Test Bank | Ch12 + Depository Institutions Banks And Bank

Student name:__________

1) What is the equation that reflects a bank's balance sheet?

2) If a bank has a net worth that is negative, what do you know about the relationship between the amounts the bank has in assets and liabilities?

3) Identify the four broad categories that make up the asset side of the balance sheet for banks and identify which category is usually the largest.

4) One of the cash items included on the asset side of banks' balance sheets is reserves. What makes up reserves and what is their purpose?

5) What are the securities that U.S. banks own and why are they often referred to as secondary reserves?

6) Explain why non-transactions accounts have become a more important source of funds for the bank than transaction accounts over the past thirty years.

7) Why would a bank usually want to minimize the amount of excess reserves it has on hand?

8) A bank has a need for cash for a short period of time to meet its liquidity needs. The bank has significant holding of U.S. Treasury securities. The bank really does not want to sell the securities, realizing the liquidity need is a temporary problem. A pension fund has significant cash holdings and would like to earn some return on part of these holdings. The problem is the fund will need this cash in a few days to honor a purchase agreement it made for municipal bonds being issued. Is there any way these two organizations can work together to solve each other's problem?

9) Explain why a bank manager and a bank regulator would likely view the timing at which a loan should be charged to the loan loss reserve differently.

10) You are provided with the following information: a bank has a net income after taxes of $3.5 million; it has assets of $150 million; and bank capital of $12.5 million. What is the bank's return on assets; its return on equity, and its debt-to-equity ratio?

11) Explain why a bank with a high debt-to-equity ratio may be more profitable than a bank with a lower ratio but would also have a higher level of risk.

12) Considering that, on average, the return on assets is the same for small and large banks, and the return on equity is higher for large banks than small banks, what can be one of the explanations for the trend toward bank mergers?

13) We saw in Chapter 12 that initially savings and loans were created to make home mortgages, and their main source of funds was deposits from savers. In the late 1970s and into the 1980s, the United States experienced rising interest rates that had depositors looking for higher returns. Congress quickly removed the interest-rate ceilings that savings and loans could offer. Explain the initial impact this had on the interest-rate spread and the net interest margin for the savings and loans.

14) As the end of the year 1999 approached, many people worried that banks and more specifically the banks' computers would not be able to read the year 2000 correctly. This was commonly known as the Y2K problem. Many people were concerned that their bank would lose the record of their deposits, etc., and made plans to take most of their funds out of the bank. Address the potential Y2K problem from the standpoint of bank risk. What two types of risk potentially could have been involved?

15) If the Federal Reserve were to do away with the required reserve regulation, do you think banks would stop holding reserves? Explain.

16) A bank has the following assets: reserves of $15 million, loans of $150 million, and securities of $50 million. Their liabilities include deposits of $150 million, borrowed funds of $35 million, and bank capital of $30 million. If the required reserve rate is 10 percent, answer the following: What is the amount of excess reserves the bank is currently holding? What are the options available to the bank if customers decide to withdraw $10 million in deposits?

17) Information asymmetry that exists in lending creates what type of risk for banks? Discuss the ways for a bank to handle or minimize this risk.

18) If you focus on interest-rate risk, can you explain why banks offer higher interest rates on longer-term CDs than they do on short-term CDs?

19) A bank has $100 million in assets and 50 percent of its assets are interest sensitive. The bank has $75 million in liabilities, 50 percent of which are interest sensitive. What is the bank's gap between interest-sensitive assets and liabilities?

20) A home buyer is presented with two options for financing the purchase of a home: a 20-year fixed-rate mortgage or a 20-year adjustable-rate mortgage, where the rate adjusts once a year. Which mortgage would you expect to start at the lowest interest rate and why?

21) The trading losses that some banks incurred could be thought to be from trading risk, but in many cases the real cause of the losses could be attributed to moral hazard. Why was this the case?

22) Why are U.S. banks prohibited from owning stocks?

23) What should be the impact on a bank's return on assets and return on equity from increased use of off-balance-sheet activities?

