Bank Management Chapter 1

61. Which function of an FI reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings? A. Brokerage services. B. Asset transformation services. C. Information production services. D. Money supply management. E. Administration of the payments mechanism.

A

80. Net regulatory burden for FIs is higher because regulators may require the FI to A. hold more capital than what would be held without regulation. B. produce less information than would be produced without regulation. C. hold more debt than what would be held without regulation. D. hold fewer reserves than they would without regulation. E. All of the options.

A

81. What distinguishes financial intermediaries from industrial firms? A. FI balance sheets are almost totally comprised of financial assets while commercial firms hold substantial amounts of real assets. B. Industrial firms are the customers of FIs, but FIs cannot be customers of industrial firms. C. FIs deal exclusively in primary securities, but industrial firms specialize in secondary securities. D. Industrial firms produce real goods or services while FIs only produce money. E. Industrial firms are unregulated while FIs are heavily regulated.

A

93. The following are protective mechanisms that have been developed by regulators to promote the safety and soundness of the banking system EXCEPT A. encouraging banks to rely more on deposits rather than debt or capital as a cushion against failure. B. encouraging banks to limit lending to a single customer to no more than 10% of capital. C. the provision of deposit insurance. D. the periodic monitoring of banks. E. encouraging banks to produce timely accounting statements and reports.

A

100. As Despository Institutions made a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model over the last decade, A. banks became more financially stable. B. it became easier to measure the riskiness of individual loans. C. there was a dramatic increase in systematic risk of the financial system. D. the Federal Reserve decreased the number of services that banks could provide. E. it became more difficult for households to obtain credit.

C

104. The recent financial crisis highlighted, in retrospect, how heavily households and businesses had come to rely on FIs to act as specialists in A. generating profits and lowering costs. B. risk measurement and management. C. investment advice and brokerage services. D. time intermediation and denomination mediation. E. derivative securities and interbank borrowing.

B

105. Prior to the most recent financial crisis, the risks faced by FIs have traditionally been measured and managed by A. outside agencies such as Moody's or Standard and Poor's. B. functional risk area such as liquidity risks, price risk, or credit risk. C. designated regulatory agencies for the industries in which the FI operates. D. using enterprise risk management techniques. E. None of the options. FIs did not monitor nor manage the risks that they face.

B

57. Economic collapse during the 1930s, the banking system in the U.S. performed directly or indirectly all financial services. Those functions included all of the following EXCEPT A. commercial banking. B. money market funds. C. investment banking. D. stock investing. E. insurance services.

B

68. The asset transformation function of FIs typically involves A. receipt of securities through electronic payments systems. B. altering the liquidity and maturity features of funds sources used to finance the FI's asset portfolio. C. granting loans to transform funds deficit units into funds surplus units. D. investing short-term funds in off-balance sheet activities. E. transferring of funds from one generation to another

B

71. Traditionally, regulation of FIs in the U.S. has been A. minimal, as evidenced by the recent financial crisis. B. extensive, as a result of the importance of FI to the economy. C. minimal, because the free market is allowed to allocate financial resources. D. extensive, because banks have monopoly power. E. no different from regulation of nonfinancial firms.

B

83. How have the innovations of global financial networks and computerized money and information transfer systems changed financial intermediation? A. Financial intermediation has become riskier because it is more difficult to stay informed about worldwide events. B. Financial intermediation has become more costly because it is necessary to invest in high cost technology. C. Financial intermediation has been unaffected. D. Financial intermediation has become more costly as global firms exploit economies of scale and scope. E. Financial intermediation has become less risky as firms become adept at maintaining zero gap positions.

B

90. Verifying the minimum level of capital or equity that must be held to fund the operations of an FI is part of the goal of A. investor protection regulation. B. safety and soundness regulation. C. entry regulation. D. credit allocation regulation. E. consumer protection regulation

B

96. Which of the following repealed the 1933 Glass-Steagall barriers between commercial banking, insurance, and investment banking? A. Financial Institutions Reform Recovery and Enforcement Act (1989). B. Financial Services Modernization Act (1999). C. Competitive Equality in Banking Act (1987). D. The Bank Holding Company Act (1956). E. Garn-St. Germain Depository Institutions Act (1982).

