Question 1

The emergence of the Euro as a uniform medium of exchange is expected to cause the importance of the dollar to increase among major European countries.

Accepted Answer

A) True 
 B)False

Question 2

International expansion often produces revenue-risk diversification benefits for U.S. banks.

Accepted Answer

A) True 
 B)False

Question 3

International expansion by a commercial bank should provide increased access to funding sources.

Accepted Answer

A) True 
 B)False

Question 4

Economies of scope opportunities seem to be available in the financial services industry, but economies of scale opportunities do not seem to exist.

Accepted Answer

A) True 
 B)False

Question 5

Reciprocal banking pacts allowed the non-state companies to purchase banks as long as the purchase permission went in both directions.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is true of X efficiencies?

Accepted Answer

A) They result from diseconomies of scope. 
B) They are difficult to pin down in a quantitative fashion. 
C) They result from diseconomies of scale. 
D) They are a direct result of significant economies of scope. 
E) They are a direct result of significant economies of scale. 
A) They result from diseconomies of scope. 
B) They are difficult to pin down in a quantitative fashion. 
C) They result from diseconomies of scale. 
D) They are a direct result of significant economies of scope. 
E) They are a direct result of significant economies of scale.

Question 7

If Bank C agrees to be purchased by Banks A and B, what proportion of assets of Bank C should be taken by Banks A and B, respectively in order to have equal post-merger assets?

Accepted Answer

A) 52 percent and 48 percent. 
B) 50 percent and 40 percent. 
C) 56 percent and 44 percent. 
D) 40 percent and 50 percent. 
E) 45 percent and 55 percent. 
A) 52 percent and 48 percent. 
B) 50 percent and 40 percent. 
C) 56 percent and 44 percent. 
D) 40 percent and 50 percent. 
E) 45 percent and 55 percent.

Question 8

$$\begin{array} { | c | r | } 
\hline \text { Bank } & \text { Asset Size } \
\hline 1 & \text { \$100 million } \
\hline 2 & \text { \$200 million } \
\hline 3 & \text { \$500 million } \
\hline
\end{array}$$
-How do you think the Department of Justice (DOJ) would characterize this market before the merger and which merger is more likely to be approved?

Accepted Answer

A) This is a competitive market and either merger will be acceptable to the DOJ. 
B) This is a concentrated market and neither merger will be acceptable to the DOJ. 
C) This is a concentrated market, but the merger between Banks 1 and 3 is more likely to be acceptable to the DOJ. 
D) This is a competitive market, but the merger between Banks 1 and 2 is more likely to be acceptable to the DOJ. 
E) This is a moderately concentrated market, but the merger between Banks 1 and 3 is more likely to be acceptable to the DOJ. 
A) This is a competitive market and either merger will be acceptable to the DOJ. 
B) This is a concentrated market and neither merger will be acceptable to the DOJ. 
C) This is a concentrated market, but the merger between Banks 1 and 3 is more likely to be acceptable to the DOJ. 
D) This is a competitive market, but the merger between Banks 1 and 2 is more likely to be acceptable to the DOJ. 
E) This is a moderately concentrated market, but the merger between Banks 1 and 3 is more likely to be acceptable to the DOJ.

Question 9

Section 20 affiliates allow banks to transact previously ineligible securities activities.

Accepted Answer

A) True 
 B)False

Question 10

Banks typically have faced few restrictions in expanding their businesses, while securities firms and insurance companies have faced complex rules regarding expansion.

Accepted Answer

A) True 
 B)False

Question 11

Merger premiums tend to be higher for target banks in competitive environments, but for which the target bank's loan portfolios are of high quality.

Accepted Answer

A) True 
 B)False

Question 12

An investment bank may take a big loss when underwriting an issue on a firm commitment basis because

Accepted Answer

A) it may overestimate the demand for the shares by the market. 
B) it may underestimate the demand for the shares by the market. 
C) interest rates may rise during the offering period. 
D) security prices in general may increase during this period. 
E) Answers A and D only. 
A) it may overestimate the demand for the shares by the market. 
B) it may underestimate the demand for the shares by the market. 
C) interest rates may rise during the offering period. 
D) security prices in general may increase during this period. 
E) Answers A and D only.

Question 13

The barriers among nonbank financial service firms and commercial firms are generally much stronger than the barriers separating banking and commercial sector activities.

Accepted Answer

A) True 
 B)False

Question 14

Concern about the ability to analyze a more complex corporate structure 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 15

Which action of the holding company to help its securities affiliate can damage the financial health of its banking subsidiary?

