Commercial Bank Workshop

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Questions and Answers

What is the primary reason banks need to maintain high liquidity?

To reduce operational costs.

To maximize profits from loans.

To swiftly meet currency withdrawals. (correct)

To invest in long-term securities.

What could happen if a bank faces large deposit outflows and has insufficient liquidity?

The bank may struggle to meet its obligations. (correct)

The bank can use its investments to cover withdrawals.

The bank will receive higher returns on loans.

The bank can automatically access additional capital.

What does holding more excess reserves mean for a bank's return on investments?

No effect on returns from other investments.

Higher returns from increased lending.

Higher returns due to lower risk.

Lower returns due to lack of investment opportunities. (correct)

What is the liquidity-risk trade-off for banks?

Maintaining high liquidity reduces risks but leads to lower returns. Signup and view all the answers

What does a reserve requirement of 10% indicate about a bank's excess reserves?

The bank has no excess reserves. Signup and view all the answers

Which type of deposit allows the account holder to withdraw funds at any time?

Savings deposit Signup and view all the answers

What is a characteristic of non-transaction deposits?

They cannot be withdrawn or transferred using third-party instructions. Signup and view all the answers

Which statement best describes a time/term deposit?

It involves locking away funds for a specified term with guaranteed interest. Signup and view all the answers

What role does the discount window serve for commercial banks?

It facilitates short-term liquidity management through lending. Signup and view all the answers

What is the primary purpose of a discount loan?

To provide immediate cash by deducting interest and charges upfront. Signup and view all the answers

What distinguishes an overnight loan between banks?

It is used for short-duration borrowing needs between banks. Signup and view all the answers

Which term describes the interest rate used by the Federal Reserve for banks' short-term loans?

Discount rate Signup and view all the answers

What happens at the end of the term for a time deposit?

The account holder receives the principal and any accrued interest. Signup and view all the answers

What happens to the bank's required reserves if depositors withdraw $20 million from the bank with an initial balance of $400 million?

Required reserves will need to increase by $18 million. Signup and view all the answers

If a bank decides to maintain high liquidity, what is the likely outcome regarding its returns?

It will face lower risk and lower returns. Signup and view all the answers

Which of the following ratios indicates higher liquidity for a bank?

The ratio of securities to total assets. Signup and view all the answers

What is the bank's situation if it has $10 million in excess reserves and withdraws $20 million, leaving $30 million in reserves?

It will need to find additional funds due to insufficient reserves. Signup and view all the answers

Which method is NOT a way for a bank to finance profitable lending opportunities?

Offering savings accounts. Signup and view all the answers

What is a likely consequence of a higher ratio of demand deposits to total deposits for a bank?

The bank may need to maintain more liquidity. Signup and view all the answers

What would happen to a bank's liquidity if it had a higher ratio of loans to total assets?

Liquidity would decrease. Signup and view all the answers

After a $20 million withdrawal, how much does the bank need to increase its reserves if its remaining reserves are $30 million?

$8 million Signup and view all the answers

What is a characteristic of Treasury bills?

They are considered low-risk, low-interest securities. Signup and view all the answers

What does a repurchase agreement (Repo) involve?

Selling securities in order to repurchase them at a higher price. Signup and view all the answers

Which risk is not typically associated with bank capital management?

Market risk Signup and view all the answers

What is a primary use of commercial paper by corporations?

To manage accounts payable and inventories. Signup and view all the answers

What financial strategy can lead to severe losses for banks if interest rates rise sharply?

Aggressive liability management. Signup and view all the answers

What happens if a bank faces a daily shortage in reserves?

It can borrow from the Fed at the discount rate or from other banks. Signup and view all the answers

What is the primary source of income for banks?

Interest earned from loans and service fees. Signup and view all the answers

Which statement about Eurodollars is correct?

They can pay higher interest rates due to less regulation. Signup and view all the answers

What is the main consequence of a bank maintaining low liquidity?

Increased risk with the potential for higher returns Signup and view all the answers

Which scenario describes a situation of bank insolvency?

The total liabilities surpass total assets Signup and view all the answers

What is the potential risk of aggressive liability management for a bank?

It may lead to severe losses if interest rates rise sharply Signup and view all the answers

How does a higher bank capital ratio impact insolvency risk?

It implies a lower risk of insolvency and potentially lower returns Signup and view all the answers

What is the interest income generated from the business loans at a rate of 7%?

$7,000,000 Signup and view all the answers

What is the operating cost that the bank must account for?

$5,000,000 Signup and view all the answers

What is the effective interest income from car loans at an interest rate of 10%?

$3,000,000 Signup and view all the answers

What is the total deposit interest the bank pays to its customers at a 2% rate?

$3,000,000 Signup and view all the answers

Study Notes