B

106. Adopting an enterprise risk management approach by an FI is likely to result in all of the following EXCEPT A. prioritizing each risk and managing them as a portfolio of risks. B. recognizing that risk-taking is rooted in subtle behavioral characteristics. C. larger investments in risk management processes and systems. D. encouraging a culture of risk awareness and decisions throughout the organization. E. realignment of the stature and resources provided to risk management functions within the FI.

C

58. Depository financial institutions include all of the following EXCEPT A. commercial banks. B. savings banks. C. investment banks. D. credit unions. E. all of the options are depository institutions

C

64. Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following EXCEPT A. monitoring done by the bank on your behalf. B. increased liquidity if funds are needed quickly. C. increased transactions costs. D. less price risk when funds are needed. E. better diversification of deposited funds.

C

73. Which of the following measures the difference between the private costs of regulations and the private benefits of those regulations for the producers of financial services? A. Capital adequacy. B. Agency costs. C. Net regulatory burden. D. Charter value. E. Liquidity risk.

C

76. Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer? A. The bank failure usually leads to a government bailout. B. There are fewer steel manufacturers than there are banks. C. The large bank failure reduces credit availability throughout the economy. D. Since the steel company's assets are tangible, they are more easily reallocated than the intangible bank assets. E. Everyone needs money, but not everyone needs steel.

C

63. Which of the following is NOT a major function of financial intermediaries? A. Brokerage services. B. Asset transformation services. C. Information production. D. Management of the nation's money supply. E. Administration of the payments mechanism.

D

74. What is globalization? A. The process that causes an FI to focus more intensely on their own domestic market. B. Acceptance of the Federal Reserve as the regulator of the world financial system. C. Usually refers to the initiation of GLOBEX, a new international financial communications and trading system. D. The evolution of markets and institutions so that geographic boundaries do not restrict financial transactions. E. Joint ownership of international electronic payments systems.

D

86. FIs perform their intermediary function in two ways A. they specialize as brokers between savers and users. B. they serve as asset transformers by purchasing primary securities and issuing secondary securities. C. they serve as asset transformers by purchasing secondary securities and issuing primary securities. D. they specialize as brokers between savers and users and they serve as asset transformers by purchasing primary securities and issuing secondary securities. E. they specialize as brokers between savers and users and they serve as asset transformers by purchasing secondary securities and issuing primary securities.

D

101. All of the following are examples of participants in the shadow banking system EXCEPT A. money market mutual funds (MMMFs). B. structured investment vehicles (SIVs). C. credit hedge funds. D. limited-purpose finance companies. E. credit unions

E

60. Which of the following statements is FALSE? A. A financial intermediary specializes in the production of information. B. A financial intermediary reduces its risk exposure by pooling its assets. C. A financial intermediary benefits society by providing a mechanism for payments. D. A financial intermediary may act as a broker to bring together funds deficit and funds surplus units. E. A financial intermediary acts as a lender of last resort.

E

66. The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in relatively illiquid and higher risk assets is A. because diversification allows an FI to predict more accurately the expected returns on its asset portfolio. B. significant amounts of portfolio risk are diversified away by investing in assets that have correlations between returns that are less than perfectly positive. C. because individual savers cannot benefit from risk diversification. D. because FIs have a cost advantage in monitoring their portfolios. E. All of the options.

E

69. Which of the following refers to the possibility that a firm's owners or managers will take actions contrary to the promises contained in the covenants of the securities the firm issues to raise funds? A. Liquidity risk. B. Price risk. C. Credit risk. D. Intermediation. E. Agency costs.

E

77. Why do households prefer to use FIs as intermediaries to invest their surplus funds? A. Transaction costs are low to the household since FIs are more efficient in monitoring and gathering investment information. B. To receive the benefits of diversification that households may not be able to achieve on their own. C. The FI has can benefit from combining funds and negotiating lower asset prices and transactions costs. D. The FI can provide insurance at relatively low cost that will protect funds under management. E. All of the options.

E

78. Financial intermediaries are A. funds surplus units, because they exist to make money. B. funds deficit units, because they must pay heavy regulatory fees and taxes. C. funds surplus units, because they hold large portfolios of financial securities. D. funds deficit units, because they must comply with minimum capital requirements. E. neither funds surplus nor deficit units

E