24) A bank develops specialized skills in analyzing companies from one specific industry. This contributes significantly to the bank achieving economies of scale because a large portion of its total loan portfolio is made up of companies in this industry. What are the long-run profit prospects for this bank? Explain.

25) An argument that comes up from time to time is that credit unions have an advantage over other financial depository institutions in the sense that they are non-profit institutions and, therefore, are exempt from taxes on income that other private depository institutions pay. As a result, credit unions may be able to charge lower rates of interest to borrowers and pay a higher rate to depositors than these other institutions. What do you think of this argument?

26) We have discussed the principal-agent problem as a form of moral hazard. Discuss the unique problems a bank manager faces in terms of trying to please the owners of the bank and at the same time trying to appease regulators.

27) ABC Co., Inc., has recently suffered a data breach and has been investigating how to prevent this from happening. They have researched the costs of developing a new data security system that could protect their entire industry, and possibly beyond, from cyberattacks. What type of market failure exists in this environment that might prevent ABC from investing in the new technology?

28) Why is it important for firms and regulators in the area of cybersecurity to focus on prospective risks?

29) Bank managers seem to have to walk a tightrope between managing risk and earning a profit. Explain.

30) The primary difference among various kinds of depository institutions is in the composition of their loan portfolios. Do you agree or disagree? Explain.

31) Depository institutions, nondepository institutions, and commercial banks

A) are all financial intermediaries.
B) offer the same kinds of financial services to the public.
C) have the same types of liabilities and different types of assets.
D) are different because only depository institutions are profit-driven.

32) Which one of the following correctly portrays a commercial bank's balance sheet?

A) Total Bank Liabilities = Total Bank Capital + Total Bank Assets
B) Total Bank Assets = Total Bank Capital − Total Bank Liabilities
C) Total Bank Assets = Total Bank Liabilities − Total Bank Capital
D) Total Bank Assets = Total Bank Liabilities + Total Bank Capital

33) Considering a commercial bank's balance sheet, which one of the following statements is true?

A) Total Bank Assets = Total Bank Capital − Total Bank Liabilities
B) Total Bank Assets = Total Bank Liabilities + Total Bank Capital
C) Total Bank Assets + Total Bank Capital = Total Bank Liabilities
D) Total Bank Assets + Total Bank Liabilities =Total Bank Capital

34) Considering a commercial bank's balance sheet, which one of the following statements is false?

A) Total Bank Assets + Total Bank Liabilities = Total Bank Capital
B) Total Bank Assets = Total Bank Liabilities + Total Bank Capital
C) Total Bank Liabilities = Total Bank Assets − Total Bank Capital
D) Total Bank Capital = Total Bank Assets − Total Bank Liabilities

35) A bank's net worth is synonymous with its

A) assets.
B) assets + bank's liabilities.
C) capital.
D) required reserves.

36) Considering the balance sheet for all commercial banks in the United States, the largest category of assets is

A) cash items.
B) U.S. Government Securities.
C) required reserves.
D) loans.

37) Considering the balance sheet for all commercial banks in the United States, the largest category of liabilities is

A) borrowing from other banks in the United States.
B) checkable deposits and nontransaction deposits.
C) checkable deposits.
D) borrowings from nonbanks in the United States.

38) Considering the balance sheet for all commercial banks in the United States, the net worth of banks is about

A) 5 times the total assets.
B) 11% of total assets.
C) the same as total assets.
D) the same as total liabilities.

39) Considering the balance sheet for all commercial banks in the United States, the net worth of banks is about

A) 11% of total liabilities.
B) 5 times total assets.
C) the same as total assets.
D) 8 times total liabilities.

40) The total assets of commercial banks in 2018 amounted to about

A) three times nominal GDP in the United States.
B) one-half of nominal GDP in the United States.
C) four-fifths of nominal GDP in the United States.
D) one-tenth of nominal GDP in the United States.

