Question 1

An organization form that establishes bank subsidiaries rather than branches to expand is

Accepted Answer

A) an unit bank. 
B) a multibank holding company. 
C) a one-bank holding company. 
D) a representative office. 
E) a nonbank bank. 
A) an unit bank. 
B) a multibank holding company. 
C) a one-bank holding company. 
D) a representative office. 
E) a nonbank bank. B

Question 2

The economic value of narrowly defined bank franchises has declined because

Accepted Answer

A) product line restrictions inhibit the ability of an FI to optimize the set of financial services it can offer. 
B) product restrictions limit the ability of FI managers to adjust flexibly to shifts in the demand for financial products. 
C) product restrictions limit the ability of FI managers to adjust flexibly to shifts in costs due to technology and related innovations. 
D) All of the above. 
E) Answers A and B only. 
A) product line restrictions inhibit the ability of an FI to optimize the set of financial services it can offer. 
B) product restrictions limit the ability of FI managers to adjust flexibly to shifts in the demand for financial products. 
C) product restrictions limit the ability of FI managers to adjust flexibly to shifts in costs due to technology and related innovations. 
D) All of the above. 
E) Answers A and B only. D

Question 3

The NAFTA agreement and other agreements reached through the help of the World Trade Organization should reduce some of the restrictions that have face U.S. banks in attempts to enter emerging market countries.

Accepted Answer

A) True 
 B)False  True

Question 4

The Riegle-Neal Act of 1994

Accepted Answer

A) specifically allows banks to establish de novo branches in new states. 
B) effectively allows full interstate branching within the U.S. 
C) is given credit for initiating a wave of bank mergers across the U.S. 
D) All of the above. 
E) Answers B and C only. 
A) specifically allows banks to establish de novo branches in new states. 
B) effectively allows full interstate branching within the U.S. 
C) is given credit for initiating a wave of bank mergers across the U.S. 
D) All of the above. 
E) Answers B and C only.

Question 5

A bank threatens to credit ration unless the customer agrees to let the bank's securities affiliate do its securities underwritings. Identify the conflict of interest in this scenario.

Accepted Answer

A) Salesperson's Stake. 
B) Stuffing fiduciary accounts. 
C) Tie-ins. 
D) Third-party loans. 
E) Information transfer. 
A) Salesperson's Stake. 
B) Stuffing fiduciary accounts. 
C) Tie-ins. 
D) Third-party loans. 
E) Information transfer.

Question 6

If the firm commitment price is $15 and one million shares are sold in the primary market for $13 and then resold in the secondary market for $13.25, what is the underwriter's profit/loss?

Accepted Answer

A) -$2,000,000. 
B) $2,000,000. 
C) -$1,750,000. 
D) $1,750,000. 
E) 0 
A) -$2,000,000. 
B) $2,000,000. 
C) -$1,750,000. 
D) $1,750,000. 
E) 0

Question 7

$$\begin{array} { | c | r | } 
\hline \text { Bank } & \text { Asset Size } \
\hline 1 & \text { \$100 million } \
\hline 2 & \text { \$200 million } \
\hline 3 & \text { \$500 million } \
\hline
\end{array}$$
-What is the market share of Bank 2?

Accepted Answer

A) 12.5 percent. 
B) 37.5 percent. 
C) 25.0 percent. 
D) 62.5 percent. 
E) 50.0 percent. 
A) 12.5 percent. 
B) 37.5 percent. 
C) 25.0 percent. 
D) 62.5 percent. 
E) 50.0 percent.

Question 8

If Bank C splits into two separate institutions at ½ its original size each, what is the new Herfindahl (HHI) Index?

Accepted Answer

A) 60. 
B) 340. 
C) 2,538. 
D) 2,847. 
E) 10,000. 
A) 60. 
B) 340. 
C) 2,538. 
D) 2,847. 
E) 10,000.

Question 9

$$\begin{array} { | c | r | } 
\hline \text { Bank } & \text { Asset Size } \
\hline 1 & \text { \$100 million } \
\hline 2 & \text { \$200 million } \
\hline 3 & \text { \$500 million } \
\hline
\end{array}$$
-What is the market share of Bank 1?

Accepted Answer

A) 12.5 percent. 
B) 37.5 percent. 
C) 25.0 percent. 
D) 62.5 percent. 
E) 50.0 percent. 
A) 12.5 percent. 
B) 37.5 percent. 
C) 25.0 percent. 
D) 62.5 percent. 
E) 50.0 percent.

Question 10

Chinese Walls are

Accepted Answer

A) internally imposed barriers that limits the flow of confidential client information among departments or areas. 
B) regulatory barriers that are introduced to insulate the bank against losses. 
C) regulations that prohibit a bank from lending anything at all to its securities affiliates. 
D) restrictions on a bank holding company that prevents the use of subsidiary funds to support ailing affiliates. 
E) hurdles created by excessive drain in the form of dividends and fees from a bank. 
A) internally imposed barriers that limits the flow of confidential client information among departments or areas. 
B) regulatory barriers that are introduced to insulate the bank against losses. 
C) regulations that prohibit a bank from lending anything at all to its securities affiliates. 
D) restrictions on a bank holding company that prevents the use of subsidiary funds to support ailing affiliates. 
E) hurdles created by excessive drain in the form of dividends and fees from a bank.

