The Economics of Money, Banking, and Financial Markets

Frederic S. Mishkin

Chapter 9

Banking and the Management of Financial Institutions - all with Video Answers

Educators

Chapter Questions

Problem 1

Why might a bank be willing to borrow funds from other banks at a higher rate than the rate at which it can borrow from the Fed?

Pragya Ahuja

Pragya Ahuja

Numerade Educator

Problem 2

Rank the following bank assets from most to least liquid:
a. Commercial loans
b. Securities
c. Reserves
d. Physical capital

Pragya Ahuja

Numerade Educator

Problem 3

The bank you own has the following balance sheet: If the bank suffers a deposit outflow of $\$ 50$ million with a required reserve ratio on deposits of $10 \%$, what actions should you take?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 4

If a deposit outflow of $\$ 50$ million occurs, which balance sheet would a bank rather have initially, the balance sheet in Question 3 or the following balance sheet? Why?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 5

Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?

Pragya Ahuja

Numerade Educator

Problem 6

If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to lend out? Why or why not? What options are available that will enable you to provide the funds your customer needs?

Pragya Ahuja

Numerade Educator

Problem 7

If a bank finds that its $\mathrm{ROE}$ is too low because it has
too much bank capital, what can it do to raise its ROE?

Pragya Ahuja

Numerade Educator

Problem 8

If a bank is falling short of meeting its capital requirements by $\$ 1$ million, what three things can it do to rectify the situation?

Pragya Ahuja

Numerade Educator

Problem 9

Why do equity holders care more about ROE than about ROA?

Pragya Ahuja

Numerade Educator

Problem 10

If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?

Pragya Ahuja

Numerade Educator

Problem 11

What are the benefits and costs for a bank when it
decides to increase the amount of its bank capital?

Pragya Ahuja

Numerade Educator

Problem 12

Why is being nosy a desirable trait for a banker?

Pragya Ahuja

Numerade Educator

Problem 13

A bank almost always insists that the firms it lends to keep compensating balances at the bank. Why?

Pragya Ahuja

Numerade Educator

Problem 14

If the president of a bank told you that the bank was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy stock in that bank? Why or why not?

Pragya Ahuja

Numerade Educator

Problem 15

"Because diversification is a desirable strategy for avoiding risk, it never makes sense for a bank to specialize in making specific types of loans." Is this statement true, false, or uncertain? Explain your answer.

Pragya Ahuja

Numerade Educator

Problem 16

If you are a banker and expect interest rates to rise in the future, would you prefer to make short-term loans or long-term loans?

Shazia Naz

Numerade Educator

Problem 17

"Bank managers should always seek the highest return possible on their assets." Is this statement true, false, or uncertain? Explain your answer.

Pragya Ahuja

Numerade Educator

Problem 18

Why has noninterest income been growing as a source of bank operating income?

Pragya Ahuja

Numerade Educator

Problem 19

Using the T-accounts of the First National Bank and the Second National Bank given in this chapter, describe what happens when Jane Brown writes a check for $\$ 90$ on her account at the First National Bank to pay her friend Joe Green, who in turn deposits the check in his account at the Second National Bank.

Pragya Ahuja

Numerade Educator

Problem 20

What happens to reserves at the First National Bank if one person withdraws $\$ 1,100$ of cash and another person deposits $\$ 200$ of cash? Use T-accounts to explain
your answer.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 21

NewBank started its first day of operations with $\$ 155$ million in capital. A total of $\$ 92$ million in checkable deposits is received. The bank makes a $\$ 28$ million commercial loan and lends another $\$ 23$ million in mortgage loans. If required reserves are $5.4 \%,$ what does the bank balance sheet look like?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 22

NewBank decides to invest $\$ 273$ million in 30 -day T-bills. The T-bills are currently trading at $\$ 4,981$ (including commissions) for a $\$ 4,940$ face value instrument. How many T-bills do they purchase? What does the balance sheet look like?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 23

X-Bank reported an ROE of $16 \%$ and an ROA of $1.32 \%$ What is the equity multiplier? How well capitalized is this bank?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 24

Suppose you are the manager of a bank whose $\$ 100$ billion of assets have an average duration of four years and whose $\$ 90$ billion of liabilities have an average duration of six years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest rates rise by 2 percentage points. What actions could you take to reduce the bank's interest-rate risk?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 25

Suppose you are the manager of a bank that has $\$ 15$ million of fixed-rate assets, $\$ 30$ million of rate-sensitive assets, $\$ 25$ million of fixed-rate liabilities, and $\$ 20$ million
of rate-sensitive liabilities. Conduct a gap analysis for the bank, and show what will happen to bank profits if interest rates rise by 5 percentage points. What actions could you take to reduce the bank's interest-rate risk?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator