FIN 384

Gr_____- L_____ -Bl____ is the landmark act which allows financial service providers to offer an expanded menu of financial services for the customer. This law allows banks to truly become conglomerate financial service providers.

(True) FR Act; Glass Steal GLB Dodd Frank Gramm-Leach- Bliley Act AKA Financial Services Modernization Act passed in 1999 permits US banks to operate like their global competitors

When the Federal Reserve buys T-bills through its open market operations, it causes the bank deposits and loans to decrease. Note: When the central bank buys government debt, deposits and...

False NOTE: When the central bank buys government debt, deposits and loanable funds increase

Government-sponsored deposit insurance typically encourages individual depositors to monitor their banks' behavior in accepting risk.

False Prior to 1933 depositors in the U.S. did keep close watch over their bank's financial standing. After the introduction of deposit insurance the FDIC did it for them )

Agency theory suggests that bank management will always pursue the goal of maximizing the return of the bank's shareholders.

False (Managers will watch out for number ONE first)

Banks which operate entirely on the web are known as invisible banks.

False (Virtual Banks)

One of the main roles of the Federal Reserve today is m________ p_____. Three tools are used to carry out this role; open market operations, the discount rate and legal reserve requirements.

Monetary Policy

Any bank which spans regions, nations, and continents, offering the widest menu of financial services is a m_______ c___________ bank

Money Center Bank

Bank holding companies are allowed to own nonbank businesses as long as those businesses offer services closely related to banking. Q: Is a grocery store closely related to banking? Is an automobile dealership closely related to banking?

True, Yes? Yes?

Tr _________ s_______ is a traditional banking activity. The bank manages the financial affairs and property of individuals and in some cases businesses.

Trust Service(s)

A ________ bank offers its full range of services from a single location.

UNIT

The court with the most banks in: ___

United States (our culture don't trust big institutions)

A ________ bank offers its services only online.

VIRTUAL

A(n) _______________________ is a traditional service which permits a depositor to write a draft in payment for goods and services.

Demand Deposit AKA (checking account)

The Federal Reserve changes reserve requirements frequently because the affect of these changes is so small.

False

Q. To keep the internet trading system honest, there must always be at least one physical location on each continent where: A. floor traders conduct business. B. there are no taxes on trades of securities. C. no cell phones are permitted. D. commodities are delivered against the futures contract. E. corporate managers can meet stockholders.

A. Floor traders conduct business

The fastest growing crime in the U.S. is: A.Identity theft B.Bank robbery C.Car theft D.Counterfeiting E.Hacking into Apple iPods.

A. Identity Theft

Banks with less than _______ in assets are generally called community banks. A. Less than $1 billion B. Less than $10 billion C. Less than $50 billion D. Less than $100 billion E. Less than $500 billion

A. Less than $1 billion

Convergence refers to the fact that the number of bank mergers has increased in recent years.

False Convergence refers to the trend whereby non-financial firms start-up or buy banks and whereby banks start-up or buy non-financial firms

The etymological roots of the word "bank" trace this word back to an Italian term referring to a "money-changer's table"

True

Which one of the following is charged with setting policy and overseeing a bank's performance? A. Board of directors B. Depositors C. The FDIC D. Regulators E. Shareholders

A. Board of Directors

Q. The view that depositors hire banks to analyze the financial condition of prospective borrowers and continually evaluate the condition of outstanding loans is referred to as: A.Delegated monitoring. B.Intermediation. C.Currency exchange. D.Default analysis. E. Too big to fail.

A. Delegated monitoring

The equivalent of the Federal Reserve System in Europe is known as the: A.European Union B.Bank of London C.Cirque de Solei D.Deutsche Bank E. European Central Bank

A. European Central Bank

Which of the following is a reason for the rapid growth in branch banks? A.Exodus of population from cities to suburban areas. B.Bank convergence. C.Bank failure. D.Deregulation. E.Economies of scope.

