1) 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
2) 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.
3) 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.