24 Questions
What do banks primarily invest in to create value for their capital providers?
Assets
What is the primary source of bank liabilities?
Non-transaction deposits
What type of account allows the owner to write checks to third parties?
Checkable deposit
What is the main characteristic of money market deposit accounts?
Low cost, safe, and liquid
What percentage of bank liabilities are made up of checkable deposits?
10%
What is the approximate percentage of bank assets supplied by the bank owner?
11%
What are the funds held in an account with the Federal Reserve, including vault cash, referred to as?
Reserves
What type of risk is associated with the possibility of borrowers defaulting on their loans?
Credit risk
What is the term for the process of a bank taking in short-term deposits and using the funds to make long-term mortgage loans?
Asset transformation
What is the primary goal of asset management in a bank?
To manage both risk and return on assets
What is the term for the management of a bank's sources of funds, including deposits and borrowed funds?
Liability management
What is the primary function of an Asset-Liability Management (ALM) committee in a bank?
To manage both sides of the balance sheet together
What was the response to changes in demand conditions in the 1960s, leading to a huge increase in interest risk?
Introduction of adjustable rate mortgages
What was the primary benefit of sweep accounts to investors?
Avoidance of reserve requirement taxes
What is the primary function of shadow banking systems?
Asset transformation through securitization
What innovation was introduced in the early 1980s to avoid reinvestment risk associated with coupon bonds?
STRIPS
What was the primary driver of the growth of shadow banking systems?
All of the above
What was the primary benefit of improvement in technology to the financial industry?
Lower cost of processing financial transactions
What is the formula for Return on Equity (ROE)?
Net profit / equity capital
Why do banks hold capital?
To meet capital requirements and for safety
What is the Net Interest Margin (NIM) formula?
(Interest income - interest expense) / assets
What is secutization?
The process of converting liquid assets into marketable capital market instruments
What is the purpose of off-balance-sheet activities in banking?
To generate fee income and manage risk
What drives financial innovation in the banking industry?
The search for profit and new products and ideas
Understand the components of a bank's balance sheet, including liabilities and assets. Learn about checkable deposits, NOW accounts, and money market deposit accounts. Test your knowledge of banking and finance!
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