Question

Fill the blank with the correct word from the word blank

Because of the adverse selection problem in the financial market, a firm’s newly issued stocks or bonds could be ( ) so that the firm would withdraw from the market. It will leave only the ( ) credit firms in the market.

To solve the asymmetric information problem between the lenders and borrowers, ( ) could be used as a good mechanism for ensuring that a borrower is likely to repay a lender.

word bank:

over-valued, under-valued, internal, external, directly, indirectly, GNP, GDP, information, confidence, good, bad, average, assets, liabilities, capital, revenues, expenses, costs, profits, net worth, resources, data, collateral,

Which of the following statements is NOT true about the balance sheet of commercial banks?

①Banks obtain the funds from depositors as well as by borrowings

②Banks use these funds to make loans or to purchase marketable securities

③The difference between a bank’s assets and liabilities is the bank’s profit

④The bank’s profit also come from service fees

Some of the bank’s profit-making activities do not appear on the balance sheet of the bank. These activities are called (          ).

①Profit generator

②Hidden card operation

③Off-balance sheet activities

④Off-income statement items

Answer 1

1) Because of the adverse selection problem in the financial market, a firm’s newly issued stocks or bonds could be under-valued so that the firm would withdraw from the market. It will leave only the good credit firms in the market.

To solve the asymmetric information problem between the lenders and borrowers, collateral could be used as a good mechanism for ensuring that a borrower is likely to repay a lender.

2) c) The difference between a bank's assets and liabilities is the bank's profits

This is statement is not true about the balance sheet of commercial banks
The profit of the bank is calculated by subtracting operating expenses, provisions, tax, and various other expenses from the net interest income. All of this appears in the income statement of the bank and not the balance sheet.

Banks obtain funds from depositors as well as by borrowings and this appears on the liability side of the balance sheet.

Banks use these funds to make loans or to purchase marketable securities and this appears on the asset side of the balance sheet.

The bank’s profit also comes from service fees by providing various services.

3) c) Off-Balance Sheet Activities

Off-Balance Sheet Assets are those assets from which the bank earns fees or profits but it does not appear on the balance sheet of the banks
Few examples of Off-Balance sheet Assets are Dividends earned from SPVs created by the bank, asset management or brokerage services, etc.