ECON 2411 - Ch. 12 Banking Industry: Structure and Competition

Why was the United States one of the last major industrialized countries to have a central bank?

Agricultural and other U.S. interests were suspicious of centralized power and opposed the creation of a central bank.

How do sweep accounts and money market mutual funds allow banks to avoid reserve requirements?

Although they function as interest -earning deposits, these accounts are not legally deposits and so are not subject to reserve requirements.

What is the major difference between banking systems in the United States and Japan?

American banks are not allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks can.

Which of the following is not a reason for the dramatic increase in the number of bank holding companies?

Bank holding companies can monopolise the market for banking services in a given region.

Why is loophole mining so prevalent in the banking industry in the United States?

Banks engage in loophole mining in order to avoid regulatory constraints that restrict their ability to earn profits.

Why is there a higher percentage of banks with less than $25 million of assets among commercial banks than among savings and loans and mutual savings banks?

Because restrictions on branching are stricter for commercial banks than for savings and loans, small commercial banks have greater protection from competition and are more likely to survive than small savings and loans.

Why have banks been losing income advantages on their assets in recent years?

Both A and C are correct: Securitization has enabled other financial institutions to originate loans, taking away some of the banks' loan business. The growth of the commercial paper market and the development of the junk bond market have given corporations alternatives to borrowing funds from banks, thus ending the competitive advantage of banks on the lending side.

Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks? National banks: _____ Bank holding companies: _____ Non-Federal Reserve member state banks: _____ Federal Reserve member state banks: ____ Federally chartered savings and loan associations: ____ Federally chartered credit unions: _____

Comptroller of the Currency. Federal Reserve System. State banking authorities. Federal Reserve System. Office of Thrift Supervision. National Credit Union Administration.

Unlike commercial banks, savings and loans, and mutual savings banks, credit unions did not have restrictions on locating branches in other states. Why, then, are credit unions typically smaller than the other depository institutions?

Credit unions are small because members usually share a common employer or have ties to a particular organization.

Which of the following is not an incentive created by regulatory agencies to encourage international banking?

Direct federal subsidies.

'The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the industry, while in the United States there are around 6,500 commercial banks.' Is this statement true or false? Explain your answer.

False. The reason for the large number of US banks is anticompetitive regulations such as branching restrictions.

Which of the following is responsible for the supervision of savings and loan associations?

Federal Home Loan Bank System.

Which of the following repealed the Glass-Steagall Act?

Gramm-Leach-Bliley Act.

How could the approval of international banking facilities (IBFs) by the Fed in 1981 have reduced employment in the banking industry in Europe?

IBFs encourage American and foreign banks to do more banking business in the United States, thus shifting employment from Europe to the United States.

Which of the following factors doe snot explain the rapid growth in international banking?

Increased regulation of the U.S. banking industry.

How does the emergence of interest-rate risk help explain financial innovation? How does the emergence of interest-rate risk help financial innovation? An increase in interest-rate risk ____ the demand for financial innovation.

It increases the demand for financial products and services that could reduce that risk. Increases

Why might American businesses want to hold Eurodollars?

Many commercial transactions and international contracts are denominated in dollars.

Which of the following is a requirement of the Federal Deposit Insurance Corporation? (*)

Member banks of the Federal Reserve System are required to purchase FDIC insurance for their depositors.

If the bank at which you keep your checking account is owned by foreigners, should you worry that your depositors are less safe than if the bank were owned by Americans? (*)

No, because the foreign bank is subject to the same regulations as the American-owned bank.

Which of the following repealed the prohibition on interstate banking?

Riegle-Neal Act.

How did competitive forces lead to the repeal of the Glass-Steagall Act's separation of the banking and securities industries? (Check all that apply.)

The Act's restrictions put American banks at a competitive disadvantage relative to foreign banks. The Fed allowed bank holding companies to enter the underwriting business. Financial innovation motivated banks and other financial institutions to bypass the intent of the Glass-Steagall Act.

Why have banks been losing cost advantages in acquiring funds in recent years?

The increased cost of funds from higher interest rates and the abolishment of Regulation Q.

Which of the following is not a motivation for the original Glass-Steagall Act in 1933?

The need to further consolidate the banking industry and securities industry.

What are the advantages of interstate banking? (Check all that apply.)

There is a convenience factor for bank customers. There is increased efficiency in the banking industry. Interstate banking creates geographical diversification of bank loan portfolios.

Why does the United States operate under a dual banking system? (Check all that apply.)

There is skepticism of centralized power in the U.S. banking system. Federally chartered banks help to stabilize the banking system and are less prone to failure.

What are the disadvantages of interstate banking? (Check all that apply.)

There may be a decrease in competition as small banks may fail. Interstate lending may cause a reduction in lending to small businesses. There may be increased risk from expanding into new geographical markets.

What has been the likely effect of the Gramm-Leach-Bliley Act on financial consolidation?

This legislation further stimulated financial consolidation of the banking industry. Thus, more financial mergers are likely to occur, which will increase both the size and complexity of financial institutions in the future.

If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today. Is this statement true, false, or uncertain? Explain your answer.

True. Higher inflation helped raise interest rates, which caused the disintermediation process to occur and helped create money market mutual funds.

Why is there only one U.S. bank among the ten largest banks in the world? U.S. banks are ___ regulated foreign banks, which ___ bank consolidation and mergers in U.S. banks. Why is there only one U.S. bank among the ten largest banks int he world?

U.S. banks are more heavily regulated than foreign banks, thus limiting the number of mergers in the United States. With fewer mergers and bank consolidation, U.S. banks are less dominant in world markets. more; limits There is more competition among banks in the United States, which keeps U.S. banks smaller.

If reserve requirements were eliminated in the future, as some economists advocate, what effect would this have on the size of money market mutual funds? Money market mutual funds (MMMFs) would likely ____.

become smaller.

The ability to use one common resource to provide different products and services is:

economies of scope

The Glass-Steagall Act, which was repealed in 1999, prohibited commercial banks from:

engaging in underwriting and dealing in corporate securities

Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by foreign banks has been: (*)

eroded.

Financial instruments with returns tied to previously issued securities are called: (*)

financial derivatives

As a result of strict banking regulations, the United States has: (*)

many more smaller banks when compared to other industrialised countries

With the creation of the Federal Deposit Insurance Corporation, (*)

member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could choose to buy deposit insurance.

Thrift institutions include:

mutual savings banks

Lack of competition in the United States banking industry can be attributed to ____. (*)

nineteenth-century populist sentiment.

The presence of so many commercial banks in the United States is most likely the result of:

previous restrictions on branch banking

The McFadden Act of 1927:

prohibited banks from branching across state lines.

Experts predict that future trends in the U.S. banking industry will lead to: (*)

several thousand banks.

Bank holding companies that rival money center banks in size but are not located in money center cities are known as:

super-regional banks.

Under the Gramm-Leach-Bliley Act the oversight of the securities activities of bank holding companies belong to ____. (*)

the SEC.

Prior to 2008, the bank's cost of holding reserves equaled ____. (*)

the interest earned on loans times the amount on reserves.