Accepted Answer

A) Downstreaming funds from the subsidiary and then upstreaming it to the securities affiliate. 
B) Upstreaming funds from the securities affiliate and then downstreaming it to the bank subsidiary. 
C) Indulging in product diversification. 
D) Upstreaming funds from the bank subsidiary and then downstreaming it to the securities affiliate. 
E) Diversifying the earnings stream of a banking company geographically. 
A) Downstreaming funds from the subsidiary and then upstreaming it to the securities affiliate. 
B) Upstreaming funds from the securities affiliate and then downstreaming it to the bank subsidiary. 
C) Indulging in product diversification. 
D) Upstreaming funds from the bank subsidiary and then downstreaming it to the securities affiliate. 
E) Diversifying the earnings stream of a banking company geographically.

Question 16

Nonbank institutions have NOT gained competitive momentum for which of the following financial products?

Accepted Answer

A) Commercial paper. 
B) Money market mutual funds. 
C) Annuities. 
D) Business credit market. 
E) Savings accounts. 
A) Commercial paper. 
B) Money market mutual funds. 
C) Annuities. 
D) Business credit market. 
E) Savings accounts.

Question 17

The Financial Services Modernization Act repealed the Glass-Steagall barriers between commercial banking and investment banking.

Accepted Answer

A) True 
 B)False

Question 18

Under the 1982 guidelines, would the Fed approve the merger of Banks A and C?

Accepted Answer

A) It is likely to approve because it is not a concentrated market. 
B) It is unlikely to approve because the post-merger HHI has increased by over 100. 
C) It is likely to approve because the post-merger HHI has increased by over 100. 
D) Likely to approve because the post-merger HHI has increased by less than 5,000. 
E) It is unlikely to approve because the post-merger HHI has increased by an amount over 5,000. 
A) It is likely to approve because it is not a concentrated market. 
B) It is unlikely to approve because the post-merger HHI has increased by over 100. 
C) It is likely to approve because the post-merger HHI has increased by over 100. 
D) Likely to approve because the post-merger HHI has increased by less than 5,000. 
E) It is unlikely to approve because the post-merger HHI has increased by an amount over 5,000.

Question 19

This legislation explicitly stated that banking and insurance were not closely related activities.

Accepted Answer

A) The McCarran-Ferguson Act of 1945. 
B) Savings and Loan Holding Company Act of 1968. 
C) The Garn-St.Germain Depository Institutions Act of 1982. 
D) The Competitive Equality Banking Act of 1987. 
E) The International Banking Act of 1978. 
A) The McCarran-Ferguson Act of 1945. 
B) Savings and Loan Holding Company Act of 1968. 
C) The Garn-St.Germain Depository Institutions Act of 1982. 
D) The Competitive Equality Banking Act of 1987. 
E) The International Banking Act of 1978.

Question 20

The Douglas amendment to the Bank Holding Company was passed to address a potential loophole to interstate banking posed by

Accepted Answer

A) unit banks. 
B) multibank holding companies. 
C) one-bank holding companies. 
D) foreign banks. 
E) reciprocal agreements. 
A) unit banks. 
B) multibank holding companies. 
C) one-bank holding companies. 
D) foreign banks. 
E) reciprocal agreements.

Exam 21: Product and Geographic Expansion

The emergence of the Euro as a uniform medium of exchange is expected to cause the importance of the dollar to increase among major European countries.

International expansion often produces revenue-risk diversification benefits for U.S. banks.

International expansion by a commercial bank should provide increased access to funding sources.

Economies of scope opportunities seem to be available in the financial services industry, but economies of scale opportunities do not seem to exist.

Reciprocal banking pacts allowed the non-state companies to purchase banks as long as the purchase permission went in both directions.

Which of the following is true of X efficiencies?

If Bank C agrees to be purchased by Banks A and B, what proportion of assets of Bank C should be taken by Banks A and B, respectively in order to have equal post-merger assets?

Bank Asset Size 1 \1 00 million 2 \2 00 million 3 \5 00 million -How do you think the Department of Justice (DOJ) would characterize this market before the merger and which merger is more likely to be approved?

Section 20 affiliates allow banks to transact previously ineligible securities activities.

Banks typically have faced few restrictions in expanding their businesses, while securities firms and insurance companies have faced complex rules regarding expansion.

Merger premiums tend to be higher for target banks in competitive environments, but for which the target bank's loan portfolios are of high quality.

An investment bank may take a big loss when underwriting an issue on a firm commitment basis because

The barriers among nonbank financial service firms and commercial firms are generally much stronger than the barriers separating banking and commercial sector activities.

Concern about the ability to analyze a more complex corporate structure has been used to justify product segmentation on the grounds of

Which action of the holding company to help its securities affiliate can damage the financial health of its banking subsidiary?

Nonbank institutions have NOT gained competitive momentum for which of the following financial products?

The Financial Services Modernization Act repealed the Glass-Steagall barriers between commercial banking and investment banking.

Under the 1982 guidelines, would the Fed approve the merger of Banks A and C?

This legislation explicitly stated that banking and insurance were not closely related activities.

The Douglas amendment to the Bank Holding Company was passed to address a potential loophole to interstate banking posed by

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