Chapter 3

T/F: The Monetary Control Act prohibited the Federal Reserve from controlling thrift institutions.

False

T/F: The U.S. banking system as it exists today is relatively unchanged since just before the Civil War.

False

T/F: The prime rate of interest represents, in theory, the highest business loan rate available at a particular point in time and is sometimes called the ceiling rate.

False

T/F: Today, reserve requirements imposed by the Federal Reserve apply only to member banks.

False Monetary Control Act

T/F: Insurance companies sell shares in their firms to individuals and invest the pooled proceeds in corporate and government securities.

False definition of investment companies

T/F: Secondary reserves are vault cash and deposits held at other depository institutions and at Federal Reserve Banks.

False definition of primary reserves

T/F:Commercial banks provide loans directly to consumers and businesses or aid individuals in obtaining financing of durable goods and homes.

False finance companies provide loans directly to consumers and businesses

T/F: Credit risk is the likelihood that a bank will be unable to meet depositor withdrawal demands and other liabilities when due.

False liquidity risk

T/F: The primary types of assets on a bank's balance sheet include cash and deposits.

False loans are 59% of assets, deposits are a liability not an asset

T/F: Insurance companies receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees for use during their retirement years.

False pension fund

T/F: Mortgage banking firms provide loans directly to consumers and businesses or aid individuals in obtaining financing of durable goods and homes.

False they dont provide loans directly to consumes and businesses, finance companies do this

T/F: The bank holding company may not engage in direct banking activities.

False they may or may not

T/F: Investment banking firms sell shares in their firms to individuals and invest the pooled proceeds in corporate and government securities.

False they sell or market new securities issued by other businesses to individuals and corporate investors

T/F: An investment bank accepts deposits, makes loans, and issues checking accounts.

False this is the definition of a commercial bank

T/F: Savings and loan associations are cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit.

False definition of a credit union

T/F: Investment banking firms assist individuals to purchase new or existing securities issues or to sell previously purchased securities.

False definition of brokerage firms

T/F: As a result of the Basel Accord, the Bank for International Settlements established capital adequacy requirements for internationally involved banks.

True

T/F: Bank solvency reflects the ability to keep the value of a bank's assets greater than its liabilities.

True

T/F: Credit risk is the chance of nonpayment or delayed payment of interest or principal.

True

T/F: Credit unions are cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit.

True

T/F: Depository institutions include commercial banks, savings and loans, savings banks, and credit unions.

True

T/F: International banking exists when banks operate in more than one country.

True

T/F: Investment companies sell shares in their firms to individuals and invest the pooled proceeds in corporate and government securities.

True

T/F: Mutual funds are open-end investment companies that can issue an unlimited number of shares to its investors and use the pooled proceeds to purchase corporate and government securities.

True

T/F: Part of the reason that the Banking Act of 1933 (Glass-Steagall Act) was passed was in response to the large numbers of bank failures.

True

T/F: Pension funds receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees for use during their retirement years.

True

T/F: Pension funds receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees.

True

T/F: The Federal Reserve Act of 1913 created a system of central banks in the United States.

True

T/F: The Glass-Steagall Act was repealed with the passage of the Gramm-Leach-Bliley Act of 1999.

True

T/F: The National Banking Act of 1864 made it possible for banks to receive federal charters.

True

T/F: The largest type of assets on a bank's balance sheet is loans.

True

T/F: The largest type of liabilities on a bank's balance sheet is deposits.

True

T/F: The major types of financial institutions (intermediaries) in the U.S. include commercial banks, mutual funds, insurance companies, and pension funds.

True

T/F: The principal assets of depository institutions are cash, securities, loans, and fixed assets.

True

T/F: Commercial banks accept deposits and makes loans to individuals and businesses.

True 2 of the things mentioned in the definition of commercial banks

T/F: The prime rate is the interest rate charged by banks for short-term unsecured loans to a bank's highest- quality business customers.

True Definition of prime rate

T/F: Investment banking firms sell or market new securities issued by businesses to individual and institutional investors.

True definition of investment banking firms

T/F: Interest rate risk results from possible price fluctuations in fixed-rate debt instruments associated with changes in market interest rates.

True if interest rates decrease, the price / value of debt instruments increase

T/F: The effective rate of interest is generally lower on a standard loan than an otherwise equivalent discount loan.

True on a discount loan you pay the interest upfront

T/F: The main provisions of the Monetary Control Act of 1980 are deregulation and monetary control.

True the depository institution deregulation and monetary control act 1980 is often referred to simply and the monetary control act of 1980

T/F: Branch banks are those banking offices that are controlled by a single parent bank.

