Deck 11: Banking Industry: Structure and Competition

Question 1

To eliminate the abuses of the state-chartered banks,the ________ created a new banking system of federally chartered banks,supervised by the ________.

A)National Bank Act of 1863;Office of the Comptroller of the Currency
B)Federal Reserve Act of 1863;Office of the Comptroller of the Currency
C)National Bank Act of 1863;Office of Thrift Supervision
D)Federal Reserve Act of 1863;Office of Thrift Supervision

Answer 1

National Bank Act of 1863;Office of the Comptroller of the Currency

Question 2

The Federal Reserve Act of 1913 required that

A)state banks be subject to the same regulations as national banks.
B)national banks establish branches in the cities containing Federal Reserve banks.
C)national banks join the Federal Reserve System.
D)state banks could not join the Federal Reserve System.

Answer 2

national banks join the Federal Reserve System.

Question 3

With the creation of the Federal Deposit Insurance Corporation,member banks of the Federal Reserve System ________ to purchase FDIC insurance for their depositors,while non-member commercial banks ________ to buy deposit insurance.

A)could choose;were required
B)could choose;were given the option
C)were required;could choose
D)were required;were required

Answer 3

were required;could choose

Question 4

The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the

A)central bank.
B)commercial bank.
C)bank of settlement.
D)monetary fund.

Question 5

The Second Bank of the United States was denied a new charter by

A)President Andrew Jackson.
B)Vice President John Calhoun.
C)President Benjamin Harrison.
D)President John Q. Adams.

Question 6

Which regulatory body charters national banks?

A)the Federal Reserve
B)the FDIC
C)the Comptroller of the Currency
D)the U.S. Treasury

Question 7

The modern commercial banking system began in America when the

A)Bank of United States was chartered in New York in 1801.
B)Bank of North America was chartered in Philadelphia in 1782.
C)Bank of United States was chartered in Philadelphia in 1801.
D)Bank of North America was chartered in New York in 1782.

Question 8

Before 1863

A)federally-chartered banks had regulatory advantages not granted to state-chartered banks.
B)the number of federally-chartered banks grew at a much faster rate than at any other time since the end of the Civil War.
C)banks acquired funds by issuing banknotes.
D)banks were required to maintain 100% of their deposits as reserves.

Question 9

Prior to 1863,all commercial banks in the United States

A)were chartered by the U.S. Treasury Department.
B)were chartered by the banking commission of the state in which they operated.
C)were regulated by the Federal Reserve.
D)were regulated by the central bank.

Question 10

Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been

A)the creation of the FDIC.
B)rapid economic growth since 1941.
C)the employment of new procedures by the Federal Reserve.
D)better bank management.

Question 11

Although the National Bank Act of 1863 was designed to eliminate state-chartered banks by imposing a prohibitive tax on banknotes,state banks were able to stay in business by

A)issuing credit cards.
B)ignoring the regulations.
C)acquiring funds through deposits.
D)branching into other states.

Question 12

Because of the abuses by state banks and the clear need for a central bank to help the federal government raise funds during the War of 1812,Congress created the

A)Bank of United States in 1812.
B)Bank of North America in 1814.
C)Second Bank of the United States in 1816.
D)Second Bank of North America in 1815.

Question 13

The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains,in part,the passage of

A)the National Bank Charter Amendments of 1918.
B)the Garn-St. Germain Act of 1982.
C)the National Bank Act of 1863.
D)Federal Reserve Act of 1913.

Question 14

The National Bank Act of 1863,and subsequent amendments to it

A)created a banking system of state-chartered banks.
B)established the Office of the Comptroller of the Currency.
C)broadened the regulatory powers of the Federal Reserve.
D)created insurance on deposit accounts.

Question 15

Currency circulated by banks that could be redeemed for gold was called

A)junk bonds.
B)banknotes.
C)gold bills.
D)state money.

