Econ 2035 Chapter 12

A firm issuing credit cards earns income from A) loans it makes to credit card holders. B) subsidies from the local governments. C) payments made to it by manufacturers of the products sold in stores on credit card purchases. D) sales of the card in foreign countries.

A

ATMs were developed because of breakthroughs in technology and as a A) means of avoiding restrictive branching regulations. B) means of avoiding paying interest to corporate customers. C) way of concealing transactions from the SEC. D) increasing the competition from foreign banks

A

Adjustable rate mortgages A) reduce the interest-rate risk for financial institutions. B) benefit homeowners when interest rates rise. C) generally have higher initial interest rates than conventional fixed-rate mortgages. D) allow borrowers to avoid paying interest on portions of their mortgage loans.

A

Bank holding companies that rival money center banks in size, but are not located in money center cities are A) superregional banks. B) bank clearing houses. C) international banks. D) local banks.

A

Banks responded to disintermediation by A) supporting the elimination of interest rate regulations, enabling them to better compete for funds. B) opposing the elimination of interest rate regulations, as this would increase their cost of funds. C) demanding that interest rate regulations be imposed on money market mutual funds. D) supporting the elimination of interest rate regulations, as this would reduce their cost of funds.

A

Credit cards date back to A) prior to the second World War. B) just after the second World War. C) the early 1950s. D) the late 1950s.

A

Critics of nationwide banking fear A) an elimination of community banks. B) increased lending to small businesses. C) cutthroat competition. D) banks with economies of scale problems

A

Disintermediation resulted from A) interest rate ceilings combined with inflation-driven increases in interest rates. B) elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits). C) increases in federal income taxes. D) reserve requirements

A

Financial innovations occur because of financial institutions search for A) profits. B) fame. C) stability. D) recognition.

A

Financial innovations that grew out of the bank branching restrictions were A) bank holding companies and automatic teller machines. B) bank holding companies and securitization. C) automatic teller machines and sweep accounts. D) automatic teller machines and bank credit cards

A

In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status. A) Michael Milken B) Roger Milliken C) Ivan Boskey D) Carl Ichan

A

In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as "breaking the buck." This means that A) they could no longer afford to redeem shares at the par value of $1. B) they required shareholders to contribute a dollar more in fees each month. C) shareholders were able to redeem shares for more than a $1. D) shares earned more than a dollar in interest.

A

In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 3.5 percent; in the 1980s it fluctuated between ________ percent and ________ percent. A) 5; 15 B) 4; 11.5 C) 4; 18 D) 5; 10

A

In this type of arrangement, any balances above a certain amount in a corporation's checking account at the end of the business day are "removed" and invested in overnight securities that pay the corporation interest. This innovation is referred to as a A) sweep account. B) share draft account. C) removed-repo account. D) stockman account

A

Money market mutual funds A) function as interest-earning checking accounts. B) are legally deposits. C) are subject to reserve requirements. D) have an interest-rate ceiling

A

One factor contributing to the decline in cost advantages that banks once had is the A) decline in the importance of checkable deposits from over 60 percent of banks' liabilities to 2 percent today. B) decline in the importance of savings deposits from over 60 percent of banks' liabilities to under 15 percent today. C) decline in the importance of checkable deposits from over 40 percent of banks' liabilities to 15 percent today. D) decline in the importance of savings deposits from over 40 percent of banks' liabilities to under 20 percent today

A

One of the concerns of increased bank consolidation is the reduction in community banks which could result in A) less lending to small businesses. B) loss of cultural identity. C) higher interest rates. D) more bank regulation

A

Prior to 2008, bank managers looked on reserve requirements A) as a tax on deposits. B) as a subsidy on deposits. C) as a subsidy on loans. D) as a tax on loans.

A

Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been A) the creation of the FDIC. B) rapid economic growth since 1941. C) the employment of new procedures by the Federal Reserve. D) better bank management.