True branch banking allows a bank to have more than one full service office

Legislation that permits depository institutions to compete with money market mutual funds on an equal basis with respect to interest rates offered to investors is the: a. Garn-St. Germain Depository Institutions Act b. National Banking Act c. Hunt Commission legislation d. Depository Institutions Deregulation and Monetary Control Act

a. Garn-St. Germain Garn-St. Germain allowed depository institutions to issue new money market deposit accounts with non cieling on the interest rate paid on these accounts

The primary purpose of this Act was to aid the savings and loan industry a. Garn-St. Germain Depository Institutions Act b. Glass-Steagall Act c. Hunt Commission legislation d. Depository Institutions Deregulation and Monetary Control Act

a. Garn-St. Germain Depository Institutions Act It allowd depository institutions to issue new money market deposit accounts with no interest-rate ceiling

The _______________________ provided for separation of commercial banking and investment banking activities in the United States. a. Glass Steagall Act b. Gramm-Leach-Bliley Act c. Garn-Saint Germain Act d. Depository Institutions Deregulation and Monetary Control Act

a. Glass Steagall Act

Unit banking means: a. a bank may have only one full-service office b. the bank is owned by a unit trust c. all branch offices are controlled by a central unit d. none of the above

a. a bank may have only one full-service office definition of unit banking

The adequacy of capital for commercial banks as measured by regulatory authorities is: a. a composite of equity capital and total assets b. a measure of investment success c. based on the total amount of deposits of a bank d. based on the ratio of federal government obligations to deposits

a. a composite of equity capital and total assets Equity Capital Ratio = ((equity capital) / total assests) *100

Which of the following would not be part of a bank's Stockholders' Equity? a. bank premises asset b. common stock of the bank c. retained earnings d. all of the above are part of a bank's Stockholders' Equity

a. bank premises asset

Select ALL of the following that are an asset of commercial banks: a. cash asset b. loans to individuals asset c. time deposits liability d. U.S. government securities asset e. demand deposits liability

a. cash asset b. loans to individuals asset d. U.S. government securities asset

Select ALL of the following that are liabilities or owners' capital of commercial banks: a. certificates of deposit liability b. demand deposits liability c. loans secured by real estate asset d. investments in mutual funds asset e. retained earnings owners' equity

a. certificates of deposit liability b. demand deposits liability e. retained earnings owners' equity

Commercial banks obtain the bulk of their loanable funds from: a. depositors b. the issue of certificates of deposit c. sale of bank stock d. sale of subordinated debenture bonds

a. depositors

The item on the liabilities and equity section of a bank's balance sheet that represents the largest proportion of a typical bank's liabilities and stockholders' equity is: a. deposits b. stockholders' equity c. securities d. federal funds

a. deposits

The Monetary Control Act: a. extended the Fed's control to thrift institutions and non-member commercial banks b. has resulted in more competition among depository institutions c. increased federal deposit insurance from $40,000 to $80,000 for each account d. established minimum capital requirements for banks with federal charters

a. extended the Fed's control to thrift institutions and non-member commercial banks

The National Banking Act of 1864 provided for: a. federally chartered banks b. the establishment of a system of central banks c. deregulation and monetary control d. the establishment of deposit insurance

a. federally chartered banks

Primary reserves a. include the cash assets of the bank. b. are short term securities held by banks that are quickly converted into cash at little cost to the banks. c. include securities sold in primary markets. d. include securities sold in secondary markets.

a. include the cash assets of the bank.

An organization that sells shares in their firms to individuals and others and invests the proceeds in corporate and government securities is called a (n) a. investment company b. investment bank c. insurance company d. brokerage firm

a. investment company

An open-end investment company that can issue an unlimited number of its shares to investors and use the pooled proceeds to purchase corporate and government securities is called a (n) a. mutual fund b. pension fund c. insurance company d. brokerage firm

a. mutual fund definition

Limited branch banking: a. permits banks to locate offices within a geographically defined distance of the main office b. is controlled by the Federal Reserve system c. means that banks may only engage in certain limited activities d. none of the above

a. permits banks to locate offices within a geographically defined distance of the main office

