Deck 2: The Financial Services Industry: Depository Institutions

Question 1

Which of the following is a reason for the increase in the number of banks since the mid-1980s?

A) Relaxation of entry requirements into the Australian banking industry.
B) Changes in the regulatory requirements of non-bank depository institutions.
C) The need for a more sophisticated banking system in Australia.
D) Relaxation of entry requirements into the Australian banking industry and changes in the regulatory requirements of non-bank depository institutions.

Answer 1

D

Question 2

Which of the following statements is true?

A) Credit unions are mutual cooperative organisations.
B) Credit unions provide deposit facilities, personal and housing loans and payments services to their members.
C) In case of credit unions the depositors are also members of the society.
D) Credit unions are mutual cooperative organisations that provide deposit facilities, personal and housing loans and payments services to their members.

Answer 2

D

Question 3

The collapse of Lehman Brothers in 2008 and the impact of the global financial crisis made it difficult for Australian banks to obtain off-shore funding. As a consequence banks pursued more stable sources of: funds. These strategies include:

A) increased use of wholesale long-term funding.
B) decreased use of wholesale long-term funding.
C) decreased holdings of liquid assets.
D) decreased use of wholesale long-term funding and increased holdings of liquid assets.

Answer 3

D

Question 4

Which of the following statements is true?

A) Capital adequacy regulations of banks were introduced in 1989.
B) Capital adequacy regulations require banks to hold, on average, less capital for low-risk assets such as housing loans compared to higher-risk assets such as commercial loans.
C) Capital adequacy regulations were abolished in 2000.
D) Capital adequacy regulations of banks were introduced in 1989 and Capital adequacy regulations require banks to maintain levels of capital adequate for the type of activity undertaken, on average, less capital for low-risk assets such as housing loans compared to higher-risk assets such as commercial loans.

Question 5

Which of the following is a role of a bank?

A) Attract funds from the capital markets to facilitate borrowing by the household sector.
B) Accept deposits and make loans and in doing so facilitate the flow of funds from borrowers to lenders.
C) Accept deposits and make loans and in doing so facilitate the flow of funds from savers to borrowers.
D) Manage the level of interest rates.

Question 6

Which of the following statements is true?

A) An off-balance-sheet item is recorded on the balance sheet of a financial institution when the annual report is being prepared.
B) An off-balance-sheet liability is an item that moves onto the liability side of the balance sheet when a contingent event occurs.
C) An off-balance-sheet asset is an item that moves onto the asset side of the balance sheet when a contingent event occurs or at the end of a financial period.
D) All of the listed options are correct.

Question 7

Which of the following statements is true?

A) Building societies are depository institutions.
B) Building societies usually operate on a cooperative basis.
C) In case of building societies the depositors are also members of the society.
D) All of the listed options are correct.

Question 8

The market structure of the banking sector has changed since deregulation of the financial system during the 1980s. Which statement more closely reflects the current structure of the banking sector in Australia?

A) Foreign banks dominate in number and share of total assets.
B) The major banks no longer hold the largest share of total assets.
C) Total assets are fairly evenly distributed between the major, regional and foreign banks.
D) The number of banks has grown steadily since the 1980s and the major banks maintain the highest percentage share of total assets.

Question 9

Following the global financial crisis, banks strengthened their funding and liquidity profiles by:

A) reducing their holdings of liquid assets.
B) increasing their holdings of liquid assets.
C) reducing their use of wholesale funds and increasing their holdings of liquid assets.
D) increasing their use of wholesale funds and decreasing their holdings of liquid assets.

Question 10

The term 'spread' refers to the difference between an FI's:

A) assets and liabilities.
B) liabilities and equity.
C) short-term lending rates and long-term lending rates.
D) lending and deposit rates.

Question 11

The main features of the local banking industry over the two decades to 2010 have been an increase in concentration. This has occurred due to mergers and acquisitions motivated by the desire to:

A) be competitive in global markets.
B) protect against takeover by foreign competitors.
C) increase efficiency in terms of economies of scale and scope.
D) All of the listed options are correct.

Question 12

Which of the following statements is true for the Australian banking industry?

A) The Australian banking industry is highly concentrated.
B) There are four major banks in Australia.
C) The four major banks and the five regional banks offer a full range of commercial and investment banking services.
D) All of the listed options are correct.

Question 13

Which of the following is true?

A) All banks are depository institutions and are authorised by APRA to carry out financial intermediation
B) All authorised depository institutions are banks.
C) All financial intermediaries are authorised depository institutions by APRA to carry out financial intermediation.
D) All of the listed options are correct.

Question 14

Which of the following statements is true?

A) The net interest margin is a profitability indicator and is measured as net income divided by earning assets.
B) The net interest margin is a profitability indicator and is measured by interest income minus interest expense, divided by earning assets.
C) The net interest margin is a profitability indicator and is measured by interest income plus interest expense, divided by earning assets.
D) The net interest margin is a profitability indicator and is measured as interest income minus non-interest income divided by total assets.

Question 15

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.

Question 16

Which of the following statements is true?

A) Non-bank depository institutions include building societies and credit unions.
B) A non-bank depository institution meets the legal definition of a bank.
C) A non-bank depository institution does not meet the legal definition of a bank.
D) A non-bank depository institution may be a building society or a credit union and a non-bank depository institution undertakes many of the same activities of a bank without meeting the legal definition of a bank.

Question 17

Which of the following statements is true?

A) Australian banks' decreased reliance on off-shore funding post GFC led to funding pressures and increased the costs of obtaining funds.
B) Australian banks' increased reliance on off-shore funding post GFC led to funding pressures and increased the costs of funding.
C) Australian banks reduced their reliance on on-shore funding in an effort to reduce the costs of funding and ease pressure on mortgage interest rates.
D) Australian banks increased their reliance on on-shore funding post GFC which led to funding pressures and increased the costs of obtaining funds.

Question 18

In response to the GFC and the global liquidity crisis the Australian government introduced the following measure in 2008:

A) A Financial Claims Scheme that provided coverage to all depositors in any financial institution.
B) A Financial Claims Scheme that guaranteed bank deposits coverage to depositors up to a million dollars per depositor.
C) A Financial Claims Scheme that guaranteed bank deposits coverage to depositors up to a million dollars per depositor and provided a temporary wholesale funding guarantee.
D) All of the listed options are correct.

Question 19

Which of the following statements is true?

A) Authorised depository institutions are those that have been granted an authority by the RBA to operate in Australia.
B) Authorised depository institutions are those that have been granted an authority by APRA to operate in Australia.
C) Authorised depository institutions are those that have been granted an authority by the Australian Government to operate in Australia.
D) Authorised depository institutions are those that have been granted an authority by ASIC to operate in Australia.

Question 20

The number of banks has grown steadily since the middle of the 1980s for the following reasons:

A) liberalisation of conditions for foreign bank entry by APRA.
B) deregulation of the banking industry, including the relaxation of bank entry requirements.
C) changes to the regulatory regime for non-bank depository institutions favoured conversion from building society to banks.
D) All of the listed options are correct.

Question 21

The Probability and Impact Rating System (PAIRS):

A) determines the response ASIC should make to the outcomes of PAIRS ratings.
B) determines the response the RBA should make to the outcomes of bank failures.
C) determines the response the RBA should make to the outcomes of financial crisis.
D) None of the listed options are correct.

Question 22

Which of the following statements are not true?

A) ACCC is responsible for market integrity and consumer protection across the financial system.
B) The RBA is responsible for prudential supervision and the promotion of financial system stability.
C) The RBA is responsible for monetary policy and for overall financial system stability.
D) APRA is responsible for prudential supervision of the financial services industry and supervises all deposit-taking institutions

Question 23

Some prudential standards issued by APRA include regulations regarding:

A) capital adequacy for market risk and liquidity.
B) credit quality and capital adequacy for credit risk.
C) large exposures, business continuity management and securitisation.
D) All of the listed options are correct.

Question 24

Which of the following statements is true?

A) APRA stands for Australian Prudential Regulation Authority.
B) APRA stands for Australian Payments Regulation Association.
C) APRA stands for Australian Payments Review Authority.
D) None of the listed options are correct.

Question 25

Which of the following statements is true?

A) During the 1960s and 1970s, the growth of building societies ensured an increasing supply of funds for housing loans at reasonable rates.
B) During the 1960s and 1970s, the credit union expansion ensured the availability of relatively low cost unsecured and secured personal loans.
C) During the 1960s and 1970s, regulatory constraints meant that banks could not in general satisfy the demand for consumer credit.
D) All of the listed options are correct.

Question 26

Depository institutions are required by APRA to be responsible for:

A) their own liquidity management strategy that must include scenario analysis.
B) their own capital management strategy that must include risk analysis.
C) both their own liquidity, capital management strategies and a business continuity plan.
D) None of the listed options are correct. APRA is responsible for the supervision and oversight of all depository institutions.

Question 27

Which of the following statements is true?

A) Key performance ratios for credit unions and building societies indicate that from 2005 to 2011 their cost structures were higher than for banks.
B) Key performance ratios for credit unions and building societies indicate that from 2005 to 2011 their cost structures were lower than for banks.
C) Deposits are a higher proportion of the funding base for banks than for credit unions and building societies.
D) Despite credit unions and building societies having higher cost structures over the period 2005-2011 than banks, they have much lower bad debt expenses than banks and hence have navigated the GFC well in terms of their overall performance.

