Quiz — Why Banks Fail

1) A bank run happens when many depositors try to withdraw their money at the same time.

2) If a bank has valuable loans that will be repaid in several years, it must have enough cash to meet large withdrawals today.

3) When borrowers fail to repay their loans, the resulting losses can reduce the bank’s equity, its cushion against losses.

4) When market interest rates rise, the market value of an existing fixed-rate bond generally rises too.

5) A bank forced to sell bonds for less than it paid can turn a fall in market value into a realized loss.

6) Bank capital and bank liquidity mean the same thing: cash kept ready for withdrawals.

7) Relying heavily on large uninsured deposits can make funding less stable if those depositors lose confidence.

8) Lending mainly to one industry eliminates the risk that many borrowers will struggle at the same time.

9) A bank has $100 million in assets and $95 million in liabilities. If asset losses are $7 million and liabilities stay unchanged, the bank still has positive equity.

10) Weak risk management can leave a bank unprepared for rising interest rates, loan losses, and sudden withdrawals.