chapter 11

Question 1

3 ways to satisfy liquidity needs

Answer 1

1. sell assets
2. new borrowings
3. new stock issues

Question 2

liquidity

Answer 2

a banks capacity to acquire immediately available funds at a reasonable price

Question 3

cost of liquidity/how effectively it’s meeting needs

Answer 3

1. market conditions
2. market’s perception of risk at the institution as well as in the marketplace
3. market’s perception of bank management and its strategic direction
4. current economic environment

Question 4

why banks own liquid assets

Answer 4

1. to meet customers regular transaction needs
2. to meet legal reserve requirements
3. to assist in the check payment system
4. to purchase correspondent banking services

Question 5

5 types of liquid assets

Answer 5

1. cash and due from banks in excess of requirements
2. federal funds sold and reverse repurchase agreements
3. short term treasury and agency obligations
4. high quality short term corporate and municipal securities
5. some government guaranteed loans that can be readily sold

Question 6

types of cash assets

Answer 6

1. vault cash
2. demand deposit balances @private institutions
3. demand deposit balances @ fed
4. CIPC
   dont satisfy liquidity needs

Question 7

purpose of required reserves

Answer 7

enable the fed to control the nation’s money supply

Question 8

3 monetary policy tools

Answer 8

1. open market operations
2. changes in the discount rate
3. changes in the required reserve ratio
   fed hasn’t changed requirements or discount rate in decades

Question 9

reserve maintenance period

Answer 9

the 14 day period during which a bank must hold sufficient deposit balances at the fed to meet it’s reserve requirement

vault cash and fed reserve cash count

Question 10

computation period

Answer 10

two one week reporting periods to test if they will meet requirements

Question 11

required reserves calculation

Answer 11

1. daily average balances during computation period
2. apply reserve percentages
3. subtract vault cash
4. add/subtract allowable reserve carried forward from prior period (4%)

Question 12

correspondant banking

Answer 12

one bank sells services to another financial institution; bank buying is respondent bank

Question 13

sweep accounts

Answer 13

accounts that enable institutions to shift funds from OCDs which are reservable to MMDAs or other non reservable accounts

Question 14

types of sweep accounts

Answer 14

1. weekend accounts: friday afternoon to monday morning

2. threshold account: computer moves to MMDA when $ balance reaches some point

Question 15

3 elements of required reserves

Answer 15

1. dollar magnitude of base liabilities
2. required reserve fraction
3. dollar magnitude of qualifying cash assets

can be met over a two week period

Question 16

short term liquidity planning

Answer 16

objective is to manage a legal reserve position that meets the minimum requirement at the lowest cost

Question 17

events underlying liquidity problems

Answer 17

1. extended credit to high risk borrowers
2. reports reduced earnings
3. media publiczied credit and interest rate risk problems
4. bank has to pay higher interest rates to keep customers

Question 18

common liability liquidity ratios

Answer 18

1. total equity to total assets
2. loans to deposits
3. core deposits to total assets
4. fed funds purchased and RP to total assets

Question 19

liability liquidity

Answer 19

ease with which a bank can issue new debt to acquire clearing balances at reasonable costs

Question 20

contingency planning

Answer 20

carefully designed plan for strategies handling unexpected liquidity crises
quantitative section; summarize key risks; outline actions needed to provide the necessary liquidity; consider the cost of changing its asset or liability structure; prioritize assets to sell; consider customer relationships