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Which of the following would not be a way to increase the return on equity?
A) Buy back bank stock
B) Pay higher dividends
C) Acquire new funds by selling negotiable CDs and increase assets with them
D) Sell more bank stock
Answer: D
Diff: 2 Type: MC Page Ref: 307
Skill: Recall
Objective List: 13.2 Specify how banks make profits by accepting deposits and making loans
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose
to ____.
A) buy back bank stock
B) pay higher dividends
C) sell bank stock
D) sell securities the bank owns and put the funds into the reserve account
Answer: C
Diff: 2 Type: MC Page Ref: 307
Skill: Recall
Objective List: 13.2 Specify how banks make profits by accepting deposits and making loans
Your bank has the following balance sheet:
Assets Liabilities
Reserves $ 50 million Deposits $200 million
Securities 50 million
Loans 150 million Bank capital 50 million
If the desired reserve ratio is 10 percent, what actions should the bank manager take if there is an
unexpected deposit outflow of $50 million?
Answer: After the deposit outflow, the bank will have a reserve shortfall of $15 million. The
bank manager could try to borrow in the overnight market, borrow from the Bank of Canada, sell
$15 million of the securities the bank owns, sell off $15 million of the loans the bank owns, or
lastly call-in $15 million of loans. All of the actions will be costly to the bank. The bank manager
should try to acquire the funds with the least costly method.
Diff: 1 Type: SA Page Ref: 302 - 303
Skill: Applied
Objective List: 13.2 Specify how banks make profits by accepting deposits and making loans