A

Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers A) has shrunk dramatically, from around 40 percent of total credit advanced to around 25 percent by 2011. B) has shrunk dramatically, from around 70 percent of total credit advanced to below 50 percent by 2011. C) has expanded dramatically, from around 50 percent of total credit advanced to above 70 percent by 2011. D) has expanded dramatically, from around 30 percent of total credit advanced to above 50 percent by 2011

A

So-called fallen angels differ from junk bonds in that A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds that have had their credit ratings fall below Baa. B) junk bonds refer to previously issued bonds that have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings. C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C. D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C

A

State banking authorities have sole jurisdiction over state banks A) without FDIC insurance. B) that are not members of the Federal Reserve System. C) operating as bank holding companies. D) chartered in the 21st century.

A

Sweep accounts A) have made reserve requirements nonbinding for many banks. B) sweep funds out of deposit accounts into long-term securities. C) enable banks to avoid paying interest to corporate customers. D) reduce banks' assets.

A

The McFadden Act of 1927 A) effectively prohibited banks from branching across state lines. B) required that banks maintain bank capital equal to at least 6 percent of their assets. C) effectively required that banks maintain a correspondent relationship with large money center banks. D) separated the commercial banks and investment banks

A

The Second Bank of the United States was denied a new charter by A) President Andrew Jackson. B) Vice President John Calhoun. C) President Benjamin Harrison. D) President John Q. Adams

A

The development of money market mutual funds contributed to the growth of ________ since the money market mutual funds need to hold liquid, high-quality, short-terms assets. A) the commercial paper market B) the municipal bond market C) the corporate bond market D) the junk bond market

A

The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the A) central bank. B) commercial bank. C) bank of settlement. D) monetary fund

A

The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the A) McFadden Act. B) National Bank Act. C) Glass-Steagall Act. D) Garn-St.Germain Act

A

The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known as A) securitization. B) internationalization. C) arbitrage. D) program trading.

A

To eliminate the abuses of the state-chartered banks, the ________ created a new banking system of federally chartered banks, supervised by the ________. A) National Bank Act of 1863; Office of the Comptroller of the Currency B) Federal Reserve Act of 1863; Office of the Comptroller of the Currency C) National Bank Act of 1863; Office of Thrift Supervision D) Federal Reserve Act of 1863; Office of Thrift Supervision

A

________ is the process of researching and developing profitable new products and services by financial institutions. A) Financial engineering B) Financial manipulation C) Customer manipulation D) Customer engineering

A

Both ________ and ________ were financial innovations that occurred because of interest rate volatility. A) adjustable-rate mortgages; commercial paper B) adjustable-rate mortgages; financial derivatives C) sweep accounts; financial derivatives D) sweep accounts; commercial paper

B

Currency circulated by banks that could be redeemed for gold was called A) junk bonds. B) banknotes. C) gold bills. D) state money

B

The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of A) the National Bank Charter Amendments of 1918. B) the Garn-St. Germain Act of 1982. C) the National Bank Act of 1863. D) Federal Reserve Act of 1913

C

A major controversy involving the banking industry in its early years was A) whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions. B) whether the federal government or the states should charter banks. C) what percent of deposits banks should hold as fractional reserves. D) whether banks should be allowed to issue their own bank notes

B

Allowing bank branching across state lines gives banks greater ability to coordinate bank operations. This makes it easier for them to receive the benefits of A) the dual banking system. B) economies of scale. C) disintermediation. D) interest-rate irregularities

B

Banks have attempted to maintain adequate profit levels by A) making fewer riskier loans, such as commercial real estate loans. B) pursuing new off-balance-sheet activities. C) increasing reserve deposits at the Fed. D) decreasing capital accounts

B

Financial innovation has caused A) banks to suffer declines in their cost advantages in acquiring funds, although it has not caused a decline in income advantages. B) banks to suffer a simultaneous decline of cost and income advantages. C) banks to suffer declines in their income advantages in acquiring funds, although it has not caused a decline in cost advantages. D) banks to achieve competitive advantages in both costs and income

B

Financial instruments whose payoffs are linked to previously issued securities are called A) grandfathered bonds. B) financial derivatives. C) hedge securities. D) reversible bonds

B

One factor contributing to the rapid growth of the commercial paper market since 1970 is A) the fact that commercial paper has no default risk. B) improved information technology making it easier to screen credit risks. C) government regulation. D) FDIC insurance for commercial paper

B

Prior to 1863, all commercial banks in the United States A) were chartered by the U.S. Treasury Department. B) were chartered by the banking commission of the state in which they operated. C) were regulated by the Federal Reserve. D) were regulated by the central bank.