Question 16

A major controversy involving the banking industry in its early years was

A)whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions.
B)whether the federal government or the states should charter banks.
C)what percent of deposits banks should hold as fractional reserves.
D)whether banks should be allowed to issue their own bank notes.

Question 17

The regulatory system that has evolved in the United States whereby banks are regulated at the state level,the national level,or both,is known as a

A)bilateral regulatory system.
B)tiered regulatory system.
C)two-tiered regulatory system.
D)dual banking system.

Question 18

The U.S. banking system is considered to be a dual system because

A)banks offer both checking and savings accounts.
B)it actually includes both banks and thrift institutions.
C)it is regulated by both state and federal governments.
D)it was established before the Civil War,requiring separate regulatory bodies for the North and South.

Question 19

The Federal Reserve Act of 1913 required all ________ banks to become members of the Federal Reserve System,while ________ banks could choose to become members of the system.

A)state;national
B)state;municipal
C)national;state
D)national;municipal

Question 20

Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side.

A)federal government;municipalities
B)state governments;municipalities
C)federal government;states
D)municipalities;states

Question 21

Both ________ and ________ were financial innovations that occurred because of interest rate volatility.

A)adjustable-rate mortgages;commercial paper
B)adjustable-rate mortgages;financial derivatives
C)sweep accounts;financial derivatives
D)sweep accounts;commercial paper

Question 22

The most significant change in the economic environment that changed the demand for financial products in recent years has been

A)the aging of the baby-boomer generation.
B)the dramatic increase in the volatility of interest rates.
C)the dramatic increase in competition from foreign banks.
D)the deregulation of financial institutions.

Question 23

Which of the following statements concerning bank regulation in the United States is TRUE?

A)The Office of the Comptroller of the Currency has the primary responsibility for state banks that are members of the Federal Reserve System.
B)The Federal Reserve and the state banking authorities jointly have responsibility for the state banks that are members of the Federal Reserve System.
C)The Office of the Comptroller of the Currency has sole regulatory responsibility over bank holding companies.
D)The state banking authorities have sole regulatory responsibility for all state banks.

Question 24

The most important source of the changes in supply conditions that stimulate financial innovation has been the

A)deregulation of financial institutions.
B)dramatic increase in the volatility of interest rates.
C)improvement in information technology.
D)dramatic increase in competition from foreign banks.

Question 25

________ is the process of researching and developing profitable new products and services by financial institutions.

A)Financial engineering
B)Financial manipulation
C)Customer manipulation
D)Customer engineering

Question 26

State banks that are not members of the Federal Reserve System are most likely to be examined by the

A)Federal Reserve System.
B)FDIC.
C)FHLBS.
D)Comptroller of the Currency.

Question 27

State banking authorities have sole jurisdiction over state banks

A)without FDIC insurance.
B)that are not members of the Federal Reserve System.
C)operating as bank holding companies.
D)chartered in the 21st century.

Question 28

The Glass-Steagall Act,before its repeal in 1999,prohibited commercial banks from

A)issuing equity to finance bank expansion.
B)engaging in underwriting and dealing of corporate securities.
C)selling new issues of government securities.
D)purchasing any debt securities.

Question 29

Adjustable rate mortgages

A)reduce the interest-rate risk for financial institutions.
B)benefit homeowners when interest rates rise.
C)generally have higher initial interest rates than conventional fixed-rate mortgages.
D)allow borrowers to avoid paying interest on portions of their mortgage loans.

Question 30

Which bank regulatory agency has the sole regulatory authority over bank holding companies?

A)the FDIC
B)the Comptroller of the Currency
C)the FHLBS
D)the Federal Reserve System

Question 31

In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 3.5 percent;in the 1980s it fluctuated between ________ percent and ________ percent.

A)5;15
B)4;11.5
C)4;18
D)5;10

Question 32

An instrument developed to help investors and institutions hedge interest-rate risk is

A)a debit card.
B)a credit card.
C)a financial derivative.
D)a junk bond.

