Reference no: EM13552259

1. If a bank has assets that are defaulting at high rates and has significant uninsured debt there is a high likelihood that the bank will become insolvent.
True
False
2. Credit risk management tools include:
a. duration analysis.
b. deductibles.
c. interest rate swaps.
d. collateral.
3. Having insufficient liquidity can be costly to a bank because raising funds on short notice in times of stress can be costly and having to sell illiquid assets on short notice will require the bank to suffer losses.
True
False
4. According to the 2013 annual report of Wells Fargo & Co., managers use securitization to manage liquidity risk.
True
False
5. Goldman Sachs has an advantage over Bank Holding Companies since it is not constrained by Federal Reserve capital regulations. Goldman is allowed operate with more leverage than Citigroup.
True
False
6. Through the Federal Reserve's annual stress tests and capital planning processes, large financial institutions are required to hold enough capital to absorb losses in a severely adverse economic environment and continue to lend to households and businesses.
True
False
7. According to the 2013 annual report of Wells Fargo & Co., the bank increased its liquidity position by selling real estate and investing the proceeds in high yield bonds.
True
False
8. When the Federal Reserve objects to a BHC's capital plan, the BHC may not make any capital distribution for five years. This includes interest payments and the repayment of principal on maturing debt.
True
False
9. Subprime MBS became less and less liquid from the Summer of 2007 through the Winter of 2008.
True
False
10. Wells Fargo will not use its high quality, liquid held to maturity securities in repurchase agreements to obtain financing because the interest rate on these securities provides a significant return to the bank.
True
False
11. If a bank has insufficient liquidity but strong assets it may be possible to borrow against these assets to cover outflows of deposits.
True
False
12. The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to assess whether the largest bank holding companies operating in the United States have sufficient liquid assets to continue operations throughout times of economic and financial stress.
True
False
13. To remain viable, a financial institution must have enough liquid assets to meet its near-term obligations, such as withdrawals by depositors.
True
False
14. According to the 2013 annual report of Wells Fargo & Co., managers of Wells Fargo must manage asset/liability risks which include interest rate, market, and liquidity and funding risks.
True
False
15. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations; examples of liquid assets generally include cash, central bank reserves, and government debt.
True
False
16. According to the 2013 annual report of Wells Fargo & Co., its cash position is not deposited at the Federal Reserve but rather held in undisclosed branch vaults. When interest rates on reserves increase managers plan to shift these funds to accounts at the Fed.
True
False
17. Because bank funding markets are global and have at times broken down, disrupting the provision of credit to households and businesses in the United States and other countries, the Federal Reserve has entered into agreements to establish central bank liquidity swap lines with a number of foreign central banks. Two types of swap lines were established: dollar liquidity lines and foreign-currency liquidity lines. The swap lines are designed to improve liquidity conditions in dollar funding markets in the United States and abroad by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress. Likewise, the swap lines provide the Federal Reserve with the capacity to offer liquidity in foreign currencies to U.S. financial institutions should the Federal Reserve judge that such actions are appropriate. These arrangements have helped to ease strains in financial markets and mitigate their effects on economic conditions. The swap lines support financial stability and serve as a prudent liquidity backstop.
True
False
18. According to the 2013 annual report of Wells Fargo & Co., the bank's available-for-sale securities portfolio consists primarily of below investment grade securities with less than one year until maturity.
True
False
19. Wells Fargo & Co had over $185 billion of unencumbered cash according to its 2013 annual report. This is an important source of liquidity.
True
False
20. Agency MBS were Wells Fargo's largest pool of liquid assets according to its according its 2013 annual report.
True
False
Question 26
21. The Federal Reserve implemented the Basel III Liquidity Coverage Ratio in September 2014, which was formulated with other U.S. and global regulators and requires large firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil.
True
False
22. Capital acts as a financial cushion to absorb unexpected losses and is the difference between all of a firm's liquid assets and its subordinate debt. To remain solvent, the value of a firm's assets must be five times higher than its liabilities.
True
False
23. National banks and bank holding companies currently are required to maintain Tier 1 and Total capital equal to at least 2% and 6%, respectively, of their total risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit).
True
False
24. According to the 2013 annual report of Wells Fargo & Co., the highly liquid nature of the available-for-sale portfolio can be used by the bank to meet funding needs that arise in the normal course of business or due to market stress. During periods of market stress the bank would be able to sell liquid securities to compensate for rapid fund outflows and limited access to funding markets.
True
False
25. In 2014 the Federal Reserve objected to the capital plan of Bank of America because of the subprime risk still on the Bank's balance sheet.
True
False
26. According to the 2013 annual report of Wells Fargo & Co., the objective of effective liquidity management is to ensure that the bank can make quarterly dividend payments without having to borrow from the Fed.
True
False
27. Bank Holding Companies typically pay dividends to their bank subsidiaries. This is an important source of liquidity for banks.
True
False