A. Exodus of population from cities to suburban areas

One of the earliest theories regarding the impact of regulation on banks was developed by George Stigler. He proposes that: A.Firms in regulated industries seek more regulation because regulation creates monopoly power. B.Regulations shelter firms from changes in demand and cost, lowering risk. C.Regulations can increase consumer confidence which increases customer loyalty to regulated firms. D.Depository institutions should be regulated no differently than any other corporation with no subsidies or special privileges. E.One global currency will stop bank failures.

A. Firms in regulated industries seek more regulation because regulation creates monopoly power

Ag____ th___ is a view of how modern corporations operate which analyzes the relationship between a firm's owners and its managers.

Agency Theory

The macro-economic function of banks whereby they transform savings into credit is known as the intermediation role

True

Target Bank stock is selling in the market today at $8 per share. Shares for Alpha Bank, the acquiring institution, trade at $12. Alpha stockholders have agreed to extend to shareholders of the target firm a bonus of $4. What is the exchange ratio for this proposed merger? A. 2 to 1 B. 1 to 1 C. 1 to 3 D. 1 to 2

B. 1 to 1

According to Levonian and Rose in order to achieve some reduction in earnings risk, interstate banks must expand into at least: A. 2 states B. 4 states C. 8 states D. 14 states E. 18 states

B. 4 states

Set the following in rank order, beginning with the investment which provides the highest returns. A. T-Bills B. Common Stock C. Bonds D. Corporate Bonds

B. Common Stock (then Corporate bonds, T-bonds, T-bills)

Many financial experts believe that the customers most likely to be damaged by decreased competition include: A.Large corporations in large cities. B.Households and business in smaller cities and towns. C.Households that earn more than a billion dollars a year. D.Students away at college. E.Government agencies.

B. Household and businesses in smaller cities and towns (Note: Community Re-investment Act; M&I Bank )

A ________ bank offers its full range of services from several locations.

BRANCH

A _________________ is a corporation chartered for the express purpose of holding the stock of one or more banks.

Bank Holding Company

The B___ Mer__ A___ is the law that requires each merging bank to seek approval from its principal federal regulating agency before a merger can take place

Bank Merger Act

Under the terms of B__ Mer___ Act, the federal regulating agencies must give top priority to the com___ off___ of the proposed merger

Bank Merger Act; Competitive Effects

The B____ of Gov_______is the center of authority and decision making within the Federal Reserve. It consists of seven members appointed by the president for terms not exceeding 14 years.

Board of Governors

The Kidwell text reveals that geographic diversification worked so well for banks in _________ that few of these institutions failed in the Great Depression. A. Nova Scotia B. Nevada C. California D. New York E. Florida

C. California (Permitted to have branch banking)

In the U.S. a commercial bank qualifies as "bank" under federal law if it offers: A.Consumer installment loans, CDs. B.Savings deposits, commercial loans. C.Checking accounts, commercial loans. D.Security investments, inventory loans to business customers. E. Commercial deposit accounts, consumer savings plans.

C. Checking accounts, commercial loans

When financial service providers offer a range of services including banking, insurance and securities services it is known as: A. European Union B. Globalization C. Convergence D. Distribution E. Economies of Scale

C. Convergence

In the U.S. the legal arrangement in which federal and state authorities both have significant bank regulatory powers is referred to as: A.Balance of power. B.The New Deal. C.Dual Banking System. D.Regulatory dialectic. E.Co-operative regulation.

C. Dual Banking System

. In banking, organizational form follows __________ because banks usually are organized in such a way as to carry out the tasks and supply the services demanded of them. A. Customers B. Management choice C. Function D. Finance E. Location

C. Function

A bank which handles the cash collections and disbursements for a company and invests any temporary cash surpluses in interest bearing assets provides c____ m_______ services to these customers.

Cash Management

Banks that sell deposits and make loans to businesses and individuals are known as __________________.

Commercial Banks

C___________ l_____g is a service provided by banks where the bank lends money to individuals for the purchase of durable and other goods

Consumer Lending

C____ ex ____ refers to trading one form of currency for another. An example of this would be when the banks trades U.S. dollars for Chinese Yuan (RMB) for a fee.

