Banking Quiz

Compensating balances

• A) are a particular form of collateral commonly required on commercial loans.

• B) are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan) must keep in a checking account at the bank.

• C) allow banks to monitor firms' check payment practices which can yield information about their borrowers' financial conditions.

• D) all of the above.

A bank's commitment (for a specified future period of time) to provide a firm with loans up to a given amount at an interest rate that is tied to a market interest rate is called

• A) credit rationing.

• B) a line of credit.

• C) continuous dealings.

• D) none of the above.

If borrowers with the riskiest investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of

• A) adverse credit risk.

• B) adverse selection.

• C) moral hazard.

• D) lemon lenders.

Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as

• A) screening and monitoring of loan applicants.

• B) collateral and compensating balances.

• C) credit rationing.

• D) all of the above.

Banks face the problem of _____ in loan markets because bad credit risks are the ones most likely to seek bank loans.

• A) adverse selection

• B) moral hazard

• C) moral suasion

• D) intentional fraud

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the

• A) adverse selection problem.

• B) lemon problem.

• C) adverse credit risk problem.

• D) moral hazard problem.

Which of the following are not rate-sensitive assets?

• A) Securities with a maturity of less than one year.

• B) Variable-rate mortgages.

• C) Fixed-rate mortgages.

• D) All of the above are rate-sensitive assets.

The difference between rate-sensitive liabilities and rate-sensitive assets is known as the

• A) duration.

• B) interest-sensitivity index.

• C) rate-risk index.

• D) gap.

A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to

• A) place a bank officer on their board of directors.

• B) place a corporate officer on the bank's board of directors.

• C) keep compensating balances in a checking account at the bank.

• D) do all of the above.

Long-term relationships between banks and their customers and lines of credit

• A) reduce the costs of information collection.

• B) make it easier for banks to screen good from bad risks.

• C) enable banks to deal with moral hazard contingencies that are neither anticipated nor specified in restrictive covenants.

• D) do all of the above.