41) A bank's reserves include

A) U.S. Treasury bills.
B) currency in the bank but not currency in the ATM machines.
C) the bank's deposits at the Federal Reserve.
D) U.S. Treasury bills and currency in the bank.

42) A bank's reserves include

A) vault cash.
B) U.S. Treasury Securities.
C) the bank's loan portfolio.
D) U.S. Treasury bills and vault cash.

43) Which one of the following describes bank assets that are cash items in the process of collection?

A) uncollected funds the bank is due to receive from the clearing of checks
B) currency the bank is due from the Treasury
C) late fees the bank is owed from loan payments that were not made on time
D) payments from the FDIC insurance fund due the bank

44) Banks do not hold a lot of their assets in the form of cash mainly because

A) of regulation.
B) of the fear of being robbed.
C) of the opportunity cost of holding cash since cash does not earn interest.
D) it can encourage employee theft.

45) For U.S. commercial banks, marketable securities held as assets include

A) stocks and bonds.
B) only the stocks of U.S. corporations.
C) only the bonds of the U.S. Treasury.
D) only bonds.

46) Secondary reserves for banks are

A) the same as the bank's net worth.
B) mainly the bank's liquid securities.
C) vault cash.
D) deposits the bank has at the Federal Reserve.

47) Considering U.S. commercial banks, loans account for

A) about one-third of total assets.
B) more than one-half of total assets.
C) two-thirds of liabilities.
D) three-quarters of total assets.

48) One thing that is common for all bank loans is that they are

A) securitized.
B) liquid.
C) part of the banks' assets.
D) unsecured.

49) Savings and loans primarily provide

A) large commercial loans.
B) unsecured credit card loans.
C) student loans.
D) home mortgages.

50) Credit unions

A) focus on consumer loans while commercial banks primarily make loans to businesses.
B) make loans and accept deposits while commercial banks just make loans.
C) can make auto loans to individual and businesses while commercial banks can make auto loans only to businesses.
D) do not have to hold reserves while commercial banks do.

51) Commercial banks increased their involvement in mortgages over the years due to the

A) ability to securitize mortgages which made them more liquid.
B) demands of regulators.
C) increase in commercial loans demanded due to the development of the commercial paper market.
D) reduced risk of borrowers defaulting on mortgage loans.

52) Which one of the following statements is false?

A) The largest source of funds for banks to lend comes from the owner's capital.
B) Transaction deposits make up less than 15 percent of banks’ sources of funds.
C) The largest source of funds for banks are nontransactions accounts.
D) Borrowing is a larger source of funds for banks than transaction deposits.

53) Checkable deposits have decreased since the 1970s mainly because

A) regulators allowed higher rates to be paid on these accounts and banks found them to be highly unprofitable.
B) people prefer to use credit cards rather than write checks.
C) these deposit accounts offer little or no interest so depositors find them to be expensive.
D) as banks added fees to these accounts people increased their holdings of currency.

54) The primary difference between small CDs(certificates of deposit), which are those that are issued for $100,000 or less, and large CDs, which are those that exceed $100,000—other than the dollar amount—is that

A) a bank does not have to include small CDs in its liabilities.
B) large CDs are negotiable and therefore can be bought and sold.
C) small CDs are issued for only six months or less.
D) large CDs are issued for only six months or more.

55) The federal funds market is the

A) market where banks borrow from the Federal Reserve System.
B) lending to banks by the U.S. Treasury when banks face liquidity emergencies.
C) inter-bank market where excess reserves from one bank can be loaned to another bank.
D) market where American banks borrow from foreign lenders.

56) Loans made in the federal funds market are

A) highly collateralized.
B) made by the Federal Reserve System to the bank within 24 hours.
C) unsecured loans.
D) insured by the FDIC.

57) On a bank's balance sheet,

A) liabilities show the uses of funds and assets show the sources of funds.
B) assets show the sources of funds and the net worth shows the uses of funds.
C) net worth shows the sources of funds and liabilities show the uses of funds.
D) liabilities show the sources of funds and assets show the uses of funds.