Question 11

The specialized nature in which credit intermediation is performed by shadow banks makes the process less cost efficient than if done by traditional banks.

Accepted Answer

A) True 
 B)False

Question 12

The existence of the "too big to fail" doctrine may encourage large banks to take excessive risks in securities underwriting activities.

Accepted Answer

A) True 
 B)False

Question 13

Concern about the improper transfer of inside information has been used to justify product segmentation on the grounds of

Accepted Answer

A) safety and soundness issues. 
B) economy of scale and scope issues. 
C) conflict of interest issues. 
D) deposit insurance issues. 
E) regulatory oversight issues. 
A) safety and soundness issues. 
B) economy of scale and scope issues. 
C) conflict of interest issues. 
D) deposit insurance issues. 
E) regulatory oversight issues.

Question 14

In the middle part of the twentieth century, large banks addressed the issue of interstate branch banking restrictions by forming multibank holding companies with bank subsidiaries in different states.

Accepted Answer

A) True 
 B)False

Question 15

Legislations restricting geographic expansion have been undermined in all of the following ways EXCEPT

Accepted Answer

A) regional banking pacts. 
B) purchase of troubled banks. 
C) opening of nonbank banks. 
D) acquisition of subsidiaries. 
E) acquisition of insurance companies out of state. 
A) regional banking pacts. 
B) purchase of troubled banks. 
C) opening of nonbank banks. 
D) acquisition of subsidiaries. 
E) acquisition of insurance companies out of state.

Question 16

The safety and soundness of a holding company that has both a bank subsidiary and a securities affiliate can be enhanced over time by the product diversification benefits of a more stable earnings stream caused by having well-diversified financial services.

Accepted Answer

A) True 
 B)False

Question 17

Expansion on a de novo basis implies the establishment and construction of a new office in a location where previously no office existed.

Accepted Answer

A) True 
 B)False

Question 18

The conflict of interest that occurs when a bank suggests the issuance of capital market debt for the purpose of reducing bank loans under conditions of deteriorating or questionable firm financial health is commonly referred to as bankruptcy risk transference.

Accepted Answer

A) True 
 B)False

Question 19

The Glass-Steagall Act allowed commercial banks to underwrite new issues of Treasury securities.

Accepted Answer

A) True 
 B)False

Question 20

The use of the Herfindahl-Hirschman Index (HHI) to measure market concentration is encouraged for banks because of the ease of separating banks from thrifts and insurance companies.

Accepted Answer

A) True 
 B)False

Exam 21: Product and Geographic Expansion

An organization form that establishes bank subsidiaries rather than branches to expand is

The economic value of narrowly defined bank franchises has declined because

The NAFTA agreement and other agreements reached through the help of the World Trade Organization should reduce some of the restrictions that have face U.S. banks in attempts to enter emerging market countries.

The Riegle-Neal Act of 1994

A bank threatens to credit ration unless the customer agrees to let the bank's securities affiliate do its securities underwritings. Identify the conflict of interest in this scenario.

If the firm commitment price is $15 and one million shares are sold in the primary market for $13 and then resold in the secondary market for $13.25, what is the underwriter's profit/loss?

Bank Asset Size 1 \1 00 million 2 \2 00 million 3 \5 00 million -What is the market share of Bank 2?

If Bank C splits into two separate institutions at ½ its original size each, what is the new Herfindahl (HHI) Index?

Bank Asset Size 1 \1 00 million 2 \2 00 million 3 \5 00 million -What is the market share of Bank 1?

Chinese Walls are

The specialized nature in which credit intermediation is performed by shadow banks makes the process less cost efficient than if done by traditional banks.

The existence of the "too big to fail" doctrine may encourage large banks to take excessive risks in securities underwriting activities.

Concern about the improper transfer of inside information has been used to justify product segmentation on the grounds of

In the middle part of the twentieth century, large banks addressed the issue of interstate branch banking restrictions by forming multibank holding companies with bank subsidiaries in different states.

Legislations restricting geographic expansion have been undermined in all of the following ways EXCEPT

The safety and soundness of a holding company that has both a bank subsidiary and a securities affiliate can be enhanced over time by the product diversification benefits of a more stable earnings stream caused by having well-diversified financial services.

Expansion on a de novo basis implies the establishment and construction of a new office in a location where previously no office existed.

The conflict of interest that occurs when a bank suggests the issuance of capital market debt for the purpose of reducing bank loans under conditions of deteriorating or questionable firm financial health is commonly referred to as bankruptcy risk transference.

The Glass-Steagall Act allowed commercial banks to underwrite new issues of Treasury securities.

The use of the Herfindahl-Hirschman Index (HHI) to measure market concentration is encouraged for banks because of the ease of separating banks from thrifts and insurance companies.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters