1. What is the primary role of depository institutions in the financial system?
A. Issuing government bonds
B. Accepting deposits and making loans
C. Speculating in financial derivatives
D. Managing fiscal policies
2. Which of the following is NOT a depository institution?
A. Commercial bank
B. Credit union
C. Investment bank
D. Savings bank
3. What is the primary source of income for depository institutions?
A. Service fees and interest from loans
B. Tax revenue from governments
C. Investments in foreign currencies
D. Stock market gains
4. What does a bank's balance sheet primarily list?
A. Assets and liabilities
B. Revenue and expenses
C. Equity and dividends
D. Loan interest rates
5. What does the principle of liquidity management focus on?
A. Maximizing long-term returns on assets
B. Meeting deposit outflows efficiently
C. Increasing return on equity
D. Reducing interest rate risks
6. How can a bank handle a reserve shortfall due to deposit outflows?
A. Issue equity shares
B. Borrow in the federal funds market
C. Increase the required reserve ratio
D. Raise the interest rate on deposits
7. Why do banks maintain reserves?
A. To comply with Basel capital requirements
B. To ensure they can meet withdrawal demands
C. To invest in high-risk securities
D. To improve their return on equity
8. What is the trade-off in capital adequacy management?
A. Between loan interest rates and deposit interest rates
B. Between safety and return on equity
C. Between liquidity and profitability
D. Between short-term and long-term lending
9. Which strategy increases a bank's capital?
A. Paying higher dividends
B. Retiring stock
C. Issuing equity
D. Making more loans
10. What happens when a bank becomes insolvent?
A. It raises more capital through equity issuance
B. Government regulators close the bank
C. The Federal Reserve assumes its liabilities
D. It is allowed to operate under close supervision
11. What is the primary goal of asset management in banks?
A. Maximizing the size of deposits
B. Earning the highest return while minimizing risk
C. Reducing reserve requirements
D. Eliminating capital adequacy concerns
12. What is a key method banks use in liability management?
A. Selling securities in open markets
B. Managing reserve ratios actively
C. Borrowing or issuing certificates of deposit (CDs)
D. Diversifying their loan portfolio
13. Why might a bank reduce its assets in response to a capital shortfall?
A. To increase its liquidity
B. To comply with Basel capital requirements
C. To contract lending and reduce risk-weighted assets
D. To improve its profitability
14. Which of the following is a cost of holding excessive capital for banks?
A. Higher return on equity
B. Lower return on equity
C. Increased insolvency risk
D. Higher borrowing costs
15. How do Basel capital requirements affect banks?
A. They mandate equal reserves for all banks
B. They set minimum ratios of capital to risk-weighted assets
C. They encourage banks to maximize loan issuance
D. They eliminate the need for reserve requirements
16. Which of the following options is LEAST likely during liquidity management?
A. Selling securities to cover reserve shortfalls
B. Reducing loans to increase reserves
C. Increasing dividends to shareholders
D. Borrowing from the Federal Reserve
17. Which of the following is NOT an objective of asset management?
A. Diversifying investments
B. Minimizing risk
C. Maximizing liquidity reserves
D. Achieving high returns on loans and securities
18. Why might a bank prefer not to hold excessive reserves?
A. It increases credit risk
B. It reduces the bank’s profitability
C. It violates Basel requirements
D. It increases the risk of insolvency
19. What is the relationship between bank capital and return on equity?
A. Higher capital increases return on equity
B. Higher capital reduces return on equity
C. Bank capital has no impact on return on equity
D. Bank capital and return on equity are directly proportional
20. Why might a bank prefer borrowing in the federal funds market over reducing loans during liquidity
management?
A. Borrowing has no associated costs
B. Borrowing avoids disrupting customer relationships
C. Reducing loans improves profitability
D. Reducing loans is a regulatory requirement
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Answers and Explanations:
1. B - Depository institutions accept deposits and provide loans, a core function of their intermediation
role.
2. C - Investment banks are not depository institutions.
3. A - Depository institutions derive income mainly from interest and fees.
4. A - A bank’s balance sheet lists its assets, liabilities, and capital.
5. B - Liquidity management ensures banks meet withdrawal demands efficiently.
6. B - Borrowing in the federal funds market is a common method to address reserve shortfalls.
7. B - Reserves allow banks to meet deposit withdrawals and regulatory requirements.
8. B - Capital adequacy balances safety and equity holder returns.
9. C - Issuing equity raises a bank’s capital.
10. B - Insolvent banks are closed by regulators.
11. B - Asset management aims to maximize returns while managing risk.
12. C - Liability management often involves issuing CDs or borrowing.
13. C - Reducing assets lowers risk-weighted asset requirements.
14. B - Excess capital results in lower returns on equity for shareholders.
15. B - Basel requirements enforce minimum capital-to-risk-weighted-asset ratios.
16. C - Increasing dividends reduces capital and does not help in liquidity management.
17. C - Asset management balances liquidity, but maximizing reserves is not its goal.
18. B - Excessive reserves earn little or no interest, reducing profitability.
19. B - Higher capital lowers return on equity because it spreads profits over a larger base.
20. B - Borrowing avoids disrupting relationships with customers by maintaining loans.
