FIN365 Ch1

All of the following are examples of participants in the shadow banking system EXCEPT

Credit Unions.

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. Management of the nation's money supply.

Depository institutions (DIs) play an important role in the transmission of monetary policy from the Federal Reserve to the rest of the economy primarily because

DI deposits are a major portion of the money supply.

What is globalization?

The evolution of markets and institutions so that geographic boundaries do not restrict financial transactions.

Financial intermediaries are

neither funds surplus nor deficit units.

In a world without FIs, households will be less willing to invest in corporate securities because they A. are not able to monitor the activities of the corporation more closely than FIs. B. tend to prefer shorter, more liquid securities. C. are subject to price risk when corporate securities are sold. D. may not have enough funds to purchase corporate securities. E. All of the above.

All of above

Many households place funds with financial institutions because many FI accounts provide A. lower denominations than other securities. B. flexible maturities verses other interest-earning securities. C. better liquidity than directly negotiated debt contracts. D. less price risk if interest rates change. E. All of the above.

All of above

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. money market funds.

Which of the following observations is true?

Bulk of the money supply consists of inside money.

Which of the following repealed the 1933 Glass-Steagall barriers between commercial banking, insurance, and investment banking?

Financial Services Modernization Act (1999).

Which of the following refers to the term "maturity intermediation"?

Mismatching the maturities of assets and liabilities.

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?

Net regulatory burden.

Which of the following is closely associated with credit allocation regulation?

Support the FI's lending to socially important sectors.

The Community Reinvestment Act and the Home Mortgage Disclosure Act were both passed to provide incentives to comply with

consumer protection regulation.

Traditionally, regulation of FIs in the U.S. has been

extensive, as a result of the importance of FI to the economy.

The housing bubble that began building in 2001 was primarily the result of

low interest rates and increased liquidity provided by the Federal Reserve.

The recent financial crisis highlighted, in retrospect, how heavily households and businesses had come to rely on FIs to act as specialists in

risk measurement and management.

Which of the following is true of secondary securities?

They are securities that back primary securities.

The charter values of FIs will be higher if regulators

- increase the cost of entry by requiring more capital. - restrict the number of FIs that can operate in a given market.

FIs perform their intermediary function in two ways

1. they specialize as brokers between savers and users. 2. they serve as asset transformers by purchasing primary securities and issuing secondary securities.

In what year did housing prices begin to deteriorate leading to a jump in defaults in the subprime mortgage markets and the onset of the recent financial crisis?

2006

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. Brokerage Services

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 above are depository institutions.

C. investment banks.

What distinguishes financial intermediaries from industrial firms?

FI balance sheets are almost totally comprised of financial assets while commercial firms hold substantial amounts of real assets.

The asset transformation function of FIs typically involves

altering the liquidity and maturity features of funds sources used to finance the FI's asset portfolio.

Price and quantity restrictions in regulation are usually aimed at determining whether an FI is meeting certain

credit allocation guidelines

When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model, the change is likely to result in

decreased monitoring costs

The federal government has traditionally extended safety nets to DIs consisting of

deposit insurance and discount window borrowing.

The following are protective mechanisms that have been developed by regulators to promote the safety and soundness of the banking system EXCEPT

encouraging banks to rely more on deposits rather than debt or capital as a cushion against failure.

Investment companies are successful in attracting business away from banks and insurance companies primarily because they

give savers cheaper access to the direct securities markets.

Net regulatory burden for FIs is higher because regulators may require the FI to

hold more capital than what would be held without regulation.

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.

increased transactions costs.

Each of the following is a special function performed by FIs at a macro level EXCEPT

interbank lending and investing.

A significant recent trend in the provision of financial services is that households increasingly prefer denomination intermediation and information services provided by

mutual funds and money market mutual funds.

As DIs made a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model over the last decade,

there was a dramatic increase in systematic risk of the financial system.

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?

Agency Cost

Negative externalities exist in the depository sector when A. the fear of DI insolvency leads to bank deposit runs. B. lending activity is impaired or constrained. C. there are delays in disbursements from insolvent DIs. D. banks that are healthy suffer when another bank nears insolvency. E. All of the above.

All of above.

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 above.

All of above.

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 above.

All of the above

Nondepository financial institutions are represented by all of the following EXCEPT A. insurance companies. B. mutual funds. C. finance companies. D. credit unions. E. securities firms.

D. Credit Union

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. A financial intermediary acts as a lender of last resort.

In its role as a delegated monitor, an FI A. keeps track of required interest and principal payments on loans it originates. B. works with financially distressed borrowers in danger of defaulting on their loans. C. holds portfolios of loans that they continue to service. D. maintains contact with borrowers to ensure that loan proceeds are utilized for intended purposes. E. All of the above.

E. All of above

Safety and soundness regulations include all of the following layers of protection EXCEPT

the creation of money for those FIs in financial trouble.

How have the innovations of global financial networks and computerized money and information transfer systems changed financial intermediation?

Financial intermediation has become more costly because it is necessary to invest in high cost technology

Which of the following groups of FIs have experienced the highest percentage growth in assets in the U.S. financial services industry during the past sixty years?

Investment Companies

Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer?

The large bank failure reduces credit availability throughout the economy.

The origination of a home mortgage loan is considered to be a

primary security, because the mortgage note is a newly created security.

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

safety and soundness regulation.