FINA/ECON 365 Exam 1 - CH 1-4

Which of the following repealed the 1933 Glass-Steagall barriers between commercial banking, insurance, and investment banking? a) Financial Services Modernization Act (1999) b) The Bank Holding Company (1956) c) Garn-St. German Depository Institutions Act (1982) d) Competitive Equality in Banking Act ( 1987) e) Financial Institutions Reform Recovery and Enforcement Act (1989)

a) Financial Services Modernization Act (1999)

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? a) agency costs b) liquidity risk c) price risk d) intermediation e) credit risk

a) agency costs

Regulatory forbearance refers to a policy of: a) allowing insolvent banks to continue to operate. b) foreclosing real estate properties in the event on non-payments of mortgages. c) strict regulation of banks, closing them down as soon as they are insolvent. d) rescheduling of all loans of a client in the event of non-payment. e) Answers B and C only.

a) allowing insolvent banks to continue to operate

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: a) decreased monitoring costs. b) increased interest rate risk. c) decreased fee income. d) increased liquidity risk. e) increased operating costs.

a) decreased monitoring costs

Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following EXCEPT: a) increased transactions costs. b) better diversification of deposited funds. c) less price risk when funds are needed. d) increased liquidity if funds are needed quickly. e) monitoring done by the bank on your behalf.

a) increased transactions costs

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: a) loans to corporations are part of the money supply b) bank loans are highly regulated c) savings institutions provide a large amount of credit to finance residential real estate d) DI deposits are a major portion of the money supply e) U.S. DIs compete with foreign financial institutions

d) DI deposits are a major portion of the money supply

Which function of an FI reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings? a) asset transformation services b) information production services c) administration of the payments mechanism d) brokerage e) money supply management

d) brokerage

National-chartered commercial banks are most likely to be regulated by: a) the FDIC only. b) the FDIC and the Federal Reserve System. c) the Federal Reserve System only. d) the FDIC, the Federal Reserve System, and the Comptroller of the Currency. e) the Federal Reserve System and the Comptroller of the Currency.

d) the FDIC, the Federal Reserve System, and the Comptroller of the Currency.

Safety and soundness regulations include all of the following layers of protection EXCEPT: a) the provision of guaranty funds. b) requiring minimum levels of capital c) requirements encouraging diversification of assets d) the creation of money for those FIs in financial trouble e) monitoring and surveillance

d) the creation of money for those FIs in financial trouble

Which of the following is try of off-balance-sheet activities? a) they involve generation of fees without exposure to any risk b) they include contingent activities recorded in the current balance sheet c) they invite regulatory costs and additional "taxes" d) they have both risk-reducing as well as risk-increasing attributes e) the risk involved is best represented by notional or face value

d) they have both risk-reducing as well as risk-increasing attributes

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 finds to purchase corporate securities e) all of these

e) all of these

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 these

e) all of these

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 these

e) all of these

Credit Unions were generally less affected than other depository institutions by the recent financial crisis because: a) they had relatively more assets in consumer loans than other DIs. b) they had relatively more residential mortgages. c) they hold more government and agency securities, on average. d) they hold less government and agency securities, on average. e) Answers A and C only.

e) answers A and C only

The federal government has traditionally extended safety nets to DIs consisting of: a) deposit insurance protection b) deposit insurance, open market operations, and discount window borrowing c) deposit insurance, unemployment insurance, and discount window borrowing d) deposit insurance, discount window borrowing, and reserve requirements e) deposit insurance and discount window borrowing

e) deposit insurance and discount window borrowing

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) insurance services b) commercial banking c) investment banking d) stock investing e) money market funds

e) money markets funds

State-chartered commercial banks may be regulated by: a) the FDIC only b) the FDIC and the Federal Reserve System c) the Federal Reserve System only d) the FDIC, the Federal Reserve System, and the Comptroller of the Currency e) the FDIC, the Federal Reserve System, the Comptroller of the Currency, and state banking commissions

e) the FDIC, the Federal Reserve System, the Comptroller of the Currency, and state banking commissions

What distinguishes financial intermediaries from industrial firms? a) FIs deal exclusively in primary securities, but industrial firms specialize in secondary securities b) FI balance sheets are almost totally comprised of financial assets while commercial firms hold substantial amounts of real assets c) industrial firms produce real goods or services while FIs only produce money d) industrial firms are unregulated while FIs are heavily regulated e) industrial firms are the customers of FIs, but FIs cannot be customers of industrial firms