Currency Exchange

Target Bank has 30,000 shares of common stock. Alpha has 50,000 common equity shares. Combined earnings after the merger are expected to be $1,760,000. Right now Alpha reports earnings of $1,000,000 and Target reports $250,000. Determine the post-merger EPS. A. $88 B. $59 C. $25 D. $22

D. $22 $22= $1,760,000/(50,000 shares +30,000 shares) $22= $1,760,000/80,000

Which balance sheet restrictions continue to limit depository institution activities? A. Holding equity securities is forbidden. B. Prohibition against loans amounting to more than 15% of bank capital to one borrower. C. Holding debt securities rated less than "investment grade" is typically not permitted. D. All of the above are limitations. E. B and C only remain as limitations.

D. All of he above are limitations

If the spread between rates paid on savings is dramatically higher than the rate paid on demand deposits, what will happen? A. Depositors will shift substantial funds from checking to savings B. The institution will experience a liquidity crisis C. The bank's shareholders will earn a lower rate D. All of the above E. A and C only

D. All of the above

A study of history shows that one of the first services offered by banks was: A.Equipment leasing. B.Loan support for the production of movies. C.Intermediating between savers and borrowers. D.Currency exchange. E. Insuring risky deposits.

D. Currency Exchange

The gradual evolution of markets and institutions such that geographic boundaries do not restrict financial transactions is known as: A. Deregulation B. Integration C. Domination D. Globalization E. Contamination

D. Globalization

A bank is also any institution which accepts Dep ___ and makes I ___.

Deposits; Loans

Banks are regulated for which of the reasons listed below? A.Banks are leading repositories of the public's savings. B.Banks have the power to create money. C.Banks provide businesses and individuals with loans that support consumption and investment spending. D.Banks assist governments in conducting economic policy, collecting taxes and dispensing government payments. E. All of the above.

E. All of the above

Which of the following is an unresolved issue in the new century? A.What should be done about the regulatory safety net set up to protect small depositors? B.If financial institutions are allowed to take on more risk, how can taxpayers be protected from paying the bill when more institutions fail? C.Does functional regulation actually work? D.Should regulators allow the mixing of banking and commerce? E. All of the above.

E. All of the above

Banks perform the indispensable task of: A.Equipment leasing. B.Absorbing excess liquidity. C.Funding home mortgage loans. D.Currency exchange. E. Intermediation.

E. Intermediation

If the earning per share of the merged firm firm has declined then the shareholders have suffered a problem known as earn ___ dil____.

Earnings Dilution

Ec______ of sc___ is the idea that there will be a lower cost of production per unit as the firm gets larger.

Economies of Scale

Ec______ of sc___ is the idea that there will be lower cost of producing multiple services using the same organization and resources.

Economies of Scope

Of the principal reasons for regulating banks, what was the primary purpose of the Truth in Lending Law? A.Protection of the public's savings. B.Loan support for the production of movies. C.Intermediating between savers and borrowers. D.Ensuring an adequate and fair supply of loans E. Insuring risky deposits.

Ensuring an adequate and fair supply of loans

Eq______________ l___________g is an alternative to lending in which the financial institution purchases the equipment and rents it to its business customers.

Equipment Leasing NOTES: auto leasing to consumers

The ex___ r___ tells how may shares of stock the shareholders of the acquired firm will receive from the acquiring firm.

Exchange Ratio

Managers who value fringe benefits, plush offices and ample travel budgets over the pursuit of maximum returns for stockholders are exhibiting signs of exp_____ pref_____ beh_____.

Expense Preference Behavior

According to Congress a bank is defined as any institution that can qualify for deposit insurance administered by the ___.

FDIC

The federal bank regulatory agency which examines the most banks is the ______.

FDIC

The _____________________ was created as part of the Glass Steagall Act. In the beginning it insured deposits up to $2,500.

FDIC AKA (Federal Deposit Insurance Corporation)

The Gl______ St_____ Act was passed during the Great Depression. It separated investment and commercial banks and created the FDIC.

Glass Steagall Act

The Gr____-Le______-Bl_____ Act allows banks to affiliate with insurance companies and securities firms either through a holding company or as a subsidiary.

