Deck 22: Product and Geographic Expansion

Question 1

The commercial paper market is an example of nonbank competition on the asset side of the balance sheet that has become increasingly intense for banks.

Answer 1

True

Question 2

Banks have been permitted to acquire existing investment banks since 1997.

Answer 2

True

Question 3

Of the ten largest financial service firms in the world, three are headquartered in the U.S.

Answer 3

False

Question 4

Under the Financial Services Modernization Act of 1999, commercial banks can own and actively manage nonfinancial corporations.

Question 5

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

Question 6

In recent years, commercial banks have attempted to expand their activities into nonbanking areas, but securities firms have not been interested in expanding into commercial banking.

Question 7

The Financial Services Modernization Act of 1999 has provided for more standardized relationships among financial service sectors and commerce.

Question 8

In late 2015, shadow banking activities came under federal government regulation.

Question 9

The Financial Services Modernization Act of 1999 allows bank holding companies to open insurance underwriting affiliates.

Question 10

In the banking environment, economic and legal firewalls often have been designed to separate the risks of investment bank affiliate activities from commercial banks.

Question 11

Historically, commercial banks have been prohibited from acting as an underwriter of insurance products.

Question 12

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

Question 13

A fully integrated universal bank allows a bank to engage in securities activities only through a separately owned securities affiliate.

Question 14

The Financial Services Modernization Act repealed the Glass-Steagall barriers between commercial banking and investment banking.

Question 15

In the U.S., the Glass-Steagall Act limited the integration of commercial banking and securities activities.

Question 16

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

Question 17

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

Question 18

The Financial Services Modernization Act of 1999 prohibits insurance companies from opening commercial banks.

Question 19

A universal FI is an FI that has expanded its operations across country lines.

Question 20

Banks increasingly have been susceptible to nonbank competition on both sides of the balance sheet.

Question 21

Interstate banking barriers have deteriorated in part because of the decisions to deal with the failing thrift industry by allowing acquiring firms to cross state lines.

Question 22

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.

Question 23

The establishment of a presence in local markets by insurance companies is reasonably inexpensive because of low capital requirements established by state regulators.

Question 24

Chinese walls are barriers within organizations that limit the flow of confidential information between departments of business areas.

Question 25

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

Question 26

The required monitoring and surveillance efforts of several regulatory bodies in the case of large holding companies with multi-subsidiaries may actually decrease the efficiency of regulatory oversight.

Question 27

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

Question 28

By the early 1990s interstate banking pacts basically had opened the doors for nearly all banks to practice interstate branching in any geographic locations.

Question 29

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

Question 30

Tie-ins and third-party loans are prohibited by current bank regulations.

Question 31

The process of using lending power to coerce a loan customer to use products sold by a securities affiliate is called information transfer.

Question 32

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.

Question 33

A one bank holding company is a parent bank holding company with only one subsidiary involved in banking activities.

Question 34

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

Question 35

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

Question 36

Increased competition for securities underwritings should reduce the spreads and thus lower the price paid for the securities by the investing public.

Question 37

Research suggests that the total risk exposure of a financial services organization could actually increase if there is excessive product expansion in some nonbank lines.

Question 38

Historically, regulations have encouraged the expansion of bank offices domestically.

Question 39

Information transfer refers to the conflict of interest that occurs when banks have the power to sell nonbank products.

Question 40

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.

Question 41

U.S.financial institutions have expanded abroad in recent years, although their foreign counterparts have been prohibited from expanding into the U.S.

Question 42

Research on bank mergers for the decade of the 1990s found that improved performance of the merged bank occurred because of both revenue enhancements and cost reduction.

Question 43

The European Community Second Banking Directive has aided the international competitive position of European banks by creating a single banking market in Europe.

Question 44

In order to achieve a more stable revenue stream in a merger, the asset and liability portfolios of the two institutions should have similar credit, interest rate, and liquidity characteristics.

Question 45

The effect of the International Banking Act of 1978 was to accelerate the expansion of foreign bank activities in the U.S.primarily because of their access to the Federal Reserve's discount window, Fedwire, and FDIC insurance.

Question 46

A foreign bank subsidiary in the U.S.is restricted to using only funds borrowed on the wholesale and money markets.

Question 47

Offices of foreign banks may be examined by the Federal Reserve under the FBSEA of 1991.

Question 48

The International Banking Act of 1978 attempted to provide a level playing field for domestic and foreign banks in U.S.banking markets.

Question 49

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.

Question 50

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.

Question 51

One result of the FBSEA was the increase in the regulatory burden of foreign banks in the U.S.

Question 52

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.

Question 53

The Garn-St Germain Act is an interstate banking law that allows banks to branch on an interstate basis rather than building more expensive holding company structures.

Question 54

Success in a merger from revenue enhancement is more likely if the markets into which expansion occurs are less than fully competitive.