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

Traditionally, regulation of FIs in the U.S. has been: a) minimal, as evident by the recent financial crisis b) extensive, as a result of the importance of FI to the economy c) minimal, because the free market is allowed to allocate financial resources d) extensive, because banks have monopoly power e) no different from regulation of nonfinancial firms

b) extensive, as a result of the importance of FI to the economy

Net regulatory burden for FIs is higher because regulators may require the FI to: a) hold fewer reserves than they would without regulation. b) hold more capital than what would be held without regulation. c) All of the above. d) produce less information than would be produced without regulation. e) hold more debt than what would be held without regulation.

b) hold more capital then what would be held without regulation

Which of the following refers to the term "maturity intermediation"? a) reducing information costs or imperfections between households and corporations b) mismatching the maturities of assets and liabilities c) creation of a secondary market mature enough to withstand volatility d) the transfer of wealth from one generation to the next e) overcoming constraints to buying assets imposed by large minimum denomination size

b) mismatching the maturities of assets and liabilities

The largest liability on U.S. commercial banks' balance sheets as of September 30, 2012 was: a) investment securities b) non-transaction accounts c) transaction accounts d) borrowings e) cash

b) non-traditional accounts

The largest liability on FDIC-insured savings institutions' balance sheet as of year-end 2012 was: a) commercial paper b) small time and savings deposits c) repurchase agreements d) FHLBB advances e) cash

b) small time and savings deposits

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? a) 2001 b) 2003 c) 2006 d) 2008 e) 2010

c) 2006

Negative externalities exist in the depository sector when: a) lending activity is impaired or constrained b) there are delays in disbursements from insolvent DIs c) all of these d) the fear of DI insolvency leads to bank deposit runs e) banks that are healthy suffer when another banks nears insolvency

c) all of these

Which of the following identifies the primary function of the Office of the Comptroller of the Currency? a) manage the deposit insurance fund and carry out bank examinations b) regulate and examine bank holding companies as well as individual commercial banks c) charter national banks and approve their merger activity d) determine permissible activities for state chartered banks e) stand as the "lender of last resort" for troubled banks

c) charter national banks and approve their merger activities

The Community Reinvestment Act and the Home Mortgage Disclosure Act were both passed to provide incentives to comply with: a) entry regulation b) credit allocation regulation c) consumer protection regulation d) safety and soundness regulation e) investor protection regulation

c) consumer protection regulation

Each of the following is a special function performed by FIs at a macro level EXCEPT: a) credit allocation b) denomination intermediation c) interbank lending and investing d) transmission of monetary policy e) intergeneration wealth transfers or time intermediation

c) interbank lending and investing

Depository financial institutions include all of the following EXCEPT: a) commercial banks b) savings banks c) investment banks d) credit unions e) all of these are depository institutions

c) investment banks

The origination of a home mortgage loan is considered to be a: a) primary security, because this is the FI's primary source of business. b) secondary security, because mortgages are typically resold in the secondary market. c) primary security, because the mortgage note is a newly created security. d) secondary security if the sale is for an existing home and a primary security if it is for a new home. e) derivative security because the value of the mortgage note depends on the underlying value of the home.

c) primary security, because the mortgage note is a newly created security

The largest asset class on U.S. commercial banks' balance sheet as of September 30, 2012 was: a) investment securities b) commercial and industrial loans c) real estate loans d) cash e) deposits

c) real estate loans

The primary regulators of savings institutions are: a) the Federal Reserve and the FDIC b) the Office of Thrift Supervision and the FDIC c) the FDIC and the Office of the Comptroller of the Currency d) the Office of Thrift Supervision and the Comptroller of the Currency e) the Federal Reserve and the Comptroller of the Currency

c) the FDIC and the Office of the Comptroller of the Currency

As DIs made a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model over the last decade, a) banks became more financially stable b) it became easier to measure the riskiness of individual loans c) there was a dramatic increase in systematic risk of the financial system d) the Federal Reserve decreased the number of services that banks could provide e) it became more difficult for households to obtain credit

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

As of 2012, commercial banks with over $10 billion in assets constituted approximately ____ percent of the industry assets and numbered approximately _____. a) 50; 310 b) 60; 165 c) 70; 525 d) 80; 90 e) 90; 440

d) 80; 90