Gramm- Leach- Bliley Act (Financial Services Modernization Act) NOTE: GLB cancelled the Glass- Steagall Act

The Her ___ Hirsch ___ Ind___ is a measure of the market concentration of a given market area. The larger this number is the more concentrated the market.

Herfindahl-Hirschaman Index (HHI)

A h____ t____ is a merger which is recited by the existing management and stockholders of the target firm

Hostile Takeover

Banks which underwrite issues of new securities for their corporate customers are known as:

Investment Banks

Dr. Nelson and Dr. Stan Adamson completed a study of m___ p___ in the title insurance industry and published it in 1999.

Market Power

A group of business firms in the same industry operating in a concentrated market having a high HHI is said possess a great deal of m___ p___. Such a group is often called a c___.

Market Power; Cartel

A m_______ b______ can invest in corporate stock and also loan money to finance the start of new ventures or support the expansion of existing businesses.

Merchant Bank

The mer___ pre__ is the amount over the current stock price shareholders of the acquired firm will receive from the acquiring bank in a merger

Merger Premium

Because the FDIC levies fixed insurance premiums regardless of risk, this leads to a problem called the m____ h ____ . The fixed premiums encourage all banks to accept greater risk.

Moral Hazard

The first major federal banking law in the U.S. was the National B_____gAct. This law was passed during the Civil War and set up a system for chartering national banks and created the OCC.

National Banking Act OCC (Office of Controller of Currency )

One tool that the Federal Reserve uses to control the money supply is op____ mark___ oper_____ . The Federal Reserve will buy and sell T-bills when they are using this tool of monetary policy.

Open Market Operations

A ______ is a machine located at the merchant's place of business which allows depositors to use their debit card to pay for purchases directly.

POS (point of sale) terminal or register

S _____ of V____ is a traditional service provided by banks in which the banks store the valuable of their customers and certify their true value

Safekeeping of Valuables

Chapter 1

See answers

The role performed by banks in which they stand behind their customers when those customers are unable to pay a debt obligation is known as the guarantor role

True (for a fee)

A greater proportion of major corporations have deserted the banking system in recent years to raise borrowed funds directly from the open markets.

True

According to the textbook, high-volume baking is required to make efficient use of automation and other technological innovations

True

Banks tend to have a higher proportion of outside directors than a typical manufacturing firm.

True

Current theory suggests that banks exist because of imperfections in our financial system.

True

Lending institutions act as delegated monitors and can diversify and reduce their risk exposure, resulting in increased safety for savers' funds.

True

Less than 10 percent of the largest banks in the U.S. control almost 90 percent of the industry assets.

True

Nearly all U.S. banks with federal or state charters have their deposits insured by the Federal Deposit Insurance Corporation.

True

One of the principal reasons for government regulation of financial firms is to protect the safety and soundness of the financial system.

True

Recent research suggests that the relationship between bank size and the cost of production per unit is roughly U shaped.

True

T/F: A market served by just two banks, equal to each other in size, would have HHI of 5,000

True

T/F: According to Dr. Nelson, the search for efficiency or economies of scale is essentially the search for market power -If a couple of banks merge and achieve Point Z in the following graphic, what will happen to competitors stuck with production cost at Point A? They'll...

True

T/F: According to a recent survey, many European bank mergers in the 1980s and 1990s were motivated by the search fro cost savings (economies of scale)

True

T/F: According to the Rose/Hudgins* textbook the financial success of a bank merger depends heavily upon the comparative dollar amounts of earnings reported by the two banking organization and their relative price-earnings ratios.

True

T/F: In recent years banking has ranked in the top five of all U.S, industries in the number of reported merger transactions

True

T/F: In recent years in the United States bank merger premiums have commonly ranged from 150 to 250 percent -This observation suggest that during the boom years of bank deregulation in the U.S., roughly 1999- 2007, acquiring banks

True

The Gramm-Leach-Bliley Act of 1999 essentially repeals the Glass-SteagallAct passed in the 1930s.

True

The In the United States, fixed fees charged for deposit insurance, regardless of how risky a bank is, led to a problem known as moral hazard.

True