Question

1) The advantage of borrowed funds as a source of funds for banks is:

A. Unlike deposits borrowed funds do not expose banks to potential liquidity problems.

B. Unlike deposits borrowed funds are a stable and elastic source of funds.

C. Unlike loans borrowed funds are a stable and elastic source of funds.

D. Unlike loans borrowed funds do not expose banks to default risk.

E. Unlike deposits borrowed funds are a less expensive source of funds.

2) Banks face liquidity problems when:

A. There is a large outflow of funds that exceeds a bank's reserves.

B. There is a large outflow of funds by depositors and creditors that exceeds a bank's capital.

C. There is a large loss that exceeds a bank's reserves.

D. There is a large loss that exceeds a bank's capital.

E. There is a large outflow of funds that exceeds a bank's deposits

3) Which statement is true?

A.Banks face potential insolvency problems if they lose the confidence of their depositors and creditors.

B.Banking panics can start if banks lend out too much of their depositors' and creditors' funds.

C.Banks face potential liquidity problems if they try to charge high interest rates for their household and business loans.

D.Banks face potential liquidity problems because they make risky loans using their depositors' and creditors' funds.

E.Banks face potential insolvency problems because they risk their depositors' and creditors' funds by making risky loans and financial trades.

4) Banks face insolvency problems when:

A. There is a large outflow of funds that exceeds a bank's reserves.

B. There is a large loss that exceeds a bank's capital.

C. There is a large outflow of funds that exceeds a bank's deposits.

D. There is a large loss that exceeds a bank's reserves.

E. There is a large outflow of funds by depositors and creditors that exceeds a bank's capital.

 

Answer 1

Ans.1- (A)

Unlike deposits, borrowed funds do not expose banks to potential liquidity problems. Depositors can demand their money anytime and if the bank does not have sufficient funds, it will create a problem.

Ans.2- (B)

There is a large outflow of funds by depositors and creditors that exceeds a bank's capital.

because if all depositers withraw their money from their account the bank's capital will start decreasing and the amount to be paid to creditors will become short . Thus this would result in decresing the value of bank's capital which will lead to liquidity problems .

Ans.3- (A)

Ans.4- (D)

There is a large loss that exceeds a bank's reserves
When the bank's assets are less than the liabilities the problem of insolvency arises. Whatever the banks posseses as reserves or assets are less when compared to the loss or what it has to pay then it is insolvency.