Question 28

Off-balance-sheet activities are:

A) not shown on the current balance sheet.
B) not shown on the balance sheet but after the completion of the financial year are recorded on the balance sheet.
C) not shown on the current balance sheet but are an off-balance-sheet asset/liability, if when a contingent event occurs, the activity moves onto the asset/liability side of the balance sheet.
D) contingent events which move the asset or liability from the balance sheet to off-balance-sheet.

Question 29

In which way did building societies respond to the competitive pressures resulting from the deregulation of the banking system in the 1980s?

A) They engaged in mergers for efficiency and scale reasons.
B) They adopted improved technology.
C) They diversified their products and activities.
D) All of the listed options are correct.

Question 30

Which of the following statements is true?

A) APRA is responsible for market integrity and consumer protection across the financial system.
B) The RBA is responsible for prudential supervision.
C) ASIC is responsible for monetary policy and for overall financial system stability.
D) None of the listed options are correct.

Question 31

APRA's aim is to develop prudential policies that:

A) promote financial safety and efficiency and that enable smaller institutions to put competitive pressures on larger institutions.
B) balance financial safety and efficiency, competition contestability and competitive neutrality.
C) promote financial system stability and fair interest rates.
D) protect consumers from predatory behaviour of financial institutions.

Question 32

Which of the following statements is true?

A) Off-balance-sheet transactions for Australian banks include direct credit substitutes, interest rate derivative contracts and foreign exchange derivative contracts.
B) On-balance-sheet transactions for Australian banks include direct futures and forward contracts.
C) Off-balance-sheet transactions for Australian banks include the commercial loans and term-deposits.
D) All of the listed options are correct.

Question 33

APRA's supervisory oversight and response system (SOARS) is designed to assess the:

A) likelihood of FI failure.
B) impact of the FI failure.
C) impact of FI failure and provide the appropriate supervisory response, which in the case of a low PAIRS probability rating will require restructure.
D) impact of FI failure and provide the appropriate supervisory response, which in the case of an extreme PAIRS probability rating will require restructure.

Question 34

Which of the following statements is true?

A) The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are credit unions.
B) The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are building societies.
C) The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are banks.
D) The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are superannuation funds.

Question 35

Which of the following is true?

A) PAIRS provides APRA with a score-card approach to assessing the risk of FI failure and the impact of any failure.
B) PAIRS provides APRA with a single rating which incorporates both the probability that the FI will fail and the impact of any failure.
C) PAIRS provides APRA with a rating that assesses the risk of FI failure.
D) PAIRS provides APRA with an impact factor that determines what regulatory response needs to be implemented to prevent FI failure.

Question 36

Which of the following statements is true?

A) Deregulation of the banking system in the 1980s brought greater competition from the banks.
B) Deregulation of the banking system in the 1980s resulted in loss of market share by non-bank depository institutions.
C) Deregulation of the banking system in the 1980s brought greater competition from the non-bank depository institutions.
D) Deregulation of the banking system in the 1980s brought greater competition from the banks and resulted in loss of market share by non-bank depository institutions.

Question 37

Which of the following statements is true?

A) Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the Campbell Committee.
B) Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the Wallis Committee.
C) Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the Martin Committee.
D) Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the Valentine Committee.

Question 38

The major reasons for the shift in the composition of bank lending commitments from the retail market to the commercial market are the:

A) introduction of capital adequacy regulations in 1989.
B) number of non-bank depository institutions that gained banking licences in the early 1990s.
C) fact that commercial loans paid higher returns than housing loans.
D) None of the listed options are correct as the shift was from commercial loans to housing loans.

Question 39

Which of the following statements is true?

A) On average building societies are larger than credit unions and their total share of the depository institution market has increased since 1992.
B) On average building societies are smaller than credit unions and their total share of the depository institution market has decreased significantly since 1992.
C) On average building societies are larger than credit unions and their total share of the depository institution market has decreased significantly since 1992.
D) On average building societies are smaller than credit unions and their total share of the depository institution market has increased since 1992.

Question 40

The current financial system in Australia consists of three major agencies, these being:

A) APRA, ASIC and the Australian Government.
B) APRA, the RBA and the Australian Government.
C) APRA, ASIC and the RBA.
D) The RBA, ASIC and the Australian Government.

Question 41

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.

Question 42

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

Question 43

Which of the following is part of the supervisory activities of APRA?

