FIN 384 - Exam 1 Review
What groups have not yet been fully incorporated into the money system?
Tribal and nomadic High inflation is found in agricultural economies where barter and money compete.
cash management services
When a bank agrees to handle the cash collections and disbursements for a company and invest any temporary cash surpluses in interest bearing assets
money-center bank
a bank which spans regions, nations, and continents, offering the widest menu of financial services
bank holding company
a corporation chartered for the express purpose of holding the stock of one or more banks
Financial Services Modernization Act (Gramm-Leach-Bliley Act)
a landmark act which allows financial service providers to offer an expanded menu of financial services for the customer allows banks to truly become conglomerate financial service providers.
Point-of-Sale (POS) terminal or register
a machine located at the merchant's place of business which allows depositors to use their debit card to pay for purchases directly.
Consumer lending
a service provided by banks where the bank lends money to individuals for the purchase of durable and other goods.
trust services
a traditional service of a bank where the bank manages the financial affairs and property of individuals (and in some cases businesses).
Safekeeping of valuables and Certification of Value
a traditional service provided by banks in which the banks store the valuables of their customers and certify their true value.
demand deposit (checking account)
a traditional service which permits a depositor to write a draft in payment for goods and services.
Gramm-Leach-Bliley Act
allows banks to affiliate with insurance companies and securities firms through a holding company or as a subsidiary.
Equipment leasing services
an alternative to lending in which the financial institution purchases the equipment and rents it to its customers.
According to Congress, a bank is defined as....
any institution that can qualify for deposit insurance administered by the FDIC.
virtual bank
bank that offers its services only over the Internet
Why is the modern banking system more efficient than barter?
both parties can sell their products for money to be used to buy other products wait time in barter system for ideal trader with desired product float is so bit, it adds another dimension to economy
What is the difference between a branch bank a virtual bank and a unit bank?
branch = full range of service from several locations unit = full range of service from single location virtual = online services only
security broker (or dealer)
buys and sells securities on behalf of their customers and for their own accounts. ex: Merrill Lynch and Charles Schwab
In the U.S. a commercial bank qualifies as a "bank" under federal law if it offers:
checking accounts commercial loans
What is a "money exchange?"
converts labor and capital into other assets and visa versa. Money Exchange = convenience + reliability + creativity + low cost
FDIC Federal Deposit Insurance Corporation
created as part of the Glass Steagall Act. In the beginning it insured deposits up to $2,500.
Labor
creates tangible and intangible goods and services. Labor = Time + Effort + Skill
A study of history shows that one of the first services offered by banks was:
currency exchange
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:
delegated monitoring
float
difference between checks written and checks cleared.
Primary Security
direct investment buy stock in a non-financial company
Managers who value fringe benefits, plush offices and ample travel budgets over the pursuit of maximum returns for stockholders are exhibiting signs of _________.
expense preference behavior
Financial Institutions
firms that provide financial services to consumers, businesses, and government units.
How do fixed insurance premiums regardless of risk lead to a moral hazard?
fixed premiums encourage all banks to accept greater risk.
To keep the internet trading system honest, there must always be at least one physical location on each continent where:
floor traders conduct business
What are agency costs?
incentives (stock options) and penalties (audits and termination)
Secondary Security
indirect investment; open savings account, buy whole life policy pay social security tax.
What Is the Velocity of Money?
interest rates and inflation are low so people more willing to increase their money balances declines during recession as people reduce spending
Banks perform the indispensable task of:
intermediating between surplus-spending parties and deficit-spending parties.
Land
labor believes land should be a free good while capital insists that land be mortgaged as much as possible as pledge against debt. neither party wishes to see land receive an acceptable rate of return.
government deregulation
loosening of government regulation and control of financial institutions
Law of One Price
mass produced items should sell for the same PRICE everywhere, excluding the impact of TRANSACTION COSTS.
What is the one of the main roles of the Federal Reserve today and the tools used to carry out this role?
monetary policy tools = open market operations, the discount rate and legal reserve requirements.
What did Albert Einstein reportedly say about compound interest?
most powerful force on Earth
What are examples of intangible goods and services that labor creates?
movies and legal
finance company
offers loans to commercial enterprises (such as appliance dealers) and to individuals and families using funds borrowed in the open market or from other financial institutions.
What theory did George Stigler propose?
one of earliest theories regarding impact of regulation on banks firms in regulated industries seek more regulation because regulation creates monopoly power.
What does the Federal Reserve use to control the money supply?
open market operations buy and sell Treasury bills
Glass-Steagall Act
was passed during the Great Depression. separated investment and commercial banks and created the FDIC.
Currency exchange
when a financial institution trades one form of currency for another.
What tools does the Fed use facilitate monetary policy?
•Discount window •Reserve requirements •FOMC •Interest rate targets
What are the Fed's goals for monetary policy?
•Growing economy •Full employment •Low inflation •Acceptable balance of trade
retail banks
Banks which serve primarily households and small firms
merchant banks
Banks which supply both debt and equity capital to businesses
investment banks
Banks which underwrite issues of new securities on behalf their corporate customers
Examples of a "money exchange"
Banks, credit unions, loans, finance and insurance companies
Which federal bank regulatory agency examines the most banks?