Question 55

The FBSEA of 1991 required a foreign bank to have Fed approval to establish a branch as a new entry, but does not require such approval if the entry is by acquisition.

Question 56

The purpose of the Foreign Bank Supervision Enhancement Act of 1991 was to extend federal authority over foreign banking organizations in the U.S.

Question 57

Large size is an important characteristic in international banking because it gives a bank a greater ability to diversify across borders.

Question 58

U.S.banking offices abroad normally are permitted by the Federal Reserve System to engage in activities that are allowed in the foreign country even when such activities are not permitted in the U.S.

Question 59

The USA Patriot Act of 2001 prohibits U.S.banks from providing banking services to foreign banks.

Question 60

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.

Question 61

Activities of nonfinancial service firms that perform banking services are referred to as nonbanking.

Question 62

Issues involved in the diversification of product offerings include the following EXCEPT

A)Safety and soundness issues
B)Economy of scale and scope issues.
C)Conflict of interest issues.
D)Deposit insurance and regulatory oversight issues.
E)Pricing issues.

Question 63

Which of the following has proven to be strong competition for bank deposit and transaction account products?

A)Commercial paper market.
B)Money market mutual funds.
C)Finance company business credit.
D)Hedge funds.
E)None of the options.

Question 64

This legislation defines a bank as any institution that accepts deposit insurance coverage.

A)The McCarran-Ferguson Act of 1945.
B)The Bank Holding Company Act of 1956.
C)The Garn-St.Germain Act of 1982.
D)The Competitive Equality Banking Act of 1987.
E)The International Banking Act of 1978.

Question 65

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

Question 66

The Pecora Commission's findings about the 1929 stock market crash resulted in the

A)Financial Services Modernization Act.
B)Glass-Steagall Act.
C)Federal Reserve Act.
D)International Banking Act.
E)Garn St.Germain Depository Institutions Act.

Question 67

Commercial banks have expanded their activities in each of the following ways EXCEPT

A)opening nonbank banks.
B)grandfathering previously permitted activities.
C)expanding off shore.
D)petitioning regulators for enhanced powers.
E)acquiring nonfinancial firms.

Question 68

Permissible section 20 subsidiary activities include

A)insurance activities.
B)hedging.
C)factoring.
D)extensions of lines of credit.
E)investment banking activities.

Question 69

This legislation restricts insurance companies from owning or being affiliated with full service banks.

A)The McCarran-Ferguson Act of 1945.
B)The Bank Holding Company Act of 1956.
C)The Garn-St.Germain Depository Institutions Act of 1982.
D)Savings and Loan Holding Company Act of 1968.
E)The International Banking Act of 1978.

Question 70

The following statements regarding the financial crisis are true EXCEPT

A)New policies have been introduced at national/regional levels to address financial stability risks from shadow banking.
B)Authorities are establishing system-wide oversight and monitoring frameworks to assess the financial stability risks from shadow banking.
C)The FSB has been conducting annual monitoring exercises since 2011 to assess global trends and risks.
D)The FSM has begun implementing a forward looking high level Policy Framework to detect and assess sources of financial stability risks from shadow banking.
E)Shadow banking is preventable and banks are prepared to spot and stop it.

Question 71

Similar to the Volcker rule in the U.S., bank structural reforms in the U.K.and
E.U.have tried to limit risks emanating from bank's trading activities by advocating the "partial separation" approach.

Question 72

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

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 73

Identify the action taken by OCC and the Federal Reserve in 1997, to expand the permitted activities of bank holding companies.

A)Repealed the Glass-Steagall barriers between commercial banking and investment banking.
B)Allowed commercial banks to acquire directly existing investment banks.
C)Allowed investment banks to offer banking products.
D)Allowed investment banks to offer deposit products.
E)All of the options.

Question 74

The banking industry in the U.S.has faced increased competition

A)on the liability side of the balance sheet from the commercial paper market.
B)on the asset side of the balance sheet from money market mutual funds.
C)on the liability side of the balance sheet from money market mutual funds.
D)on the asset side of the balance sheet from the commercial paper market.
E)on the liability side of the balance sheet from money market mutual funds and on the asset side of the balance sheet from the commercial paper market.

Question 75

Despite a sovereign debt problem that plagued Greece in 2010, by 2012 U.S.Banks had increased their exposure to Greek debt.

Question 76

The economic value of narrowly defined bank franchises has declined because

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 to shifts in the demand for financial products.
C)product restrictions limit the ability of FI managers to adjust to shifts in costs due to technology and related innovations.
D)All of the options.
E)None of the options.

Question 77

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

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

Question 78

Mutual funds that offer high liquidity, check-writing ability and a money market return to smaller individual investors are called MMMFs or money market mutual funds.

Question 79

A disadvantage to international bank expansion is the potential increase in the monitoring and information collection costs in some overseas markets.

Question 80

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