A) Prudential review is the most important as it provides a detailed assessment of a FIs inherent risks and the adequacy of its risk management controls.
B) Licensing is the last stage of APRA's supervision which ensures that only FIs that have the capacity to successfully operate can operate the market.
C) Enforcement supervision is not part of APRA supervisory activity as it would involve enforcement teams to specifically intervene in the running of the FI.
D) Entity financial analysis is the FIs own assessment of its financial position.

Question 44

The growth in off-balance-sheet activities during the two decades from 1990 to 2010 was due, in large part, to the use of derivative contracts.

Question 45

Covered bonds:

A) were introduced following the GFC to ease liquidity pressures on the bank's balance sheet.
B) are issued by a bank, backed by a pool of assets, which remain on the balance sheet of the issuing bank.
C) are issued by a bank, backed by a pool of assets, which are off-balance-sheet items of the issuing bank.
D) are issued by the Reserve Bank of Australia to FIs with liquidity problems.

Question 46

A financial institution is an institution that performs financial intermediary services and/or services requiring transactions in the capital markets.

Question 47

Responding to the financial crisis, the Australian government introduced a number of measures to ease liquidity issues and included the following:

A) a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap.
B) a semi-permanent financial claims scheme (FCS), which implicitly guaranteed bank deposits.
C) a permanent guarantee scheme for large deposits and wholesale funding, which for a fee, guaranteed bank deposits greater than $1 million.
D) a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap; the guarantee was reduced to $250 000 per depositor from 2012.

Question 48

Business continuity relates to:

A) an FI that has a business plan that meets the liquidity and capital requirements of APRA.
B) a whole-of-business approach to FI operations and profitability.
C) a business continuity plan which reduces the impact of any disruption on FI operations, reputation, profitability, depositors and other stakeholders of a FI.
D) a business continuity plan which increases profitability of a FI.

Question 49

During the 1960s and 1970s, the growth of credit unions ensured an increasing supply of funds for housing loans at reasonable rates, while the building society expansion ensured the availability of relatively low cost unsecured and secured personal loans.

Question 50

The major banks' return on equity, a measure of bank profitability has been lower than the regional banks with the gap widening since 2007.

Question 51

Credit unions were generally less affected than other depository institutions by the recent financial crisis because:

A) they hold more government securities, on average.
B) they hold less government securities, on average.
C) they had a focus on high quality domestic assets.
D) they had a focus on domestic deposits and more assets in residential mortgages.

Question 52

ASIC stands for Australian Society of Inter-bank Cooperation and ASIC is responsible for market integrity and consumer protection across the financial system.

Question 53

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 engage in off-balance-sheet activities.
D) They focus more on providing services and less on profitability.

Question 54

Which of the following statements is not correct concerning credit risk?

A) Credit risk is the risk of counterparty default and is usually the single largest risk facing a FI.
B) Credit risk occurs when borrowers are unable to repay their loans on time.
C) Credit risk decreases when FIs concentrate their loan exposures on a few counterparties and APRA requires that FIs have appropriate polices to manage such risk.
D) Credit risk increases when FIs concentrate their loan exposures on a few counterparties.

Question 55

Non-bank depository institutions are also referred to as CUBS.

Question 56

Depository institutions are financial institutions that only take deposits from savers, but do not lend money to borrowers.

Question 57

Which of the following is not an off-balance-sheet activity for banks?

A) derivative contracts
B) loan commitments
C) standby letters of credit
D) trust services

Question 58

Customer loans are classified on a DI's balance sheet as:

A) liabilities, because the customer may default on the loan.
B) assets, because the DI earns servicing fees on the loan.
C) liabilities, because the DI must transfer funds to the borrower at the initiation of the loan.
D) assets, because DIs originate and monitor loan portfolios.

Question 59

Most foreign banks have succeeded in establishing a well-developed and profitable retail banking network in Australia.

Question 60

In case of building societies, the members are usually linked to the society by some common bond such as locality or trade union.

Question 61

Explain the Post Wallis Inquiry regulatory framework in Australia.

Question 62

Discuss the factors that contributed to Australia's financial resilience and relatively strong performance during the global financial crisis.

Question 63

Compare and contrast credit unions with the major banks.

Question 64

APRA conducts a prudential supervisory framework that assesses FI risk and likelihood of FI failure and determines an appropriate supervisory response. Outline the two systems implemented by APRA-PAIRS and SOARS-and the purpose of the assessment system.

Question 65

Australia's current financial regulatory framework was reformed in 1999 and moved from industry-based regulation to functional regulation of financial institutions.

Question 66

PAIRS provides APRA with a score-card approach to assessing the risk of FI failure and the impact of any failure by detailing the 12 risk elements separately and disclosing the result to the FI being investigated.