Board of Govenors the center of authority and decision making within the Federal Reserve. consists of seven members appointed by the president for terms not exceeding 14 years.
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
What are the components of the modern financial system?
Labor Land Capital
Explain how money is a derivative
Labor produces real assets, commodities and intangibles. Once barter or trade in these assets becomes very common, notes or I.O.Us are issued against them. These notes are money.
What is the agency problem?
Managers act in their own best interest and not in the best interest of bank
What is net interest margin?
NIM = (Interest Earned on Assets - Interest Paid on Liabilities) / Total Assets
What does it mean to manage the spread?
NIM must be managed. If NIM < 0 the institution will fail
What was the first major federal banking law in the US?
National Banking Act was passed during the Civil War set up a system for chartering national banks and created the OCC
What is the Fed's unofficial slogan
Remove the punch bowl just when the party gets started.
T/F - One of the principal reasons for government regulation of financial firms is to protect the safety and soundness of the financial system.
T
T/F: A greater proportion of major corporations have deserted the banking system in recent years to raise borrowed funds directly from the open markets
T
T/F: According to the textbook, high-volume banking is required to make efficient use of automation and other technological innovations.
T
T/F: Current theory suggests that banks exist because of imperfections in our financial system.
T
T/F: Lending institutions act as delegated monitors and can diversify and reduce their risk exposure, resulting in increased safety for savers' funds.
T
T/F: The Gramm-Leach-Bliley Act of 1999 essentially repeals the Glass-Steagall Act passed in the 1930s.
T
T/F: 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.
T
T/F: The etymological roots of the word "bank" trace this word back to an Italian term referring to a "money-changer's table".
T
T/F: The macro-economic function of banks whereby they transform savings into credit is known as the intermediation role.
T
T/F: 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.
T
What country has the most banks?
The United States
national banks
Banks which function under a federal charter through the Comptroller of the Currency in the United States
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
What aren't Banks Obsolete?
Banks are not in decline, they are shifting away from managing interest rate spread to fee income. so important in US they have almost nationalized by tight regulations.
commercial banks
Banks that sell deposits and make loans to businesses, individuals, and institutions
List the following in rank order, beginning with the investment which provides the highest returns: T-Bills, Common Stock, T-Bonds, Corporate Bonds
Common Stock Corporate Bonds T-Bonds T-Bills
nonbank financial firms
Companies such as Merrill Lynch and Sears which offered some but not all banking services in the 1980s
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.
D
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
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
E
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
T/F - Government-sponsored deposit insurance typically encourages individual depositors to monitor their banks' behavior in accepting risk.
F
T/F - The Federal Reserve changes reserve requirements frequently because the affect of these changes is so small.
F
T/F: Convergence refers to the fact that the number of bank mergers has increased in recent years.
F
T/F: Nonbank financial-service institutions can offer deposits to the public, but these deposits are not eligible for insurance coverage by the FDIC.
F
T/F: Under U.S. federal law, an institution making only loans to households and offering uninsured checkable deposits and savings deposits qualifies as a commercial bank.
F
When the Federal Reserve buys T-bills through its open market operations, it causes the bank deposits and loans to decrease.
F
What are the steps in understanding the Federal Reserve System?
First - understand the stated goal, Sustainable growth, low inflation, full employment Second - look at unstated goals, Retain current political administration, Make money for bankers. Third - look at the strategies Fourth - look at the organization Fifth - consider divided authority
What are examples of tangible goods and services that labor creates?
Homes and Auto
hedge fund
sells shares mainly to upscale investors in a broad group of different kinds of assets includes nontraditional investments in commodities, real estate, loans to new and ailing companies, and other risky assets
Capital
stored value, a reservoir of wealth. Capital = currency + precious metals + claims against others
convergence
the movement of businesses across industry lines in order to broaden its base.
delegated monitoring
theory of banking where financial institutions monitor the financial condition of their borrowers by serving only as an agent on behalf of depositors
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.
•Money Exchange = convenience + reliability + creativity + low costD
How does the Fed act as "Guardian of the Payments System?"
•National, even international standardized currency •Clearing checks at face value nationwide •Fedwire •Daylight overdrafts
Describe the elements of traditional "Lender of Last Resort" theory.
•Protect aggregate money supply, not the safety of individual institutions •Lend to well-managed institutions with temporary cash needs •Allow poorly-managed institutions to fail •Accept good collateral for all loans •Announce policies in advance of any crisis
What is the antithesis?
•Regulation is not free and its costs are imposed without consultation and in an inefficient manner. •Avoidance through innovation.
What is the thesis of bank regulation?
•Regulation will level the playing field for all banks and protect the public.
What is the synthesis?
•Regulatory adjustments •Bank regulation is an iterative process
What changes have been made recently to improve the system?
•Remove interest rate restrictions (Reg Q) •Eliminate many (not all) restrictions with respect to mergers •Repeal Glass-Steagal •Sarbanes-Oxley •Dodd Frank •Consumer Financial Protection Bureau •Stress testing
What is the stated intent of financial institution regulations?
•To protect the soundness of the banking system. •To support a stable economy
