Deck 3: Depository Institutions: Activities and Characteristics

Question 1

Because of their important role, ________ are afforded special privileges such as access to federal deposit insurance and access to a government entity that provides funds for liquidity or emergency needs..

A) NOW accounts
B) repository institutions
C) depository invitations
D) depository institutions

Answer 1

D

Question 2

Traditionally, the only assets in which S&Ls were allowed to invest include ________.

A) mortgages, mortgage-backed securities, and foreign enterprises
B) mortgages, mortgage-backed securities and U.S. government securities.
C) mortgage-backed securities, non-U.S. government securities and mortgages.
D) mortgages, foreign securities and U.S. government securities.

Answer 2

B

Question 3

Depository institutions are ________ because of the important role that they play in the country's financial system.

A) lowly regarded
B) highly regulated
C) highly deregulated
D) lowly regulated

Answer 3

B

Question 4

S&Ls invest in short-term assets for ________.

A) liquidity and non-regulatory purposes.
B) long-term and regulatory purposes.
C) operational and regulatory purposes.
D) operational and illiquidity purposes.

Question 5

Which of the below statements is FALSE?

A) Risk-based capital guidelines establish a credit risk weight for all assets where a weight depends on the credit risk associated with each asset.
B) There are four credit risk classifications for banks: 0%, 20%, 50%, and 100%, arrived at on no particular scientific basis.
C) The purpose of the Basel I Framework was to improve on the rules as set forth in the Basel I Framework by bringing risk-based capital requirements more in line with the underlying risks to which banks are exposed.
D) The Basel Committee has several subcommittees whose stated purpose is to promote consistency in its implementation of the guidelines.

Question 6

Which of the below statements is TRUE?

A) A depository institution seeks to earn a positive spread between the assets it invests in (deposits and other sources) and the cost of its funds (loans and securities).
B) Interest rate risk refers to the risk that a borrower will default on a loan obligation to the depository institution or that the issuer of a security that the depository institution holds will default on its obligation
C) Regulatory risk is the risk that regulators will change the rules so as to adversely impact the earnings of the institution.
D) If the spread will be positive, it will cost the depository institution more to finance the government securities than it will earn on the funds invested in those securities.

Question 7

As the structures of S&L balance sheets and the consequent maturity mismatch led to widespread disaster, the Garn-St. Germain Act of 1982 expanded the types of assets in which S&Ls could invest. The acceptable list of investments now includes ________.

A) consumer loans .
B) nonconsumer loans.
C) municipal securities.
D) All of these

Question 8

The three sources of funds for banks are ________.

A) salaries, nondeposit borrowing, common stock, and retained earnings.
B) deposits, nondeposit borrowing, common stock, and retained earnings.
C) deposits, salaries and wages, common stock, and retained earnings.
D) deposit borrowing, bonds, and retained earnings.

Question 9

The Garn-St. Germain Act, not only granted thrifts the right to offer money market demand accounts so that S&Ls could compete with money market funds, but also ________ the types of assets in which S&Ls could invest.

A) limited
B) shortened
C) broadened
D) maintained

Question 10

Risk-based capital guidelines establish a ________ weight for all assets where a weight depends on the credit risk associated with each asset.

A) commercial bank risk
B) scientific-based
C) credit risk
D) guideline-based

Question 11

Which of the below statements is FALSE?

A) At one time, thrifts were permitted to accept deposits transferable by check (negotiable), or, as they are more popularly known, checking accounts.
B) Depository institutions are highly regulated because of the important role that they play in the country's financial system.
C) Demand deposit accounts are the principal means that individuals and business entities use for making payments, and government monetary policy is implemented through the banking system.
D) Securities held for the purpose of satisfying net withdrawals and customer loan demands are sometimes referred to as secondary reserves.

Question 12

Realizing the need for banks to obtain liquidity during periods of economic stress, the federal government wanted to establish a banking system that would have an entity that banks could borrow from. The U.S. Congress accomplished this with the passage of the ________.

A) National Bank Act in 1863
B) Office of the Comptroller of the Currency Act
C) Federal Reserve Act of 1913
D) Financial Institutions Reform, Recovery, and Enforcement Act of 1989

Question 13

Prior to 1863, banks were regulated only at the ________ level.

A) local
B) state
C) federal
D) international

Question 14

________ means that there is no stock outstanding, so technically the depositors are the owners.

A) S&L owned
B) Institutionally owned
C) Corporate stock ownership
D) Mutually owned

Question 15

In our financial system, commercial banks provide numerous services that can be broadly classified. Which of the below is NOT one of these broadly classified services?

A) individual banking
B) forthright banking
C) institutional banking
D) global banking

Question 16

Which of the below statements is FALSE?

A) Interest income and fee income are generated from mortgage lending and credit card financing.
B) Fee income is generated from brokerage services and financial investment services.
C) Loans to nonfinancial corporations, financial corporations, (such as life insurance companies), and government entities (state and local governments in the United States and foreign governments) fall into the category of institutional banking.
D) Loans and leasing generate dividend income, and other services that banks offer institutional customers generate fee income.

Question 17

Which of the below statements is TRUE?

A) Depository institutions do not include commercial banks (or simply banks), savings and loan associations (S&Ls), savings banks, and credit unions.
B) Since their funds are raised through deposits and other funding sources, depository institutions cannot make direct loans to various entities or invest in securities.
C) Depository institutions derive their income from two sources: (1) the income generated from the loans they make and the securities they purchase, and (2) fee income.
D) It is uncommon to refer to S&Ls, savings banks, and credit unions as thrifts, which are specialized types of depository institutions.

