Question 1

Why is the ROA for commercial banks typically quite low as compared to non-financial firms? Given such a low ROA, how can commercial banks attract stockholders?

Accepted Answer

Unlike non-financial companies, the major assets of a bank are financial securities (loans and securities), which are basically financial commodities. Thus, it is difficult for a bank to generate substantially positive NPVs and earn a large ROA. In practice, an ROA of 1% to 2% for a bank is typical. However, it is not easy to convince investors that a 1% return on their risky investment is acceptable. To get an acceptable ROE, banks must resort to using very high financial leverage. They have also attempted to diversify and offer additional services that have higher profit margins to become more cost effective via technology.

Question 2

Banks usually pay low explicit interest rates on demand deposit accounts.

Accepted Answer

A) True 
 B)False  False

Question 3

Fed Funds sold represent an important source of borrowed funds for commercial banks.

Accepted Answer

A) True 
 B)False  False

Question 4

Deposits are a larger percent of funding for small banks, compared to large banks.

Accepted Answer

A) True 
 B)False

Question 5

Recently, small banks have held a higher percentage of assets in real estate lending than large banks.

Accepted Answer

A) True 
 B)False

Question 6

Why can banks operate with so much more leverage (so much less equity capital) than ordinary businesses?

Accepted Answer

The main operating liabilities of banks-

Question 7

Matched-funding loan pricing is a means to limit interest rate risk.

Accepted Answer

A) True 
 B)False

Question 8

If interest rates are expected to decrease in the future, banks would prefer to make floating-rate loans rather than fixed rate loans.

Accepted Answer

A) True 
 B)False

Question 9

A sale of Fed Funds by a bank most likely represents a decrease in its excess reserves.

Accepted Answer

A) True 
 B)False

Question 10

Why has the bank holding company form of organization been so popular?

Accepted Answer

For many years the holding company form

Question 11

What are the major economic differences between deposits and borrowed funds? Aren't both intended to finance loans and investments cost-effectively?

Accepted Answer

Deposits are insured up to certain limit

Question 12

"Off-balance-sheet" activities do not count toward bank capital requirements.

Accepted Answer

A) True 
 B)False

Question 13

Credit scoring was outlawed as discriminatory by the Dodd Frank Act.

Accepted Answer

A) True 
 B)False

Question 14

Demand deposits represent the largest deposit source of funds for commercial banks.

Accepted Answer

A) True 
 B)False

Question 15

Loan pricing is designed to provide a competitive rate of return on bank shareholder's equity after accounting for loan rules and risk.

Accepted Answer

A) True 
 B)False

Question 16

Most banks issue negotiable certificates of deposits.

Accepted Answer

A) True 
 B)False

Question 17

Eurodollars are dollar denominated deposits owned by foreigners.

Accepted Answer

A) True 
 B)False

Question 18

What are the major economic differences between bank loans and investments? Aren't both intended to generate profits?

Accepted Answer

Investment securities provide some incom

Question 19

The prime rate is the lowest loan rate offered by banks.

Accepted Answer

A) True 
 B)False

Question 20

Since the 1990's both the number and size of commercial banks in the U.S. has been increasing dramatically.

Accepted Answer

A) True 
 B)False

Why is the ROA for commercial banks typically quite low as compared to non-financial firms? Given such a low ROA, how can commercial banks attract stockholders?

Banks usually pay low explicit interest rates on demand deposit accounts.

Fed Funds sold represent an important source of borrowed funds for commercial banks.

Deposits are a larger percent of funding for small banks, compared to large banks.

Recently, small banks have held a higher percentage of assets in real estate lending than large banks.

Why can banks operate with so much more leverage (so much less equity capital) than ordinary businesses?

Matched-funding loan pricing is a means to limit interest rate risk.

If interest rates are expected to decrease in the future, banks would prefer to make floating-rate loans rather than fixed rate loans.

A sale of Fed Funds by a bank most likely represents a decrease in its excess reserves.

Why has the bank holding company form of organization been so popular?

What are the major economic differences between deposits and borrowed funds? Aren't both intended to finance loans and investments cost-effectively?

"Off-balance-sheet" activities do not count toward bank capital requirements.

Credit scoring was outlawed as discriminatory by the Dodd Frank Act.

Demand deposits represent the largest deposit source of funds for commercial banks.

Loan pricing is designed to provide a competitive rate of return on bank shareholder's equity after accounting for loan rules and risk.

Most banks issue negotiable certificates of deposits.

Eurodollars are dollar denominated deposits owned by foreigners.

What are the major economic differences between bank loans and investments? Aren't both intended to generate profits?

The prime rate is the lowest loan rate offered by banks.

Since the 1990's both the number and size of commercial banks in the U.S. has been increasing dramatically.

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

The Structure of Interest Rates

Money Markets 1

Bond Markets

Mortgage Markets and Mortgagebacked Securities

Equity Markets

Derivatives Markets

International Markets

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Risk Management in Financial Institutions

Filters

Exam 13: Commercial Bank Operations

Why is the ROA for commercial banks typically quite low as compared to non-financial firms? Given such a low ROA, how can commercial banks attract stockholders?

Banks usually pay low explicit interest rates on demand deposit accounts.

Fed Funds sold represent an important source of borrowed funds for commercial banks.

Deposits are a larger percent of funding for small banks, compared to large banks.

Recently, small banks have held a higher percentage of assets in real estate lending than large banks.

Why can banks operate with so much more leverage (so much less equity capital) than ordinary businesses?

Matched-funding loan pricing is a means to limit interest rate risk.

If interest rates are expected to decrease in the future, banks would prefer to make floating-rate loans rather than fixed rate loans.

A sale of Fed Funds by a bank most likely represents a decrease in its excess reserves.

Why has the bank holding company form of organization been so popular?

What are the major economic differences between deposits and borrowed funds? Aren't both intended to finance loans and investments cost-effectively?

"Off-balance-sheet" activities do not count toward bank capital requirements.

Credit scoring was outlawed as discriminatory by the Dodd Frank Act.

Demand deposits represent the largest deposit source of funds for commercial banks.

Loan pricing is designed to provide a competitive rate of return on bank shareholder's equity after accounting for loan rules and risk.

Most banks issue negotiable certificates of deposits.

Eurodollars are dollar denominated deposits owned by foreigners.

What are the major economic differences between bank loans and investments? Aren't both intended to generate profits?

The prime rate is the lowest loan rate offered by banks.

Since the 1990's both the number and size of commercial banks in the U.S. has been increasing dramatically.

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

The Structure of Interest Rates

Money Markets 1

Bond Markets

Mortgage Markets and Mortgagebacked Securities

Equity Markets

Derivatives Markets

International Markets

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Risk Management in Financial Institutions

Filters