Question 33

The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is

A)a put option.
B)a call option.
C)a futures contract.
D)a mortgage-backed security.

Question 34

Adjustable rate mortgages

A)protect households against higher mortgage payments when interest rates rise.
B)keep financial institutions' earnings high even when interest rates are falling.
C)benefit homeowners when interest rates are falling.
D)generally have higher initial interest rates than on conventional fixed-rate mortgages.

Question 35

The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the

A)National Bank Act of 1863.
B)Federal Reserve Act of 1913.
C)Glass-Steagall Act.
D)McFadden Act.

Question 36

Rising interest-rate risk

A)increased the cost of financial innovation.
B)increased the demand for financial innovation.
C)reduced the cost of financial innovation.
D)reduced the demand for financial innovation.

Question 37

Financial innovations occur because of financial institutions search for

A)profits.
B)fame.
C)stability.
D)recognition.

Question 38

Financial instruments whose payoffs are linked to previously issued securities are called

A)grandfathered bonds.
B)financial derivatives.
C)hedge securities.
D)reversible bonds.

Question 39

Uncertainty about interest-rate movements and returns is called

A)market potential.
B)interest-rate irregularities.
C)interest-rate risk.
D)financial creativity.

Question 40

With the creation of the Federal Deposit Insurance Corporation

A)member banks of the Federal Reserve System were given the option to purchase FDIC insurance for their depositors,while non-member commercial banks were required to buy deposit insurance.
B)member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors,while non-member commercial banks could choose to buy deposit insurance.
C)both member and non-member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors.
D)both member and non-member banks of the Federal Reserve System could choose,but were not required,to purchase FDIC insurance for their depositors.

Question 41

________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans.

A)Diversification
B)Arbitrage
C)Computerization
D)Securitization

Question 42

Which of the following is NOT part of the shadow banking system?

A)the transformer
B)the servicer
C)the bundler
D)the distributor

Question 43

The declining cost of computer technology has made ________ a reality.

A)brick and mortar banking
B)commercial banking
C)virtual banking
D)investment banking

Question 44

Securitization is a process of asset transformation that involves a number of different financial institutions working together. These financial institutions are known collectively as the

A)transformers.
B)amalgamation.
C)movers and shakers.
D)shadow banking system.

Question 45

Because of securitization,a new class of residential mortgages offered to borrowers with less-than-stellar credit records developed. These mortgages are known as

A)risk-enhanced mortgages.
B)subprime mortgages.
C)bundled mortgages.
D)adjustable-rate mortgages.

Question 46

Improved computer technology has made home banking a reality. Home banking has advantages for both the customer and the bank.

A)It is more heavily regulated by the government and banks can lower transactions costs.
B)It is more convenient for the customer and banks can charge customers higher convenience fees.
C)It is harder to monitor customers and customers are limited to making transactions at specific times.
D)It is more convenient for the customer and lowers transactions costs for the bank.

Question 47

So-called fallen angels differ from junk bonds in that

A)junk bonds refer to newly issued bonds with low credit ratings,whereas fallen angels refer to previously issued bonds that have had their credit ratings fall below Baa.
B)junk bonds refer to previously issued bonds that have had their credit ratings fall below Baa,whereas fallen angels refer to newly issued bonds with low credit ratings.
C)junk bonds have ratings below Baa,whereas fallen angels have ratings below C.
D)fallen angels have ratings below Baa,whereas junk bonds have ratings below C.

Question 48

One factor contributing to the rapid growth of the commercial paper market since 1970 is

A)the fact that commercial paper has no default risk.
B)improved information technology making it easier to screen credit risks.
C)government regulation.
D)FDIC insurance for commercial paper.

Question 49

The entry of AT&T and GM into the credit card business is an indication of

A)government's efforts to deregulate the provision of financial services.
B)the rising profitability of credit card operations.
C)the reduction in costs of credit card operations since 1990.
D)the sale of unprofitable operations by Bank of America and Citicorp.