58) On a bank's balance sheet,

A) assets show the sources of funds and the net worth shows the uses of funds.
B) net worth shows the sources of funds and liabilities show the uses of funds.
C) assets show the uses of funds and liabilities show the sources of funds.
D) net worth represents both a source and a use of funds.

59) Which one of the following is a commercial bank liability?

A) mortgage loans
B) demand deposits
C) reserves
D) U.S. Treasury securities

60) Which one of the following is a commercial bank asset?

A) demand deposits
B) borrowings from other banks
C) mortgage loans
D) CDs

61) Which one of the following is not a commercial bank liability?

A) reserves
B) demand deposits
C) non-transaction deposits
D) federal fund borrowings

62) Which one of the following is not a commercial bank asset?

A) securities
B) mortgage loans
C) reserves
D) nontransaction deposits

63) Checkable deposits

A) are a larger source of bank funds today than in 1970.
B) are no longer a source of bank funds.
C) are a less important source of bank funds today than in 1970.
D) continue to be the largest source of bank funds.

64) A non-transaction deposit would include each of the following, except

A) a savings account.
B) a checking account.
C) a passbook savings account.
D) a certificate of deposit.

65) A repurchase agreement is

A) an asset that represents the value of all collateral repossessed by the bank and held for sale.
B) a long-term collateralized loan.
C) an agreement where the parties agree to reverse the transaction on a specific day.
D) only made between two or more banks.

66) Repurchase agreements are usually used by banks that

A) have a need for long-term financing.
B) need cash for a very short period of time.
C) have negative net worth.
D) cannot obtain financing from any other source.

67) Capital is the cushion banks have against

A) sudden drops in the value of their assets.
B) an unexpected decrease in liabilities.
C) liquidity risk.
D) moral hazard.

68) How are money center banks different from community banks? Money center banks

A) are usually much larger.
B) obtain their funds primarily through deposits and not through borrowing.
C) are a much smaller percentage of the total number of banks.
D) are not actively engaged in the money market.

69) Savings and loan institutions

A) are owned by the depositors.
B) originally were formed primarily to make home mortgages.
C) today offer a much smaller array of services than when originally formed.
D) are owned by depositors who also have a common bond.

70) Of the roughly 5,400 commercial banks and savings institutions in the United States at the end of 2018, by far the greatest numbers of them were

A) regional banks.
B) money center banks.
C) community banks.
D) savings banks.

71) Suppose a particular bank is very large in terms of assets, and makes consumer and residential loans as well as commercial and industrial loans. The bank is probably a

A) regional or super-regional bank.
B) money center bank.
C) community bank.
D) savings bank.

72) Suppose a particular depository institution that specializes in residential mortgages is owned by its depositors. The institution is probably a

A) regional or super-regional bank.
B) money center bank.
C) community bank.
D) savings bank.

73) If a bank sells off all of its assets and pays all of its liabilities, the amount remaining would be its

A) net profit.
B) reserves.
C) net worth.
D) excess reserves.

74) A bank's loan loss reserves are

A) the amount of loans that have defaulted in the past twelve months.
B) the same as equity capital.
C) an amount the bank sets aside to cover potential losses from defaulted loans.
D) a liability of the bank since it is a source of funds.

75) The largest liability for commercial banks in the United States is

A) demand deposits.
B) non-transaction deposits.
C) borrowing from other U.S. banks.
D) borrowing from the Federal Reserve.

76) Suppose that a bank initially has a leverage ratio of 8 to 1. If this bank increases its capital by $1 million and its assets by $10 million, then the bank's

A) risk increases and its leverage decreases.
B) liabilities decrease and its leverage increases.
C) leverage decreases and its liabilities increase.
D) leverage and risk both increase.

77) Which one of the following bank assets would be categorized as secondary reserves?

A) U.S. Treasury bills
B) cash
C) mortgage loans
D) deposits at the Federal Reserve

78) If a bank has $100 million in assets and a net worth of $10 million, its debt-to-equity ratio is

A) 10 to 1.
B) 5 to 1.
C) 9 to 1.
D) 0.1 to 1.

