Question

Which of the following is one of the largest and economically most significant 25) differences between small banks and large banks, as mentioned in class and shown on bank financial statements? (NOTE: All statements about balance sheet items refer to ratios formed relative to total assets.) a) Small banks have more net federal funds sold b) Large banks have more borrowed funds c) Small banks have more borrowed funds d) None of the above are true statements about differences between small and large banks

Answer 1

1) Which of the following is one of the largest and the economically most significant differences between small banks and large banks,as mentioned in class and shown on bank financial statements?

A) a) SMALL BANKS HAVE MORE NET FEDERAL FUNDS SOLD: Fed funds are overnight loans banks use to meet the reserve requirement at the end of each day.The federal reserve uses the fed funds to control the nations interest rates.That is because banks borrow fed funds from each other.they pay an interest rate that they call the fed funds rate.so this is not the correct option

b) LARGE BANKS HAVE MORE BORROWED FUNDS: Large banks have access to many more sources of liquid funds than smaller banks and therefore they do not.securities are much more important for small and medium sized banks than for large ones.large banks concentrate on commercial an industrial loans while small and medium sized banks focus on real estate loans so this is also not the option

c) SMALL BANKS HAVE MORE BORROWED FUNDS:Smaller banks tends to have a higher ratio because they have more limited asset growth opportunities generally have less diverse sources of funds,and historically have had greater profitability than larger banks so this is the answer as this states the best and possible one.

d) NONE OF THE ABOVE ARE THE TRUE STATEMENTS ABOUT DIFFERNCES BETWEEN SMALL AND LARGE BANKS:This can not be the option because we have proved that small banks have more borrowed funds and that is the correct answer(C)