Chapter 13

Managing Nondeposit Liabilities

True/False Questions

26. The traditional and principal source of bank funds is deposits.

Answer: True

- True vkl 😊 Deposits make up the largest part of the bank’s funds. Even though banks
may have many other ways to raise funds, the biggest source still comes from
deposits.

27. Asset management (i.e., conversion of assets to cash) is regarded as an interest-sensitive approach
to raising funds.
Answer: False

28. Deposits have been growing faster than nondeposit sources of funds in recent years among U.S.
banks.
Answer: False

29. Federal funds today consist exclusively of deposits held at the Federal Reserve banks.
Answer: False
- No, there are even second-hand Fed funds sold by accommodating banks on the
market or money other surplus institutions.

30. There are no reserve requirements on Federal funds borrowings in the U.S.
Answer: True
- True, banks or any financial situations can borrow from Fed funds market without
any specific reserve requirement.

31. Accommodating banks buy and sell Federal funds simultaneously.

Answer: True
- Accommodating banks can be regarded as the broker in the Fed funds market, they
buy and sell Fed funds in return for commission.

32. Loans of Federal funds under a continuing contract are automatically renewed each day unless
either the borrower or the lender decides to end the agreement.
Answer: True
- True because it is the characteristic of continuing contracts.

33. The loan from a Federal Reserve bank which normally lasts only a few days and is designed to
provide immediate aid in meeting a bank's legal reserve requirement is known as extended credit.
Answer: False
- No, it is an overnight loan.

1Rose/Hudgins, Bank Management and Financial Services, 8/e

 34. Yankee CDs are issued by large savings and loan associations and other nonbank savings
institutions.
Answer: False
- Yankees CDs are products of large foreign banks sell through US branches, not usual US
large saving institutions.

35. The volume of variable-rate CDs exceeds the volume of fixed-rate CDs among U.S. banks.
Answer: False
- True because variable rate CDs offer a better opportunity of gaining profit when the
interest rates are raised, while fixed-interest CDs may be unprofitable when the
interest changes.

36. Liability management is considered to be an interest-sensitive approach to raising bank funds.

Answer: True
- Banks raise funds by offering return from the interest rate, so it it interest-sensitive
way to attract funds.

37. Funds raised by the use of liability management techniques are considered to be flexible.
Answer: True
- Because the borrower can decide exactly how much he or she needs ad for how long
and usually find a source of funds that meets those requirements.

38. Liability management banking calls for using price (the interest rate offered) as the control lever
to regulate incoming funds.
Answer: True

39. The most common type of federal funds loans are term loans.
Answer: False
- It is overnight loans because for the most part, booked without a formal, written contract. Banks
exchange oral agreements based on any number of considerations, including how well the
corresponding officers know each other and how long the banks have mutually done business.
Formal contracting would slow the process and increase transaction costs.

40. Longer-term federal funds contracts lasting several days, weeks, or months, often accompanied
by a written contract, are called continuing contracts.
Answer: False
- It is not a continuing contract, it is a term contract.

41. According to the FDIC Improvement Act undercapitalized U.S. banks cannot be granted discount
window loans for more than 60 days in each 120-day period.
Answer: True

42. The largest foreign banks active in the United States sell CDs through their U.S. branches called
Yankee CDs.
Answer: True
- Because it is the definition of Yankee CDs.

2 Test Bank, Chapter 13

 43. Under current federal law commercial banks in the United States can issue commercial paper as
direct obligations of the banks.
Answer: False

44. Nondeposit funds do have the advantage of quick availability compared to most types of deposits,
but are not as stable a funding source for banks as are time and savings deposits.
Answer: True
- Yes because time and savings deposits are the less costly compared to nondeposits
funds, making banks focus mainly on them in the long run.

45. Longer-term federal funds contracts which are automatically renewed each day unless either the
borrower or the lender decides to end the agreement are called term loans,
Answer: False
- It is a continuing contract.

46. The main use of federal funds today is still the traditional one. Federal funds provide a
mechanism that allows banks short of legal reserves to tap into immediately available funds from
other institutions possessing temporarily idle funds.
Answer: True
- True it is the definition.

47. One of the factors to consider when a bank chooses among nondeposit funding sources is the
relative cost. In general, the cheapest source of short-term funds is the Fed Funds market.
Answer: True
- True, Fed funds’ cost is the lowest compared to other sources, even though they are
volatile.

48. There are no restrictions on getting a Federal Reserve loan and because it is the cheapest source
of short-term funds most banks will use this source of funds exclusively.
Answer: False
- Banks will not use this fund exclusively since they may run a risk of credit, also,
these funds are very volatile, therefore it has potential dangers.

49. CDs must be issued with maturities of at least 7 days.

Answer: True

- It is the rules 😊

50. Loans from the Fed Funds market must be backed by collateral.
Answer: False
- Loans from Fed funds may not need collateral to back them up, it is not a must.

51. In recent years financial institutions have gotten better at managing interest rate risk.
Answer: True

52. Large banks depend more on nondeposit borrowings than small banks.

3Rose/Hudgins, Bank Management and Financial Services, 8/e

 Answer: True
- Because small banks often find it hard to tap with the surplus larger banks or other
types of nondeposit borrowing (due to their sizes, credibility,…), they can only focus
on deposits as the main source of funds.

53. Although there is an active federal funds spot market, there is currently no associated futures
market for federal funds.
Answer: False
- Fed funds futures are financial futures contracts based on the federal funds rate and
traded on the Chicago Mercantile Exchange (CME) operated by CME Group Inc.
(CME). The federal funds rate is the rate banks charge each other for overnight loans
of reserves on deposit with the Federal Reserve.

54. Repurchase Agreement (RPs) transactions are perceived to be less risky than equivalent federal
funds transactions.
Answer: True
- Because RP requires borrowers to repay by marketable securities, it will reduce the
credit risk.

55. Interest rates in the Repurchase Agreement (RP) market are quoted on a 360-day basis.
Answer: True
- It is true because it is the characteristic of RP.

56. Seasonal credit discount window loans generally have the highest interest rates.
Answer: False
- It is secondary credit because this type of credit is often granted to less credible borrowers.

57. Primary credit is defined as loans available for short terms and normally considered beneficial for
the borrower because it carries an interest rate slightly below the target Fed funds rate.
Answer: False
- Above the target rate, not below.

58. When the general credit conditions are tight, there is a possibility that not every borrower will be
accommodated by a lender. This chance of credit rationing is referred to as credit availability risk.
Answer: True
- As can be seen from the word “availability”, it is the risk where there is no credit available to
be borrowed. So, the situation where the economy is tight shows the unavailability of loans.

59. The size of a financial institution has an effect on the type of nondeposit funding source that it
will consider. For example, larger depository institutions have the credit standing to sell the
largest negotiable CDs, while the Fed funds market is suitable for smaller institutions.
Answer: True
- True, because smaller institutions may appear to be less well-known, new and reliable, so it
makes it harder for them to tap the funds.

60. Only federal regulators can limit the terms (amount, frequency, and use) of borrower funds by the
U.S. depository institutions.
Answer: False

4 Test Bank, Chapter 13

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