M&B Chapter 11 - Banking Industry: Structure and Competition

What is the shadow banking system?

bank lending has been replaced by lending via the securities market, with the involvement of a number of different financial institutions

A change in the financial environment will stimulate a search by financial institutions for __________ that are likely to be profitable.

innovations

Uncertainty about interest−rate movements and returns is called​ ________.

interest-rate risk

What is the most likely future of the structure of the U.S. banking industry?

it will still be unique, but not to the degree it once was. the consolidation surge will settle down as the U.S. banking industry approaches several thousand, rather than several hundred, banks.

Newly−issued high−yield bonds rated below investment grade by the bond−rating agencies are frequently referred to as....

junk bonds

What are adjustable-rate mortgages?

mortgages loans on which the interest rate changes when a market interest rate (usually the Treasury bill rate) changes

Define financial engineering

researching and developing new products and services that meet customer needs and prove profitable

The process of transforming otherwise illiquid financial assets into marketable capital market instruments is know as...

securitization

Securitization is a process of asset transformation that involves a number of different financial institutions working together. These financial institutions are known collectively as the...

shadow banking system

Because of​ securitization, a new class of residential mortgages offered to borrowers with less−than−stellar credit records developed. These mortgages are known as...

subprime

What is the most important source of the changes in supply conditions that stimulated financial innovation?

the improvement in computer and telecommunications technology (information technology)

Define securitization

the process of bundling small and otherwise illiquid financial assets (such as residential mortgages, auto loans, and credit card receivables), into marketable capital market securities.

In a​ ________ banking​ system, commercial banks provide a full range of​ banking, securities, and insurance​ services, all within a single legal entity.

universal

Describe the originate-to-distribute business model

at each step of the securitization process, the loan originator, servicer, bundler and distributor earn a fee. Each of these four institutions has specialized in a particular element in the financial intermediation process.

List 4 examples of the impact of information technology on banking

1. Bank credit and debit cards 2. Electronic banking (ATM, home banking, etc.) 3. Junk Bonds 4. Commercial paper market

What are the two effects of information technology?

1. Lowered the cost of processing financial transactions 2. Made it easier for investors to acquire information, thereby making it easier for firms to issue securities

What are the two responses to changes in demand conditions?

1. adjustable-rate mortgages 2. financial derivatives

List the three basic types of financial innovation

1. responses to changes in demand conditions 2. responses to changes in supply conditions 3. avoidance of existing regulations

What year was the Bank of North America chartered?

1782

What year was the Federal Reserve System created in?

1913

What year was Glass-Steagall overturned in?

1999

What is a futures contract?

A hedge in which the seller agrees to provide a certain standardized commodity to the buyer on a specific future date at an agreed-on price

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

A. benefit homeowners when interest rates are falling.

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

A. reduced the cost of financial innovation.

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

A. securitization.

What is a sweep account?

An innovation that enables banks to avoid the tax from reserve requirements: any balances above a certain amount in a corporation's checking account at the end of a business day are "swept out" of the account and invested in overnight securities that pay interest

Explain how securitization is involved in the shadow banking system.

Asset transformation is accomplished through securitization and the shadow banking system is not done "under one roof" as is traditional banking

What has been the cause of the decline in the number of banks?

Bank consolidation - banks have been merging to create larger entities or have been buying up other banks.

What does a dual banking system mean?

Banks chartered by the federal government and banks chartered by the states operate side by side.

An instrument developed to help investors and institutions hedge interest−rate risk is... A. a credit card. B. a junk bond. C. a financial derivative. D. a debit card.

C. a financial derivative.

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

C. pursuing new off−balance−sheet activities.

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 deregulation of financial institutions. C. the dramatic increase in the volatility of interest rates. D. the dramatic increase in competition from foreign banks.

C. the dramatic increase in the volatility of interest rates.

What effect has financial innovation had on traditional banking?

Causing a decline -- market share has fallen, commercial banks' share of total financial intermediary assets has fallen -- no decline in overall profitability, increase in income from off-balance-sheet activities

The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the...

Central bank

What makes adjustable-rate mortgages attractive to households?

Many mortgage-issuing institutions will issue adjustable-rate mortgages with lower initial interest rates than those on conventional fixed-rate mortgages.

What did the National Bank Act of 1863 do?

Created a new banking system of federally chartered banks; the Office of the Comptroller of the Currency and a dual banking system

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

D. the growth of securitization.

The number of banks has ___________ dramatically over the last 30 years.

Declined

What did the Riegle-Neal Interstate Banking and Branching Efficiency Act do?

Expanded the regional compacts to the entire nation and allowed bank holding companies to acquire banks in any other state, notwithstanding any state laws to the contrary, but bank holding companies could also merge the banks they owned into one bank with branches in different states

​________ is the process of researching and developing profitable new products and services by financial institutions.

Financial engineering

What are financial derivatives?

Futures contracts in financial instruments

Advances in _______________ have been critical to the growth of securitization and the shadow banking system.

Information Technology

What is the main concern of nationwide banking?

It will eliminate community banks, thus resulting in less lending to small businesses and also making the banking business less competitive.

_______________ is the fundamental building block of the shadow banking system.

Securitization

What are credit unions?

Small cooperative lending institutions organized around a particular group of individuals with a common bond - the only depository institutions that are tax-exempt and can be chartered either by the states or by the federal government

What is a subprime mortgage?

a new class of residential mortgages offered to borrowers with less-than-stellar credit crecords