Question 50

In 1977,he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status.

A)Michael Milken
B)Roger Milliken
C)Ivan Boesky
D)Carl Icahn

Question 51

A debit card differs from a credit card in that

A)a debit card is a loan while for a credit card purchase,payment is made immediately.
B)a debit card is a long-term loan while a credit card is a short-term loan.
C)a credit card is a loan while for a debit card purchase,payment is made immediately.
D)a credit card is a long-term loan while a debit card is a short-term loan.

Question 52

Automated teller machines

A)are more costly to use than human tellers,so banks discourage their use by charging more for use of ATMs.
B)cost about the same to use as human tellers in banks,so banks discourage their use by charging more for use of ATMs.
C)cost less than human tellers,so banks may encourage their use by charging less for using ATMs.
D)cost nothing to use,so banks provide their services free of charge.

Question 53

New computer technology has

A)increased the cost of financial innovation.
B)increased the demand for financial innovation.
C)reduced the cost of financial innovation.
D)reduced the demand for financial innovation.

Question 54

The development of money market mutual funds contributed to the growth of ________ since the money market mutual funds need to hold liquid,high-quality,short-terms assets.

A)the commercial paper market
B)the municipal bond market
C)the corporate bond market
D)the junk bond market

Question 55

Automated teller machines (ATMs)are available for 24 hour a day use and can be placed in locations other than banks. These machines make banking

A)difficult to maintain up-to-date balance sheets.
B)frustrating for banks because they don't know how many customers will use the bank in the evening.
C)less desirable for customers because they are confusing to use.
D)more convenient for the customer.

Question 56

Credit cards date back to

A)prior to the second World War.
B)just after the second World War.
C)the early 1950s.
D)the late 1950s.

Question 57

The driving force behind the securitization of mortgages and automobile loans has been

A)the rising regulatory constraints on substitute financial instruments.
B)the desire of mortgage and auto lenders to exit this field of lending.
C)the improvement in information technology.
D)the relaxation of regulatory restrictions on credit card operations.

Question 58

A firm issuing credit cards earns income from

A)loans it makes to credit card holders.
B)subsidies from the local governments.
C)payments made to it by manufacturers of the products sold in stores on credit card purchases.
D)sales of the card in foreign countries.

Question 59

Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as

A)municipal bonds.
B)Yankee bonds.
C)"fallen angels."
D)junk bonds.

Question 60

The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known as

A)securitization.
B)internationalization.
C)arbitrage.
D)program trading.

Question 61

Since 1980

A)banks have decreased risk taking to offset the decline in profits.
B)banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities.
C)banks have offset the decline in profits from off-balance-sheet activities with increased income from traditional activities.
D)bank profits have grown rapidly due to deregulation.

Question 62

In this type of arrangement,any balances above a certain amount in a corporation's checking account at the end of the business day are "removed" and invested in overnight securities that pay the corporation interest. This innovation is referred to as a

A)sweep account.
B)share draft account.
C)removed-repo account.
D)stockman account.

Question 63

One factor contributing to the decline in cost advantages that banks once had is the

A)decline in the importance of checkable deposits from over 60 percent of banks' liabilities to 11 percent today.
B)decline in the importance of savings deposits from over 60 percent of banks' liabilities to under 15 percent today.
C)decline in the importance of checkable deposits from over 40 percent of banks' liabilities to 15 percent today.
D)decline in the importance of savings deposits from over 40 percent of banks' liabilities to under 20 percent today.

Question 64

Sweep accounts which were created to avoid reserve requirements became possible because of a change in

A)deposit ceilings.
B)technology.
C)government rules.
D)bank mergers.

Question 65

Prior to 1980,the Fed set an interest rate ________,a maximum limit,on the interest rate that could be paid on time deposits.