79) If a bank has $150 million in assets and a net worth of $20 million, its asset-to-equity ratio is

A) 6.5 to 1.
B) 7.5 to 1.
C) 0.13 to 1.
D) 0.15 to 1.

80) If bank with leverage of 8 to 1 increases its assets by adding $1 to capital for every $1 added to assets, then its leverage

A) increases.
B) decreases.
C) stays constant.
D) changes by an amount that cannot be determined from the information in the question.

81) If a bank with $100 million in assets and $10 million in equity increases its assets by adding $1 to capital for every $1 added to assets, then the debt-to-equity ratio will

A) increase.
B) remain constant.
C) decrease.
D) change in an indeterminate direction.

82) A bank's return on assets (ROA) is calculated by dividing the bank’s

A) assets by its net worth.
B) net profits after taxes by its assets.
C) net worth by its assets.
D) assets less its net profit after taxes by its net worth.

83) A bank's return on equity (ROE) is calculated by

A) dividing the bank's net profit after taxes by the bank's capital.
B) dividing the banks liabilities by the bank's capital.
C) adding together the bank's assets and the net profit after taxes and dividing this sum by the bank's capital.
D) dividing the bank's net profit after taxes by the sum of the bank's assets and its liabilities.

84) Everything else equal, if the ratio of bank assets to bank capital increases, the bank's return on equity should

A) remain constant.
B) decrease.
C) increase.
D) change in a direction that cannot be determined from the information provided.

85) Everything else equal, if the ratio of bank assets to bank capital decreases, the bank's return on equity should

A) decrease.
B) remain constant.
C) increase.
D) change in a direction that cannot be determined from the information provided.

86) If a bank's return on equity remains constant, but the ratio of bank assets to bank capital increases, then the

A) bank's return on assets must have increased.
B) bank's return on assets must have decreased.
C) bank's assets and capital must have increased by the same percentage.
D) bank must be unprofitable.

87) If a bank's return on equity remains constant, but the ratio of bank assets to bank capital decreases, then the

A) bank's return on assets must have increased.
B) bank's return on assets must have decreased.
C) bank's assets and capital must have increased by the same percent.
D) bank must be unprofitable.

88) The tendency for large banks to have a higher return on equity than small banks suggests that

A) small banks have better management than large banks.
B) large banks can charge higher interest rates than small banks.
C) there could be significant economies of scale in banking.
D) larger banks are better able to escape the cost of regulation.

89) Net interest income for a bank is the

A) difference between gross income and net income after taxes.
B) interest banks earn from uses of funds.
C) difference between interest income and interest expense.
D) difference between interest income and total expenses.

90) A bank's net interest margin is calculated by taking net interest income and

A) dividing it by the bank's capital.
B) dividing it by the bank’s total assets.
C) dividing it by the sum of the bank's assets and capital.
D) subtracting taxes.

91) The weighted average difference between the interest received on assets and the interest rate paid for liabilities for a bank is the bank’s

A) interest-rate spread.
B) net interest margin.
C) net interest income.
D) return on equity.

92) A bank's off-balance-sheet activities usually increase

A) both its assets and liabilities while reducing net income.
B) its net income but do not change its assets or liabilities.
C) the bank's liabilities but not its assets.
D) the bank's assets but not its liabilities.

93) A rumor starts that a bank has suffered significant losses and may not be able to honor its promises to depositors. This causes most of the depositors to line up in front of the bank the next morning wanting to withdraw their deposits. This is an example of

A) liquidity risk.
B) operational risk.
C) interest-rate risk.
D) credit risk.

94) A bank that cannot meet its loan commitments is experiencing the results of

A) interest-rate risk.
B) credit risk.
C) trading risk.
D) liquidity risk.