B

Prior to 1980, the Fed set an interest rate ________, a maximum limit, on the interest rate that could be paid on time deposits. A) floor B) ceiling C) wall D) window

B

Rising interest-rate risk A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation

B

Since 1980 A) bank profitability has declined. B) banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities. C) banks have offset the decline in profits from off-balance-sheet activities with increased income from traditional activities. D) bank profits have grown rapidly due to deregulation

B

State banks that are not members of the Federal Reserve System are most likely to be examined by the A) Federal Reserve System. B) FDIC. C) FHLBS. D) Comptroller of the Currency

B

Sweep accounts which were created to avoid reserve requirements became possible because of a change in A) deposit ceilings. B) technology. C) government rules. D) bank mergers

B

The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from A) issuing equity to finance bank expansion. B) engaging in underwriting and dealing of corporate securities. C) selling new issues of government securities. D) purchasing any debt securities

B

The National Bank Act of 1863, and subsequent amendments to it, A) created a banking system of state-chartered banks. B) established the Office of the Comptroller of the Currency. C) broadened the regulatory powers of the Federal Reserve. D) created insurance on deposit accounts

B

The ability to use one resource to provide different products and services is A) economies of scale. B) economies of scope. C) diversification. D) vertical integration.

B

The decline in traditional banking internationally can be attributed to A) increased regulation. B) improved information technology. C) increasing monopoly power of banks over depositors. D) increased protection from competition

B

The entry of AT&T and GM into the credit card business is an indication of A) government's efforts to deregulate the provision of financial services. B) the rising profitability of credit card operations. C) the reduction in costs of credit card operations since 1990. D) the sale of unprofitable operations by Bank of America and Citicorp

B

The large number of banks in the United States is an indication of A) vigorous competition within the banking industry. B) lack of competition within the banking industry. C) only efficient banks operating within the United States. D) consumer preference for local banks

B

The modern commercial banking system began in America when the A) Bank of United States was chartered in New York in 1801. B) Bank of North America was chartered in Philadelphia in 1782. C) Bank of United States was chartered in Philadelphia in 1801. D) Bank of North America was chartered in New York in 1782.

B

The most important developments that have reduced banks cost advantages in the past thirty years include: A) the growth of the junk bond market. B) the competition from money market mutual funds. C) the growth of securitization. D) the growth in the commercial paper market

B

The most important developments that have reduced banks' income advantages in the past thirty years include: A) the increase in off-balance sheet activities. B) the growth of securitization. C) the elimination of Regulation Q ceilings. D) the competition from money market mutual funds

B

The most significant change in the economic environment that changed the demand for financial products in recent years has been A) the aging of the baby-boomer generation. B) the dramatic increase in the volatility of interest rates. C) the dramatic increase in competition from foreign banks. D) the deregulation of financial institutions

B

Thrift institutions importance as a source of funds for borrowers A) has shrunk from around 40 percent of total credit advanced in the late 1970s to below 30 percent by 2011. B) has shrunk from over 20 percent of total credit advanced in the late 1970s to around 3 percent by 2011. C) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 25 percent by 2011. D) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 30 percent by 2011

B

Which of the following is a true statement concerning bank holding companies? A) Bank holding companies own few large banks. B) Bank holding companies have experienced dramatic growth in the past three decades. C) The McFadden Act has prevented bank holding companies from establishing branch banks. D) Bank holding companies can own only banks

B

Which of the following statements concerning bank regulation in the United States is true? A) The Office of the Comptroller of the Currency has the primary responsibility for state banks that are members of the Federal Reserve System. B) The Federal Reserve and the state banking authorities jointly have responsibility for the 900 state banks that are members of the Federal Reserve System. C) The Office of the Comptroller of the Currency has sole regulatory responsibility over bank holding companies. D) The state banking authorities have sole regulatory responsibility for all state banks

