purchases
Definition
Correspondent banking
Term
What are all of these examples of: reserves, cash items in process of collection, and deposits at other banks?
Definition
Cash items
Term
What are securities?
Definition
They are also called financial instruments but they are claims on the borrower's future income or assets
Term
Are banks allowed to hold stock?
Definition
No
Term
There are three different types of securities a bank can hold for a company:
Definition
U.S. govt securities- most liquid, state and local govt securities and other securities
Term
A loan is more/less liquid than other assets because why?
Definition
They are less liquid because they are not easily turned into cash until the loan matures
Term
Because of their high liquidity, short-term U.S. govt securities are called?
Definition
Secondary reserves
Term
A loan is a ________________ for the corporation/individual borrowing, but a(n) ______________ for the bank making the loan
Definition
Liability, asset
Term
What is a simplified balance sheet?
Definition
A T-account
Term
Banks make profits by selling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics- what is it doing with the asset?
Definition
Asset transformation
Term
The Five C's that bank loan officers use to evaluate potential borrowers:
Definition
1. Character
2. Capacity- ability to repay
3. Collateral
4. Conditions- in the local and national economies
5. Capital- net worth
Term
When deposits are lost because depositors make withdrawals and demand payment
Definition
Deposit outflows
Term
The acquisition of sufficiently liquid assets to meet banks obligations to DEPOSITORS- not the Fed
Definition
Liquidity management
Term
A bank manager must pursue an acceptably low level of risk by acquiring assets that have a low rate of default and by diversifying asset holdings
Definition
Asset management
Term
Acquire funds at a low cost
Definition
Liability management
Term
The risk arising because borrowers may default
Definition
Credit risk
Term
The riskiness of earnings and returns on bank assets that results from interest-rate charges
Definition
Interest-rate risk
Term
There are four different ways a bank can eliminate its shortfall of not having enough reserves:
Definition
1. Acquire reserves by borrowing them from other banks in the Federal funds market of by borrowing from other corporations
2. Sell securities
3. Borrow from the Fed
4. Reducing loans to meet the reserve requirements
Term
The interest rate the Fed charges
Definition
Discount rate
Term
T/F: Excess reserves are insurance against the costs associated with deposit outflows
Definition
True
Term
Asset Management- 4 ways
Definition
1. Banks find borrowers who will pay high interest rates and are unlikely to default on their loans
2. Banks try to purchase securities with high returns and low risk
3. Banks must attempt to lower risk by diversifying- spreading out their assets- not having "All their eggs in one basket"
4. Manage liquidity so it can satisfy its reserve requirements without bearing huge costs
Term
Capital Adequacy Management- 3 reasons
Definition
1. Bank capital helps prevent bank failure
2. The amount of capital affects the returns for the owners
3.A minimum amount of capital is required by the bank regulators
Term
T/F: A bank maintains bank capital to lessen the chance that it will become insolvent
Definition
True
Term
This formula provides info on how efficiently a bank is being run, b/c it indicates how much profits are being generated on average by each dollar of assets
Definition
Return on Assets = Net profits after taxes/ assets
Term
This is a better measure because it describes how much is earned on the owners' equity investment
Definition
Return on Equity
Term
Given the return on assets, the lower the bank capital, the _____________ the return for the owners of the bank.
Definition
Higher
Term
What does higher bank capital result in?
Definition
Lower profits because the money is just sitting around not making a profit
Term
Are banks required to hold bank capital?
Definition
Yes- even though it is costly, there are still required to hold a certain amount
Term
This is a bank's commitment to provide a firm with loans up to a given amount at an interest rate that is tied to some market interest rate- these are also short-term loan commitments
Definition
Loan commitment
Term
The benefit of a loan commitment is providing the bank with what?
Definition
A long term relationship with the customer
Term
A firm receiving a loan must keep a required minimum amount of funds in a checking account at the bank
Definition
Compensating balances
Term
Refusing to make loans even though borrowers are willing to pay the stated interest rate or higher
Definition
Credit rationing
Term
The sensitivity of bank profits to changes in interest rates can be measured by using: one of two things
Definition
Gap analysis or Duration analysis
Term
What is an example of an off-balance sheet activity?
Definition
A loan sale
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