During the colonial period in the nation's history, banks depended on: a. their own issue of paper money b. foreign sources for their loanable funds c. deposits of foreign currency such as the Spanish dollar d. the investment of their own stockholders

a. their own issue of paper money

Select ALL of the following that are ways to clear a check through the U.S. banking system: a. through a Federal Reserve Bank b. through the U.S. Treasury Bank c. through a bank clearinghouse d. bank to bank

a. through a Federal Reserve Bank c. through a bank d. bank to bank

The Bank of North America: a. was the first incorporated bank in the United States b. was patterned after the Central Bank of England c. was established to assist in financing the Civil War d. all the above e. none of the above

a. was the first incorporated bank in the United States

__________________ is the process by which individual savings are accumulated in depository institutions and, in turn, lent or invested. a. Investing b. Financial intermediation c. The multiplier effect d. Lending e. none of the above

b. Financial intermediation

Legislation that provided for the separation of commercial banking and investment banking activities in the United States is called a. Garn-St. Germain Depository Institutions Act b. Glass-Steagall Act c. Hunt Commission legislation d. Depository Institutions Deregulation and Monetary Control Act

b. Glass-Steagall Act

The _______________________ made it possible for banks to receive federal charters and provided a basis for national banking laws. a. Glass Steagall Act b. National Banking Act c. Garn-Saint Germain Act d. Federal Reserve Act

b. National Banking Act

21. One of the advantages claimed by branch banking is: a. lower interest rates are usually available from branch banks b. convenience for customers c. banking operations are easier to regulate d. all the above

b. convenience for customers

The likelihood that borrowers are ill and would not be able to make interest and principal payments is an example of: a. interest rate risk b. credit (default) risk c. liquidity risk d. capital adequacy risk

b. credit (default) risk

NOW accounts: a. are not subject to ceiling rates under Regulation Q b. enable depository institutions to compete effectively for funds that were flowing in large amounts to money market funds c. typically pay interest rates equal to that paid by money market funds more competitive than before d. all the above

b. enable depository institutions to compete effectively for funds that were flowing in large amounts to money market funds Now negotiable order of withdrawal

The Garn-St. Germain Depository Institutions Act, among other things: a. extended the Fed's control to thrift institutions and to commercial banks that are not members of the Fed b. enabled depository institutions to issue money market accounts with no regulated interest rate ceiling c. was designed to assist the investment banking industry d. all the above

b. enabled depository institutions to issue money market accounts with no regulated interest rate ceiling

The holding-company device to control two or more commercial banks: a. has diminished in importance in recent years b. has increased in importance in recent years c. is limited to state chartered banks d. is sometimes described as chain banking

b. has increased in importance in recent years

The Depository Institutions Deregulation and Monetary Control Act: a. established a system of central banks b. has resulted in more competition among depository institutions c. increased federal deposit insurance from $40,000 to $80,000 for each account d. established minimum capital requirements for banks with federal charters

b. has resulted in more competition among depository institutions

An organization that sells or markets new securities issued by businesses to individuals and institutional investors is called a (n) a. mutual fund b. investment bank c. insurance company d. brokerage firm

b. investment bank

In general, the effective rate of interest on a discount loan a. is lower than that on standard loan b. is higher than that on a standard loan c. is identical to that on a standard loan d. none of the above

b. is higher than that on a standard loan

Credit unions are: a. for profit organizations b. made up of individuals who possess common bonds of association c. institutions that derive funds from investment activities d. all the above

b. made up of individuals who possess common bonds of association

Statewide branch banking: a. is prohibited in all 50 states b. means that branch systems are less likely to fail than independent systems c. permits banks to be located within a geographically defined distance of the main office d. none of the above

b. means that branch systems are less likely to fail than independent systems

Foreign banks in the United States: a. are prohibited in all 50 states b. need the approval of the Federal Reserve c. are not subject to federal examination d. none of the above

b. need the approval of the Federal Reserve

The item on the liabilities and equity section of a bank's balance sheet that represents the smallest proportion of a typical bank's liabilities and stockholders' equity is: a. deposits 68% b. stockholders' equity 8% c. securities asset d. federal funds major part of OTHER LIABILITIES 24%

b. stockholders' equity 8%

The _______________________ was designed mainly to assist the savings and loan industry. a. Glass Steagall Act b. Gramm-Leach-Bliley Act c. Garn-Saint Germain Act d. Depository Institutions Deregulation and Monetary Control Act

c. Garn-Saint Germain Act

Reasons that banks become insolvent include all of the following EXCEPT: a. excessive credit risk b. interest rate risk c. a bank's assets exceeding its liabilities d. all of the above are reasons that banks become insolvent

c. a bank's assets exceeding its liabilities

Select ALL of the following that are not thrift institutions: a. credit unions b. savings and loan associations c. commercial banks d. investment banking firms

c. commercial banks d. investment banking firms definition of thrift instituations

