Question

1. (                 ) How does bank capital reduce bank risk?

1. It provides a cushion for firms to absorb losses.
2. It creates unlimited growth opportunities.
3. It limits access to the financial markets.
4. None of the above.
5. All of the above.

2. (                 ) How do capital requirements constrain bank growth?

1. By discouraging investments in Treasury securities.
2. By disallowing the ownership of mortgage loans.
3. By decreasing a bank’s net interest margin.
4. By limiting the amount of new assets that a bank can acquire through debt financing.
5. None of the above.

1. (                 ) A bank is currently exactly meeting its reserve requirements of 10%. If the bank has a deposit outflow of $10,000,000, what is the impact on its required reserve position?

1. It is now deficient $1,000,000 in required reserves.
2. It is now deficient $9,000,000 in required reserves.
3. It now has excess reserves in the amount of $9,000,000.
4. It now has excess reserves in the amount of $10,000,000.
5. There would be no impact on the bank's required reserves.

Answer 1

1. How does bank capital reduce bank risk?

Answer : It provides a cushion for firms to absorb losses.

2. How do capital requirements constrain bank growth?

Answer : By limiting the amount of new assets that a bank can acquire through debt financing.

3. A bank is currently exactly meeting its reserve requirements of 10%. If the bank deposit outflow of $10,000,000 what is the impact on its required reserve position.

Answer : It is now deficient $1,000,000 in required reserves.