Money & Banking CH 11
How do sweep accounts and money market mutual funds allow banks to avoid reserve requirements?
Although they function as interest-earning deposits, these accounts are not legally deposits and so are not subject to reserve requirements.
Which of the following statements are true of the firewall created by the Glass-Steagall Act of 1933? (Select all that apply.) A. It was able to examine and enforce regulations related to housing mortgages. B. It put the U.S. banks at a disadvantage against their foreign competitors in terms of lost opportunities to make profits. C. It was able to separate a risky industry from traditional commercial banking. D. It put the U.S. banks at a disadvantage against their foreign competitors in terms of differentiating between risky mortgages and safe ones.
B & C
How did competitive forces lead to the repeal of the Glass-Steagall Act's separation of the banking and securities industries? (Check all that apply.) A. Banks were allowed to hold substantial equity stakes in commercial firms in order to keep them competitive. B. The Fed allowed bank holding companies to enter the underwriting business. C. Financial innovation motivated banks and other financial institutions to bypass the intent of the Glass-Steagall Act. D. The Act's restrictions put American banks at a competitive disadvantage relative to foreign banks.
B, C, & D
Which of the following explain why only two U.S. banks are present among the ten largest banks in the world? (Select all that apply.) A. An inefficient legal system. B. Stricter regulations in the United States. C. Slow pace of consolidation in the banking sector. D. A large number of banks in the United States.
B, C, & D
Which of the following is not a reason for the dramatic increase in the number of bank holding companies?
Bank holding companies can monopolize the market for banking services in a given region
Why is loophole mining so prevalent in the banking industry in the United States?
Banks engage in loophole mining in order to avoid regulatory constraints that restrict their ability to earn profits.
Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks? National banks: FDIC/Federal Reserve System/Comptroller of the Currency. Bank holding companies: Comptroller of the Currency/Office of Thrift Supervision/Federal Reserve System Non-Federal Reserve member state banks: Comptroller of the Currency/State banking authorities/Federal Reserve System. Federal Reserve member state banks: Federal Reserve System/Comptroller of the Currency/State banking authorities. Federally chartered savings and loan associations: Federal Reserve System/Office of Thrift Supervision/Comptroller of the Currency. Federally chartered credit unions: Federal Reserve System/Office of Thrift Supervision/National Credit Union Administration.
Comptroller of the Currency Federal Reserve System State Banking Authority Federal Reserve System Office of Thrift Supervision National Credit Union Administration
Unlike commercial banks, savings and loans, and mutual savings banks, credit unions did not have restrictions on locating branches in other states. Why, then, are credit unions typically smaller than the other depository institutions?
Credit unions are small because members usually share a common employer or have ties to a particular organization.
Why have banks been losing income advantages on their assets in recent years? A. Securitization has enabled other financial institutions to originate loans, taking away some of the banks' loan business. B. The collapse of the subprime mortgage market has put banks at a comparative disadvantage because regulators are requiring them to refinance subprime mortgages with terms that are unfavorable to the banks. C. The growth of the commercial paper market and the development of the junk bond market have given corporations alternatives to borrowing funds from banks, thus eroding the competitive advantage of banks on the lending side. D. Both A and C are correct. E. All of the above are correct.
D
How could the approval of international banking facilities (IBFs) by the Fed in 1981 have reduced employment in the banking industry in Europe?
IBFs encourage American and foreign banks to do more banking business in the United States, thus shifting employment from Europe to the United States.
How does the emergence of interest-rate risk help explain financial innovation? An increase in interest-rate risk decreases/does not change/increases the demand for financial innovation.
It increases the demand for financial products and services that could reduce that risk. increases
Which of the following statements is true of the role of a loan originator in the securitization process of a mortgage loan?
The loan originator is only concerned with households accepting the terms of the mortgage loan.
Do you think that before the National Bank Act of 1863 the prevailing conditions in the banking industry fostered or hindered trade across states in the United States?
They hindered trade across states because there was no national currency and the banknotes issued by the state-chartered banks had become worthless.
What has been the likely effect of the Gramm-Leach-Bliley Act on financial consolidation?
This legislation further stimulated financial consolidation of the banking industry. Thus, more financial mergers are likely to occur, which will increase both the size and complexity of financial institutions in the future.
"If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today." Is this statement true, false, or uncertain? Explain your answer.
True. Higher inflation helped raise interest rates, which caused the disintermediation process to occur and helped create money market mutual funds.
If the bank at which you keep your checking account is owned by foreigners, should you worry that your deposits are less safe than if the bank were owned by Americans?
No, because the foreign bank is subject to the same regulations as the American-owned bank.
Why have banks been losing cost advantages in acquiring funds in recent years? A. The increased cost of funds from higher interest rates and the abolishment of Regulation Q. B. The reinstatement of Regulation Q and the appearance of NOW accounts significantly increased disintermediation. C. Foreign banks have been able to tap a large pool of domestic savings, thereby lowering their cost of funds relative to American banks. D. Both A and C are correct. E. All of the above are correct.
A
Why is there a higher percentage of banks with less than $25 million of assets among commercial banks than among savings and loans and mutual savings banks?
Because restrictions on branching are stricter for commercial banks than for savings and loans, small commercial banks have greater protection from competition and are more likely to survive than small savings and loans.
If reserve requirements were eliminated in the future, as some economists advocate, what effect would this have on the size of money market mutual funds? Money market mutual funds (MMMFs) would likely become larger/become smaller/remain unchanged.
Become Smaller
Which of the following factors does not explain the rapid growth in international banking? A. The expansion of U.S. banks into the Eurodollar market. B. Increased profitability of U.S. banks in global investment banking. C. Increased regulation of the U.S. banking industry. D. Rapid growth in international trade and multinational corporations.
C
Which of the following is not an incentive created by regulatory agencies to encourage international banking? A. Special tax treatment. B. Relaxed branching regulations for international banking facilities (IBFs). C. Direct federal subsidies. D. Relaxed branching regulations for Edge Act corporations.
C
Why does the United States operate under a dual banking system? (Check all that apply.) A. Financial innovation is more likely to occur in a dual banking system. B. Dual banking systems are always more efficient and economically sound than other banking systems. C. Federally chartered banks help to stabilize the banking system and are less prone to failure. D. There is skepticism of centralized power in the U.S. banking system. E. Dual banking systems encourage competition between state-chartered banks and federally chartered banks.
C & D
'The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the industry, while in the United States there are around 6,500 commercial banks.' Is this statement true or false? Explain your answer.
False. The reason for the large number of US banks is anticompetitive regulations such as branching restrictions