Question 18

Which of the below statements is FALSE?

A) Absent from any balance sheet of a depository institution is interest rate risk exposure.
B) Managers must be willing to accept some exposure, but they can take various measures to address the interest rate sensitivity of the institution's liabilities and its assets.
C) Regulators impose restrictions on the degree of interest rate risk a depository institution may be exposed to.
D) A depository institution will have an asset/liability committee that is responsible for monitoring the interest rate risk exposure.

Question 19

Most global banking activities generate ________ rather than ________.

A) dividend income; interest income
B) fee income; dividend income
C) interest income; fee income
D) fee income; interest income

Question 20

Which of the below statements is FALSE?

A) There are two sets of capital adequacy standards for S&Ls as for banks.
B) Until the early 2000s, S&Ls and all other lenders financed housing through traditional mortgages at interest rates fixed for the life of the loan.
C) For S&Ls, if interest rates rise above the interest rate on the mortgage loan, a negative spread will result, which must result eventually in insolvency.
D) With the high volatility of interest rates in the 1970s, followed by the historically high level of interest rates in the early 1980s, all depository institutions began to lose funds to competitors exempt from ceilings, such as the newly formed money market funds; this development forced some increase in ceilings.

Question 21

The basic motivation behind creation of S&Ls was the providing of funds for financing the purchase of a home.

Question 22

All banks must maintain a specified percentage of their deposits in a non-interest-bearing account at one of the twelve Federal Reserve Banks. These specified percentages are called required reserves, and the dollar amounts based on them that are required to be kept on deposit at a Federal Reserve Bank are called reserve ratios.

Question 23

________ are institutions similar to, although much older than, S&Ls.

A) Federal Reserve Banks
B) Partnerships
C) Corporations
D) Savings banks

Question 24

The maximum interest rate that is permitted on deposit accounts has been phased out by the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA).

Question 25

Time deposits, also called certificates of deposit, have a fixed maturity date and pay either a fixed or floating interest rate.

Question 26

The market where banks can borrow or lend reserves is called the federal funds market. The interest rate charged to borrow funds in this market is called the federal funds rate.

Question 27

By interest rate risk, we refer to the prospect that the selling price of the security will be less than its purchase price, resulting in a loss.

Question 28

In comparing savings banks and S&Ls, which of the below comparisons is FALSE?

A) Although the total deposits at savings banks are less than those at S&Ls, savings banks are typically larger institutions.
B) Asset structures of savings banks are always greater than S&Ls.
C) Because states have permitted more portfolio diversification than was permitted by federal regulators of S&Ls, savings bank portfolios weathered funding risk far better than S&Ls.
D) Typically, the ratio of deposits to total assets is greater for savings banks than for S&Ls.

Question 29

Although S&Ls had a comparative disadvantage in originating mortgage loans, they lacked the expertise to make commercial and corporate loans.

Question 30

Since 1970, the shares of all federally chartered credit unions have been insured by the ________.

A) Central Liquidity Facility
B) National Credit Union Administration
C) U.S. Central Credit Union
D) National Credit Union Share Insurance Fund

Question 31

A depository institution can accommodate withdrawal and loan demand by attracting additional deposits and raising short-term funds in the money market.

Question 32

After 1981, the bulk of the liabilities of S&Ls consisted of passbook savings accounts and time deposits.

Question 33

Selling securities that it owns, requires that the depository institution invest a portion of its funds in securities that are both illiquid and have a lot of price risk.

Question 34

Demand deposits pay interest, typically below market interest rates; do not have a specific maturity; and, usually can be withdrawn upon demand.

Question 35

Credit union assets consist of ________.

A) small consumer loans, residential mortgage loans, and securities.
B) large consumer loans, residential mortgage loans, and securities.
C) small consumer loans, business mortgage loans, and securities.
D) small consumer loans, residential auto loans, and securities.

Question 36

Savings deposits (checking accounts) pay no interest and can be withdrawn upon demand.

Question 37

The principal source of funds for savings banks is ________.

A) government bail-out funds.
B) withdrawals.
C) venture capital.
D) deposits.

Question 38

Besides facing credit risk and interest rate risk, a depository institution must be prepared to satisfy withdrawals of funds by depositors and to provide loans to customers.

Question 39

To increase the ability of S&Ls to expand the sources of funding available to bolster their capital, legislation facilitated the conversion of mutually owned companies into a corporate stock ownership structure.

Question 40

Technically, because credit unions are ________ by their members, member deposits are called ________.

A) managed; certificates
B) owned; certificates
C) managed; shares
D) owned; shares

Question 41

The purpose of credit unions is to serve their members' lending needs.

Question 42

What is a corporate credit union?

Question 43

Contrast the differences and similarities between savings banks and S&Ls.

Question 44

Discuss how the risk-based capital guidelines attempt to recognize credit risk by segmenting and weighting requirements.

Question 45

Discuss the S&L crisis focusing your discussion upon the funding problem of lending long and borrowing short.

Question 46

Explain the following three concepts: discount window, type of collateral (to borrow from Fed), and discount rate.

Question 47

Besides facing credit risk and interest rate risk, a depository institution must be prepared to satisfy withdrawals of funds by depositors and to provide loans to customers. Identify and explain two ways that a depository institution can accommodate withdrawal and loan demand.

Question 48

The principal source of funds for savings banks is deposits.

Question 49

Federal and state-chartered credit unions are referred to as "natural person" credit unions because they provide financial services to qualifying members of the general public.

Question 50

Savings banks are institutions similar to, although much younger than, S&Ls.