A)floor
B)ceiling
C)wall
D)window

Question 66

Since 1974,commercial banks importance as a source of funds for nonfinancial borrowers

A)has shrunk dramatically,from around 40 percent of total credit advanced to around 20 percent by 2017.
B)has shrunk dramatically,from around 70 percent of total credit advanced to below 50 percent by 2017.
C)has expanded dramatically,from around 50 percent of total credit advanced to above 70 percent by 2017.
D)has expanded dramatically,from around 30 percent of total credit advanced to above 50 percent by 2017.

Question 67

According to Edward Kane,because the banking industry is one of the most ________ industries in America,it is an industry in which ________ is especially likely to occur.

A)competitive;loophole mining
B)competitive;innovation
C)regulated;loophole mining
D)regulated;innovation

Question 68

Disintermediation resulted from

A)interest rate ceilings combined with inflation-driven increases in interest rates.
B)elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits).
C)increases in federal income taxes.
D)reserve requirements.

Question 69

In order to compete with changing market conditions in the 1980s,banks supported legislation to remove interest rate ceilings and to allow banks to pay interest on checking accounts. These actions

A)lowered transactions costs for banks.
B)raised the cost of acquiring funds for banks.
C)made banks less competitive in the financial markets.
D)raised the income banks received.

Question 70

The experience of disintermediation in the banking industry illustrates that

A)more regulation of financial markets may avoid such problems in the future.
B)banks are unable to remain competitive with other financial intermediaries.
C)consumers no longer desire the services that banks provide.
D)markets invent alternatives to costly regulations.

Question 71

The most important developments that reduced banks cost advantages include

A)the growth of the junk bond market.
B)the competition from money market mutual funds.
C)the growth of securitization.
D)the growth in the commercial paper market.

Question 72

Money market mutual funds

A)function as interest-earning checking accounts.
B)are legally deposits.
C)are subject to reserve requirements.
D)have an interest-rate ceiling.

Question 73

Loophole mining refers to financial innovation designed to

A)hide transactions from the IRS.
B)conceal transactions from the SEC.
C)get around regulations.
D)conceal transactions from the Treasury Department.

Question 74

Financial innovation has caused

A)banks to suffer declines in their cost advantages in acquiring funds,although it has not caused a decline in income advantages.
B)banks to suffer a simultaneous decline of cost and income advantages.
C)banks to suffer declines in their income advantages in acquiring funds,although it has not caused a decline in cost advantages.
D)banks to achieve competitive advantages in both costs and income.

Question 75

Banks responded to disintermediation by

A)supporting the elimination of interest rate regulations,enabling them to better compete for funds.
B)opposing the elimination of interest rate regulations,as this would increase their cost of funds.
C)demanding that interest rate regulations be imposed on money market mutual funds.
D)supporting the elimination of interest rate regulations,as this would reduce their cost of funds.

Question 76

Sweep accounts

A)have made reserve requirements nonbinding for many banks.
B)sweep funds out of deposit accounts into long-term securities.
C)enable banks to avoid paying interest to corporate customers.
D)reduce banks' assets.

Question 77

In September 2008,the Reserve Primary Fund,a money market mutual fund,found itself in the situation know as "breaking the buck." This means that

A)they could no longer afford to redeem shares at the par value of $1.
B)they required shareholders to contribute a dollar more in fees each month.
C)shareholders were able to redeem shares for more than a $1.
D)shares earned more than a dollar in interest.

Question 78

Prior to 2008,bank managers looked on reserve requirements

A)as a tax on deposits.
B)as a subsidy on deposits.
C)as a subsidy on loans.
D)as a tax on loans.

Question 79

Prior to 2008,the bank's cost of holding reserves equaled

A)the interest paid on deposits times the amount of reserves.
B)the interest paid on deposits times the amount of deposits.
C)the interest earned on loans times the amount of loans.
D)the interest earned on loans times the amount on reserves.

Question 80

The process in which people seeking higher yielding securities take their funds out of the banking system thus restricting the amount of funds banks can lend is called

A)capital mobility.
B)loophole mining.
C)disintermediation.
D)deposit jumping.