95) Many people believed that when the calendar changed from December 31, 1999, to January 1, 2000, many bank records were going to be wiped out. If this had caused people to withdraw all of their funds, this would be an example of

A) credit risk.
B) operational risk.
C) interest-rate risk.
D) liquidity risk.

96) The difference between a bank's reserves and its required reserves is

A) profits.
B) net interest income.
C) excess reserves.
D) vault cash.

97) If a bank has $200 million in deposits, the required reserve rate is 10% and the bank has $23 million in reserves, then the bank

A) is short of required reserves.
B) has excess reserves of $21 million.
C) has excess reserves of $13 million.
D) has excess reserves of $3 million.

98) If a bank has deposits of $250 million, reserves that total $30 million and has a required reserve rate of 10%, then the bank

A) is short of required reserves.
B) has excess reserves of $27.5 million.
C) has excess reserves of $5 million.
D) has excess reserves of $3 million.

99) If a bank has customer deposits of $150 million, $15 million in reserves, and the amount of excess reserves equals 0 (zero), then the

A) required reserve rate is 15%.
B) required reserve rate is 10%.
C) required reserve rate is 1%.
D) bank's net interest margin is zero (0).

100) Consider a bank with the following balance sheet. If the bank is holding no excess reserves, what is the required reserve rate?

A) 1%.
B) 5%.
C) 10%.
D) 15%.

101) Consider a bank with the following balance sheet. If the bank is holding $10,000 in excess reserves, what is the required reserve rate?

A) 5%.
B) 9%.
C) 10%.
D) 11%.

102) Regulators require a bank to hold some of its assets as reserves mainly to address

A) liquidity risk.
B) trading risk.
C) credit risk.
D) operational risk.

103) A bank that does not want to hold a lot of excess reserves but wants to manage liquidity risk is likely to

A) hold a lot in highly liquid securities.
B) make sure that most of its assets are in small business loans.
C) have a high ratio of loans to securities.
D) limit withdrawals by customers.

104) If Bank A sells some its loans to Bank B for cash, everything else equal,

A) Bank A's assets decrease and Bank B's assets increase.
B) Bank A becomes less liquid while Bank B becomes more liquid.
C) Banks A's total assets do not change, but Bank A is more liquid.
D) Bank A's liabilities decrease by the amount of the loans that are sold.

105) A bank that meets deposit withdrawal by borrowing additional funds will alter the

A) asset side of their balance sheet.
B) liabilities side of the balance sheet.
C) amount of bank capital.
D) asset and liabilities side of the balance sheet.

106) The credit risk a bank faces is the risk resulting specifically from

A) the economy entering a recession.
B) interest rates falling.
C) some of the bank's loans not being repaid.
D) the bank experiencing a decrease in deposits.

107) A bank that specializes in granting loans to firms in a specific line of business may

A) decrease both its operating cost and its credit risk.
B) increase both its operating cost and its credit risk.
C) increase its operating cost and decrease its credit risk.
D) decrease its operating costs and increase its credit risk.

108) One way for a bank to deal with credit risk is to

A) charge all borrowers from the same industry an average rate for that industry.
B) add a markup to the cost of funds for a specific borrower based on the borrower's credit history.
C) avoid making loans to borrowers from a broad spectrum and specialize geographically and in specific industries.
D) increase the number of loans made in any year.

109) The fact that a bank's assets tend to be long-term while its liabilities are short-term creates

A) interest-rate risk.
B) credit risk.
C) decreased risk for the bank.
D) trading risk.

110) A bank's assets tend to be long-term while its liabilities are short-term. Therefore, when interest rates rise, the value of the bank's assets

A) increases by more than the value of its liabilities.
B) decreases by more than the value of its liabilities.
C) increases and the value of its liabilities decreases.
D) decreases and the value of its liabilities increases.

111) When interest rates fall, a bank's capital will usually

A) not change.
B) decrease.
C) turn negative.
D) increase.

112) If a bank has more interest-rate-sensitive liabilities than interest-rate-sensitive assets, an increase in the interest rate will cause profits to

A) increase.
B) decrease.
C) remain constant.
D) be negative.

