Money & Banking Chp 12: Questions 12.6, 12.5, 12.4, 12.3, 12.2

1) Like the dual banking system for commercial banks, thrifts can have either ________ or ________ charters. A) state; federal B) state; local C) local; federal D) municipal; federal

A

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

As a result of the subprime financial crisis several of the large, free-standing investment banking firms chose to become bank holding companies. This means that they will now be regulated by A) the Federal Reserve. B) the FDIC. C) the state banking authorities. D) the Treasury.

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

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 combine 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

In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity. A) universal B) severable C) barrier-free D) dividerless

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

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 banksʹ liabilities to under 10 percent today. B) decline in the importance of savings deposits from over 60 percent of banksʹ liabilities to under 15 percent today. C) decline in the importance of checkable deposits from over 40 percent of banksʹ liabilities to under 15 percent today. D) decline in the importance of savings deposits from over 40 percent of banksʹ 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

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 below 30 percent by 2005. B) has shrunk dramatically, from around 70 percent of total credit advanced to below 50 percent by 2005. C) has expanded dramatically, from around 50 percent of total credit advanced to above 70 percent by 2005. D) has expanded dramatically, from around 30 percent of total credit advanced to above 50 percent by 2005.

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 bonds that have had their credit ratings fall below Baa. B) junk bonds refer to previously 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

Sweep accounts A) have made reserve requirements nonbonding 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 banksʹ 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 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 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 know as A) securitization. B) internationalization. C) arbitrage. D) program trading.

A

Unlike banks, ________ have been allowed to branch statewide since 1980. A) federally-chartered S&Ls B) state-chartered S&Ls C) financially troubled S&Ls D) technically insolvent S&Ls

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

A major difference between the United States and Japanese banking systems is that A) American banks are allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks cannot. B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot. C) bank holding companies are illegal in the United States. D) Japanese banks are usually organized as bank holding companies.

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

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

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

In a ________ banking system, commercial banks engage in securities underwriting, but legal subsidiaries conduct the different activities. Also, banking and insurance are not typically undertaken together in this system. A) universal B) British-style universal C) short-fence D) compartmentalized

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 1980, the Fed set an interest rate ________ that is 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

Sweep accounts which were created to avoid reserve requirements became possible because of a change in ________. A) demand conditions B) supply conditions C) government rules D) bank mergers

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 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 legislation overturning the Glass-Steagall Act is A) the McFadden Act. B) the Gramm-Leach-Bliley Act. C) the Garn-St. Germain Act D) the Riegle-Neal Act.

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 2005. B) has shrunk from over 20 percent of total credit advanced in the late 1970s to below 6 percent by 2005. C) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 25 percent by 2005. D) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 30 percent by 2005.

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

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

Adjustable rate mortgages A) protect households against higher mortgage payments when interest rates rise. B) keep financial institutionsʹ 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

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

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

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

Mutual savings banks are owned by ________. A) shareholders B) partners C) depositors D) foreign investors

C

Nationwide banking might reduce bank failures due to A) reduced competition. B) reduced lending to small businesses. C) diversification of loan portfolios across state lines. D) elimination of community banks.

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 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 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) consumersʹ 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 restrict the ability of these financial institutions to open branches. D) consumersʹ 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

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

C

Under the Gramm-Leach-Bliley Act states retain regulatory authority over ________. A) bank holding companies B) securities activities C) insurance activities D) bank subsidiaries engaged in securities underwriting

C

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

An essential characteristic of credit unions is that A) they are typically large. B) branching across state lines is prohibited. C) their lending is primarily for mortgage loans. D) they are organized for individuals with a common bond.

D

As the banking system in the United States evolves, it is expected that A) the number and importance of small banks will increase. B) the number and importance of large banks will decrease. C) small banks will grow at the expense of large banks. D) the number and importance of large banks will increase.

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) ʺfallen angels.ʺ D) junk bonds.

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 agency responsible for supervising savings and loans institutions is the A) FSLIC. B) Fed. C) Comptroller of the Currency. D) Office of Thrift Supervision.

D

Thrift institutions include A) commercial banks. B) brokerage firms C) insurance companies. D) mutual savings banks.

D

________ are the only depository institutions that are tax-exempt. A) Commercial banks B) Savings and loans C) Mutual savings banks D) Credit unions

D