B

With the creation of the Federal Deposit Insurance Corporation, A) member banks of the Federal Reserve System were given the option to purchase FDIC insurance for their depositors, while non-member commercial banks were required to buy deposit insurance. B) member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could choose to buy deposit insurance. C) both member and non-member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors. D) both member and non-member banks of the Federal Reserve System could choose, but were not required, to purchase FDIC insurance for their depositors

B

A debit card differs from a credit card in that A) a debit card is a loan while for a credit card purchase, payment is made immediately. B) a debit card is a long-term loan while a credit card is a short-term loan. C) a credit card is a loan while for a debit card purchase, payment is made immediately. D) a credit card is a long-term loan while a debit card is a short-term loan

C

According to Edward Kane, because the banking industry is one of the most ________ industries in America, it is an industry in which ________ is especially likely to occur. A) competitive; loophole mining B) competitive; innovation C) regulated; loophole mining D) regulated; innovation

C

Adjustable rate mortgages A) protect households against higher mortgage payments when interest rates rise. B) keep financial institutions' earnings high even when interest rates are falling. C) benefit homeowners when interest rates are falling. D) generally have higher initial interest rates than on conventional fixed-rate mortgages

C

Although the National Bank Act of 1863 was designed to eliminate state-chartered banks by imposing a prohibitive tax on banknotes, these banks have been able to stay in business by A) issuing credit cards. B) ignoring the regulations. C) acquiring funds through deposits. D) branching into other states

C

An instrument developed to help investors and institutions hedge interest-rate risk is A) a put option. B) a call option. C) a financial derivative. D) a mortgage-backed security

C

Automated teller machines A) are more costly to use than human tellers, so banks discourage their use by charging more for use of ATMs. B) cost about the same to use as human tellers in banks, so banks discourage their use by charging more for use of ATMs. C) cost less than human tellers, so banks may encourage their use by charging less for using ATMs. D) cost nothing to use, so banks provide their services free of charge.

C

Bank consolidation will likely result in A) less competition. B) the elimination of community banks. C) increased competition. D) a shift in assets from larger banks to smaller banks

C

Because of the abuses by state banks and the clear need for a central bank to help the federal government raise funds during the War of 1812, Congress created the A) Bank of United States in 1812. B) Bank of North America in 1814. C) Second Bank of the United States in 1816. D) Second Bank of North America in 1815

C

Before 1863, A) federally-chartered banks had regulatory advantages not granted to state-chartered banks. B) the number of federally-chartered banks grew at a much faster rate than at any other time since the end of the Civil War. C) banks acquired funds by issuing bank notes. D) banks were required to maintain 100% of their deposits as reserves

C

Experts predict that the future structure of the U.S. banking industry will have A) an increased number of banks. B) as few as ten banks. C) several thousand banks. D) a few hundred banks.

C

Loophole mining refers to financial innovation designed to A) hide transactions from the IRS. B) conceal transactions from the SEC. C) get around regulations. D) conceal transactions from the Treasury Department

C

New computer technology has A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation

C

The Federal Reserve Act of 1913 required that A) state banks be subject to the same regulations as national banks. B) national banks establish branches in the cities containing Federal Reserve banks. C) national banks join the Federal Reserve System. D) state banks could not join the Federal Reserve System

C

The Federal Reserve Act required all ________ banks to become members of the Federal Reserve System, while ________ banks could choose to become members of the system. A) state; national B) state; municipal C) national; state D) national; municipal

C

The U.S. banking system is considered to be a dual system because A) banks offer both checking and savings accounts. B) it actually includes both banks and thrift institutions. C) it is regulated by both state and federal governments. D) it was established before the Civil War, requiring separate regulatory bodies for the North and South.

C

The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is A) a put option. B) a call option. C) a futures contract. D) a mortgage-backed security.

