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For a given return on assets, the lower is bank capital, ____.
A) the lower is the return for the owners of the bank
B) the higher is the return for the owners of the bank
C) the lower is the credit risk for the owners of the bank
D) the lower the possibility of bank failure
Answer: B
Diff: 2 Type: MC Page Ref: 306
Skill: Recall
Objective List: 13.2 Specify how banks make profits by accepting deposits and making loans
Bank capital has both benefits and costs for the bank owners. Higher bank capital ____
the likelihood of bankruptcy, but higher bank capital ____ the return on equity for a given
return on assets.
A) reduces; reduces
B) increases; increases
C) reduces; increases
D) increases; reduces
Answer: A
Diff: 2 Type: MC Page Ref: 306
Skill: Recall
Objective List: 13.2 Specify how banks make profits by accepting deposits and making loans
In the absence of regulation, banks would probably hold ____.
A) too much capital, reducing the efficiency of the payments system
B) too much capital, reducing the profitability of banks
C) too little capital
D) too much capital, making it more difficult to obtain loans
Answer: C
Diff: 2 Type: MC Page Ref: 306
Skill: Recall
Objective List: 13.2 Specify how banks make profits by accepting deposits and making loans
Conditions that likely contributed to a credit crunch in 2008 include ____.
A) capital shortfalls caused in part by falling real estate prices
B) regulated hikes in bank capital requirements
C) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital
D) increases in reserve requirements
Answer: A
Diff: 2 Type: MC Page Ref: 307 - 308
Skill: Recall
Objective List: 13.2 Specify how banks make profits by accepting deposits and making loans