Deck 2: Deposit-Taking Institutions

Question 1

In recent years, the number of banks in Canada has been increasing.

Answer 1

False

Question 2

The maturity structure of the assets of banks tends to be shorter than the maturity structure of liabilities.

Answer 2

False

Question 3

The movement of an off-balance-sheet asset or liability to an on-balance-sheet item is dependent on the occurrence of a contingent event.

Answer 3

True

Question 4

The growth of the commercial paper market has led to a decline in the demand for business loans from commercial banks.

Question 5

A major difference between banks and other nonfinancial firms is the low amount of leverage in commercial banks.

Question 6

Credit unions make proportionately larger amounts of real estate loans than large Canadian banks.

Question 7

The growth in off-balance-sheet activities during the decade of the 1990s was due, in large part, to the use of derivative contracts.

Question 8

Lehman Brothers failed during the recent financial crisis despite having access to the low cost sources of funds offered by the Federal Reserve.

Question 9

The use of off-balance-sheet activities allows banks to practice regulatory tax-avoidance.

Question 10

Regulator forbearance is a policy of allowing economically insolvent FIs to continue in operation.

Question 11

Large Canadian banks are often primary dealers in the market for Canadian government securities.

Question 12

Money market mutual funds have attracted large amounts of retail savings and retail time deposits from commercial banks in recent years.

Question 13

Since 1990, commercial banks decreased the proportion of business loans and increased the proportion of mortgages in their portfolios.

Question 14

Commercial banks that have invested in Internet and mobile banking services and products have significantly outperformed those banks that have chosen to avoid these markets.

Question 15

Although growing, the notional value of bank OBS activities remained less than the value of on-balance-sheet activities at the end of 2012.

Question 16

The securitization of mortgages involves the pooling of mortgage loans for sale in the financial markets.

Question 17

Because of the large amount of equity on a typical commercial bank balance sheet, credit risk is not a significant risk to bank managers.

Question 18

Retail deposits comprise the largest portion of deposits for Canadian banks.

Question 19

The use of off-balance-sheet activities and instruments will always reduce the risk to a bank.

Question 20

In general, the banking industry performed at higher levels of profitability in the decade of the 1990s than the decade of the 1980s.

Question 21

Compared to the average large Canadian bank, credit unions tend to have higher overhead expenses per dollar of assets.

Question 22

Credit unions operate on a common bond principle which emphasizes the deposit-taking and lending needs of credit union members.

Question 23

Regulatory forbearance refers to a policy of

A)allowing insolvent banks to continue to operate.
B)foreclosing real estate properties in the event on non-payments of mortgages.
C)strict regulation of banks, closing them down as soon as they are insolvent.
D)rescheduling of all loans of a client in the event of non-payment.
E)foreclosing real estate properties in the event of non-payments of mortgages, and allowing insolvent banks to continue to operate.

Question 24

Which of the following is the most important source of funds for credit unions?

A)Borrowings from the Bank of Canada.
B)Savings deposits from small consumers.
C)Repurchase agreements.
D)Interbank borrowing.
E)Wholesale deposits.

Question 25

A significant disadvantage for credit unions in competing with commercial banks is the severe restriction in the variety of products and services that they can offer.

Question 26

As with other DTIs, profits or return on assets (ROA) is the primary goal of credit union management.

Question 27

Customer loans are classified on a DTI's balance sheet as

A)assets, because the DTI's major asset is its client base.
B)liabilities, because the customer may default on the loan.
C)assets, because the DTI earns servicing fees on the loan.
D)liabilities, because the DTI must transfer funds to the borrower at the initiation of the loan.
E)assets, because DTIs originate and monitor loan portfolios.

Question 28

Which of the following is true of off-balance-sheet activities?

A)They involve generation of fees without exposure to any risk.
B)They include contingent activities recorded in the current balance sheet.
C)They invite regulatory costs and additional "taxes."
D)They have both risk-reducing as well as risk-increasing attributes.
E)The risk involved is best represented by notional or face value.

Question 29

Which of the following FIs does not currently provide a payment function for their customers?

A)Deposit-taking institutions.
B)Insurance companies.
C)Finance companies.
D)Pension funds.
E)Mutual funds.

Question 30

Which of the following currently manages the insurance fund for banks and some credit unions?

A)CDIC.
B)FDIC.
C)OSFI.
D)FSB.
E)Provincial and territorial governments.

Question 31

This broad class of loans constitutes the highest percentage of total assets for all banks in 2013.

A)Business loans.
B)Commercial and residential real estate loans.
C)Consumer loans.
D)Credit card debt.
E)Less developed country loans.

Question 32

Which of the following identifies the primary function of OSFI?

A)Manage the deposit insurance fund and carry out bank examinations.
B)Regulate and examine banks.
C)Charter national banks and approve their merger activity.
D)Determine permissible activities for chartered banks.
E)Stand as the "lender of last resort" for troubled banks.

Question 33

Customer deposits are classified on a DTI's balance sheet as

A)assets, because the DTI uses deposit funds to earn profits.
B)liabilities, because the DTI uses deposits as a source of funds.
C)assets, because customers view deposits as assets.
D)liabilities, because the DTI must meet reserve requirements on customer deposits.
E)liabilities, because DTIs are required to serve depositors.

Question 34

Which of the following FIs does not provide a business lending function?

A)Deposit-taking institutions.
B)Insurance companies.
C)Finance companies.
D)Pension funds.
E)Mutual funds.

Question 35

A consumer lending function is performed by each of the following FIs EXCEPT

A)mutual funds.
B)finance companies.
C)pension funds.
D)deposit-taking institutions.
E)insurance companies.

Question 36

The credit union industry avoided much of the financial distress of the 1980s because of the short maturity and relatively lower credit risk of their assets.

Question 37

All credit unions are nationally chartered and regulated by the Office of the Superintendent of Financial Institutions.

Question 38

The largest asset class on Canadian banks' balance sheet as of April 30, 2013 was

A)investment securities.
B)business loans.
C)real estate loans.
D)cash.
E)deposits.

Question 39

The largest liability on Canadian banks' balance sheet as of April 30, 2013 was

A)investment securities.
B)deposits.
C)mortgages and loans payable.
D)borrowings.
E)cash.

Question 40

Holdings of Government of Canada securities are classified on a DTI's balance sheet as

A)assets, because Government of Canada securities are default risk-free.
B)liabilities, because the DTI must pay cash in order to acquire the securities.
C)assets, because securities holdings represent a use of funds for investment.
D)liabilities, because the Government of Canada securities must be pledged as collateral against borrowing from the Bank of Canada.
E)assets, because the market for Canadian government securities is the most liquid in the world.

Question 41

The primary regulators of Canadian banks are

A)the Federal Reserve and CDIC.
B)OSFI and CDIC.
C)CDIC and the Bank of Canada.
D)the Bank of Canada and the Canadian Payments Association.
E)OSFI and the Bank of Canada.

Question 42

Which of the following observations concerning credit unions is NOT true?

A)They invest heavily in corporate securities.
B)Member loans constitute a majority of their total assets.
C)They tend to invest more of their assets in Government of Canada securities than other DTIs.
D)They engage in off-balance-sheet activities.
E)They focus more on providing services and less on profitability.

Question 43

Which of the following is NOT an off balance sheet activity for Canadian banks?

A)Derivative contracts.
B)Loan commitments.
C)Standby letters of credit.
D)Trust services.
E)When-issued securities.