C

The declining cost of computer technology has made ________ a reality. A) brick and mortar banking B) commercial banking C) virtual banking D) investment banking

C

The driving force behind the securitization of mortgages and automobile loans has been A) the rising regulatory constraints on substitute financial instruments. B) the desire of mortgage and auto lenders to exit this field of lending. C) the improvement in computer technology. D) the relaxation of regulatory restrictions on credit card operations.

C

The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the A) National Bank Act of 1863. B) Federal Reserve Act of 1913. C) Glass-Steagall Act. D) McFadden Act.

C

The most important source of the changes in supply conditions that stimulate financial innovation has been the A) deregulation of financial institutions. B) dramatic increase in the volatility of interest rates. C) improvement in computer and telecommunications technology. D) dramatic increase in competition from foreign banks

C

The presence of so many commercial banks in the United States is most likely the result of A) consumers' strong desire for dealing with only local banks. B) adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks. C) prior regulations that restricted the ability of these financial institutions to open branches. D) consumers' preference for state banks

C

The process in which people take their funds out of the banking system seeking higher-yielding securities is called A) capital mobility. B) loophole mining. C) disintermediation. D) deposit jumping

C

Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side. A) federal government; municipalities B) state governments; municipalities C) federal government; states D) municipalities; states

C

Uncertainty about interest-rate movements and returns is called A) market potential. B) interest-rate irregularities. C) interest-rate risk. D) financial creativity

C

Which regulatory body charters national banks? A) The Federal Reserve B) The FDIC C) The Comptroller of the Currency D) The U.S. Treasury

C

With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System ________ to purchase FDIC insurance for their depositors, while non-member commercial banks ________ to buy deposit insurance. A) could choose; were required B) could choose; were given the option C) were required, could choose D) were required; were required

C

A disadvantage of virtual banks (clicks) is that A) their hours are more limited than physical banks. B) they are less convenient than physical banks. C) they are more costly to operate than physical banks. D) customers worry about the security of on-line transactions

D

A financial innovation that developed as a result of banks avoidance of bank branching restrictions was A) money market mutual funds. B) commercial paper. C) junk bonds. D) bank holding companies

D

Although it has a population about half that of the United States, Japan has A) many more banks. B) about 25 percent of the number of banks. C) more than 5000 commercial banks. D) fewer than 100 commercial banks

D

Bank customers perceive Internet banks as being A) more secure than physical bank branches. B) a better method for the purchase of long-term savings products. C) better at keeping customer information private. D) prone to many more technical problems.

D

Lack of competition in the United States banking industry can be attributed to A) the fact that competition does not benefit consumers. B) the fact that branching has eliminated competition. C) recent legislation restricting competition. D) nineteenth-century populist sentiment.

D

Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as A) municipal bonds. B) Yankee bonds. C) "fallen angels." D) junk bonds.

D

Prior to 2008, the bank's cost of holding reserves equaled A) the interest paid on deposits times the amount of reserves. B) the interest paid on deposits times the amount of deposits. C) the interest earned on loans times the amount of loans. D) the interest earned on loans times the amount on reserves

D

The business term for economies of scope is A) economies of scale. B) diversification. C) cooperation. D) synergies.

D

The experience of disintermediation in the banking industry illustrates that A) more regulation of financial markets may avoid such problems in the future. B) banks are unable to remain competitive with other financial intermediaries. C) consumers no longer desire the services that banks provide. D) markets invent alternatives to costly regulations

D

The legislation that overturned the prohibition on interstate banking is A) the McFadden Act. B) the Gramm-Leach-Bliley Act. C) the Glass-Steagall Act D) the Riegle-Neal Act

D

The primary reason for the recent reduction in the number of banks is A) bank failures. B) re-regulation of banking. C) restrictions on interstate branching. D) mergers and acquisitions

D

The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as a A) bilateral regulatory system. B) tiered regulatory system. C) two-tiered regulatory system. D) dual banking system.

D

Which bank regulatory agency has the sole regulatory authority over bank holding companies? A) The FDIC B) The Comptroller of the Currency C) The FHLBS D) The Federal Reserve System

D

________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans. A) diversification. B) arbitrage. C) computerization. D) securitization

D