The principal assets of savings banks are: a. securities b. vault cash and deposits at other banks c. mortgage loans d. all the above

c. mortgage loans definition of savings banks, primarily, morange loans

Another name for an open-end investment company is a: a. brokerage firm b. finance company c. mutual fund d. investment bank

c. mutual fund

Select ALL of the following that are not depository institutions: a. credit unions b. savings and loan associations c. mutual funds a type of securities firm, not a depository institution d. savings banks e. brokerage firms a type of securities firm, not a depository institution

c. mutual funds a type of securities firm, not a depository institution e. brokerage firms a type of securities firm, not a depository institution

An organization that receives contributions from employees and/or their employers and invests the proceeds on behalf of the employees for use during their retirement years is called a (n) a. mutual fund b. savings bank c. pension fund d. retirement fund

c. pension fund

The interest rate charged by banks for short-term unsecured loans to their highest quality business customers is referred to as the: a. discount rate b. federal funds rate c. prime rate d. all the above

c. prime rate

The function of adequate bank capital for a commercial bank is to: a. meet bank reserve requirements b. provide funds for real estate loans c. provide a cushion against credit risk and interest rate risk d. support the purchase of bank buildings and equipment

c. provide a cushion against credit risk and interest rate risk

The Resolution Trust Corporation was brought into existence to: a. help savings and loan institutions invest funds in a wide range of higher yielding instruments b. authorize savings and loan institutions to issue a new money market account with no regulated interest rate ceiling c. take over and liquidate the assets of failed savings and loan institutions d. all the above

c. take over and liquidate the assets of failed savings and loan institutions

The principal assets of banks do not include: a. cash b. loans c. time deposits liability d. securities owned

c. time deposits liability

T/F: Investment banks accept deposits and makes loans to individuals and businesses.

commericial banks do this

Which of the following statements is correct? a. The Gramm-Leach-Bliley Act of 1999 allowed commercial banks to again participate in investment banking activities. p 52 (49) and Figure 3.3 b. The Federal Reserve System brought the American economy a system of central banks. p 57 (53) c. "Wildcat banking" during the first half of the 1800s referred to risky banking practices by many state banks, such as excessive note issues, lack of adequate bank capital, and insufficient reserves against their notes and deposits. p 56 (52) footnote 1 d. All the above statements are correct.

d. All the above statements are correct.

The _______________________ was designed to reduce or eliminate interest rate limitations and increase access to various sources of funds available to banks and thrifts and expand the uses of the funds of S&Ls. a. Glass Steagall Act b. Gramm-Leach-Bliley Act c. Garn-Saint Germain Act d. Depository Institutions Deregulation and Monetary Control Act

d. Depository Institutions Deregulation and Monetary Control Act

The _______________________ established the U.S. central banking system and increased the effectiveness of commercial banking in general. a. Glass Steagall Act b. National Banking Act c. Garn-Saint Germain Act d. Federal Reserve Act

d. Federal Reserve Act

The most basic functions of depository institutions are: a. safekeeping for depositors b. record keeping for depositors c. efficient and economical transfer of payments d. accepting deposits and granting loans

d. accepting deposits and granting loans

Financial institutions include: a. banks b. pension funds c. insurance companies d. all of the above

d. all of the above

The National Banking Act of 1864: a. established minimum capital requirements for federally chartered banks b. regulated loans with respect to safety and liquidity c. established minimum reserve requirements d. all of the above

d. all of the above

Types of financial institutions include all of the following EXCEPT: a. commercial banks b. pension funds c. insurance companies d. all of the above are types of financial institutions

d. all of the above are types of financial institutions

The notes of the Bank of North America a. served as a circulating medium of exchange b. were loaned liberally to the government c. were redeemed in metallic coins upon demand d. all the above e. none of the above

d. all the above

The First Bank of the United States ceased operations because: a. the need to provide financing for the Civil War was not supported by Congress b. of the opposition of state banking interests c. its charter had expired and there was no provision for its renewal d. both b and c

d. both b and c

An organization that provides loans directly to consumers and businesses or aid individuals in obtaining financing for durable goods is called a (n) a. commercial bank b. investment bank c. savings and loan d. finance company

d. finance company

The item on the assets side of a bank's balance sheet that represents the largest proportion of bank assets is: a. deposits b. stockholders' equity c. securities d. loans

d. loans

Types of financial institutions include all of the following EXCEPT: a. commercial banks depository institution b. pension funds contractual savings organization c. insurance companies contractual savings organization d. brokerage firms securities firm e. all of the above are types of financial institutions

e. all of the above are types of financial institutions