Which of the following best explains why commercial banks assume significant liabilities?
A. All commercial bank deposits are liabilities.
B. The loans commercial banks write can be risky.
C. Banks may pay too much interest on their deposits.
D. Banks may not charge enough interest on their loans to fund
operations and loan default risk.
I don't know about this one. I would think the best answer is B
investing 2-3 - bobpursley, Sunday, February 22, 2009 at 7:34am
You have to think: what is the biggest assets the bank has, and what is the biggest liability. Have you read your text?
investing 2-3 - Johnny, Sunday, February 22, 2009 at 9:02am
yes I did and understand that demand deposits and savings, CD's are listed as a liability, but the reason why I'm getting stuck on A because it says "all deposits" and under assets, I see "deposits with federal reserve." listed.
The reason why I was looking at C, because if you deposit money into a bank, the bank would place 10% for example into the required reserve and would loan out 90%. The bank does assume the risk of the borrower defaulting on that loan.
investing 2-3 - drwls, Sunday, February 22, 2009 at 10:34am
The reason banks are failing these days is D, but that is not what the questiona aks. Having large liabilites is part of banking. They assume these liabilities in order to make money, loaning out the deposited money at interest and collecting fees.
investing 2-3 - Johnny, Sunday, February 22, 2009 at 12:20pm
Thanks for the info, it's making more sense now :)