113) For every $100 in assets, a bank has $30 in interest-rate sensitive assets, and the other $70 in non-interest-rate sensitive assets. The same bank has $60 for every $100 in liabilities in interest-rate sensitive liabilities while the other $40 are in liabilities that are not interest-rate sensitive. If the interest rate on assets decreases from 6 to 5%, and the interest rate on liabilities decreases from 4 to 3%, the impact on the bank's profits per $100 of assets will be

A) a reduction of $0.30.
B) an increase of $0.30.
C) a reduction of $3.00.
D) zero since the interest rates on assets and liabilities fell by the same amount.

114) For every $100 in assets, a bank has $40 in interest-rate sensitive assets, and the other $60 in non-interest-rate sensitive assets. The same bank has $50 for every $100 in liabilities in interest-rate sensitive liabilities while the other $50 are in liabilities that are not interest-rate sensitive. If the interest rate on assets increases from 5 to 6%, and the interest rate on liabilities increases from 3 to 4%, the impact on the bank's profits per $100 of assets will be

A) an increase of $0.10.
B) a decrease of $0.10.
C) a reduction of $1.00.
D) zero since the interest rates on assets and liabilities increased by the same amount.

115) The procedure that estimates the interest-rate sensitivity of a bank's assets and liabilities is called

A) managing credit risk.
B) estimating operating risk differential.
C) trading risk minimization.
D) gap analysis.

116) A bank that makes the most of its long-term loans at adjustable interest rates is

A) reducing both interest-rate and credit risk.
B) increasing credit risk and reducing interest-rate risk.
C) reducing credit risk and increasing interest-rate risk.
D) increasing both interest-rate and credit risk.

117) Trading risk faced by U.S. banks results from

A) the free-rider problem.
B) changes in regulations.
C) adverse selection.
D) moral hazard.

118) A bank faces foreign exchange risk when

A) it has assets denominated in one currency and liabilities in another.
B) it lends to foreign borrowers because they are less likely to repay a U.S. bank.
C) foreign governments restrict dollar-denominated payments.
D) it has branches in other countries.

119) Ceteris paribus, when internal processes are inadequate or even fail, losses can occur that result from what type of risk?

A) credit risk
B) trading risk
C) operational risk
D) interest-rate risk

120) Cyber risk describes losses that result from

A) natural disasters.
B) bank loans not being repaid.
C) compromised information systems.
D) fluctuating values in financial instruments.

121) Cyber risk is reduced through

A) the use of floating interest rates.
B) diversifying the types of loans issued.
C) cloud computing and other information redundancies.
D) hiring traders to actively manage buying and selling of securities.

122) Cyber risk is especially high in financial sectors because

A) cyberattacks are rarely concealed from the public.
B) most governments place a high priority on protecting individual records.
C) the network of users in the financial sector is generally small compared to the size of the economy.
D) financial institutions and markets are heavily reliant on on-demand information.

123) Firms that pay for protecting electronic records and networks cannot reap the full benefit of their investments because there are

A) natural monopolies in the financial sector.
B) principal-agent problems with network protection.
C) redistributive effects from investing in cybersecurity.
D) positive externalities from putting protective measures in place.

124) Which type of government intervention would address market failures that exist in the area of cybersecurity by changing firms’ incentives to allocate resources to promoting cybersecurity? Government should

A) use regulation to eliminate cyberattacks.
B) provide cybersecurity within its borders.
C) create a public agency to eliminate cyberattacks.
D) strongly encourage disclosure and information sharing about breaches.

125) One of the lessons from the 2007–2009 financial crisis regarding the management of risk by financial institution is that

A) many banks lacked real-time information that would allow them to assess their various risk exposures at the bank-wide level.
B) some banks, especially large ones, overestimated the trading risk associated with mortgage backed securities.
C) banks were holding too much capital as a protection against market risk.
D) many of the usual mechanisms for managing liquidity risk actually worked pretty well.