Deck 2: Financial Services: Depository Institutions

Question 1

Commercial banks have had limited power to underwrite corporate securities since 1987.

Answer 1

True

Question 2

Large money center banks finance most of their activities by using retail consumer deposits as the primary source of funds.

Answer 2

False

Question 3

By converting to a bank holding company, an investment bank gains access to Federal Reserve lending facilities.

Answer 3

True

Question 4

Money center banks rely more heavily on wholesale and borrowed funds as sources of liability funding than do community banks.

Question 5

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

Question 6

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

Question 7

All banks with assets greater than $10 billion are considered money center banks.

Question 8

Large banks tend to make business decisions based on personal knowledge of customers creditworthiness and business conditions in the local communities.

Question 9

Prior to the financial crisis of 2008, the return on equity for small community banks had been larger than for large money center banks.

Question 10

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

Question 11

In recent years, the number of commercial banks in the U.S. has been increasing.

Question 12

In terms of total assets, commercial banks with under $1 billion in assets have become a larger segment of the industry in recent years.

Question 13

Most of the change in the number of commercial banks since 1990 has been due to bank failures.

Question 14

Retail nontransaction savings and time deposits comprise the largest portion of deposits for commercial banks.

Question 15

Large money center banks are often primary dealers in the U.S. Treasury markets.

Question 16

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

Question 17

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

Question 18

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 19

Currently, federal standards do not allow investment banks to covert to a bank holding company structure.

Question 20

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

Question 21

The Financial Services Modernization Act of 1999 allows commercial banking activities and securities underwriting to operate simultaneously under the same ownership structure.

Question 22

The primary objective of the 1933 Glass-Steagall Act was to prevent commercial banks from competing directly with commercial insurance companies.

Question 23

The DIDMCA of 1980 and the DIA of 1982 were the initial acts to begin the deregulation of the commercial banking industry.

Question 24

The Federal Reserve System has regulatory supervision over all holding company banks whether they include national- or state-chartered banks.

Question 25

Negotiable certificates of deposits are differentiated from fixed time deposits by their negotiability and active trading in the secondary markets.

Question 26

The primary objective of the 1927 McFadden Act was to restrict interstate bank branching.

Question 27

The dual banking system in the U.S. refers to the operation and establishment of large regional as well as small community banks.

Question 28

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

Question 29

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

Question 30

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 31

As of December 2012, the number of nationally chartered banks was greater than the number of state chartered banks.

Question 32

Savings banks and savings associations are savings institutions; with savings banks serving as the primary providers of residential mortgage loans, and savings associations concentrating on commercial loans and corporate bonds as well as mortgage assets.

Question 33

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 34

The Riegle-Neal Act of 1994 removed many of the restriction on interstate banking that were originally imposed by the 1933 Glass Steagall Act.

Question 35

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

Question 36

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.

Question 37

Small banks make proportionately larger amounts of real estate loans than large banks.

Question 38

Commercial banks in the U.S. often are subject to several of the four regulatory agencies.

Question 39

All commercial banks must be members of the Federal Reserve System.

Question 40

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

Question 41

The number of savings associations has been declining since 1990.

Question 42

Savings associations and savings banks are chartered and regulated by the Federal Reserve Bank.

Question 43

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 44

The primary reason for the decline of the S&L industry was the passage of legislation that gave commercial lending powers to the S&L industry.

Question 45

Savings institutions enjoyed record profitability during the late 1990s and early 2000s.

Question 46

The primary objective of the Reigle-Neal Act (1994) was to ease branching across state lines by banks.

Question 47

All credit unions are nationally chartered and regulated by the National Credit Union Administration.

Question 48

As a percent of total assets, savings institutions hold lower amounts of cash and U.S. Treasury securities than commercial banks.

Question 49

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 50

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 51

According to the American Bankers Association, the tax-exempt status of credit unions is the equivalent of a $1 billion per-year subsidy to the industry.

Question 52

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

Question 53

A significant advantage for credit unions in competing with commercial banks is the tax-exempt status that has been granted to credit unions.

Question 54

The savings association industry continues to be the primary lender of residential mortgages.

Question 55

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

A)Depository institutions.
B)Insurance companies.
C)Finance companies.
D)Pension funds.
E)Mutual funds.

Question 56

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

Question 57

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

Question 58

Savings associations and savings banks both are insured by insurance funds that are managed by the FDIC.

Question 59

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

Question 60

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

A)mutual funds.
B)finance companies.
C)pension funds.
D)depository institutions.
E)insurance companies.

Question 61

One of the primary reasons that investment banks were allowed to convert to bank holding companies during the recent financial crisis was recognition that

A)their operating activities were too risky and they needed the cushion of bank deposits to alleviate funding risks.
B)the industry had acquired too much capital during the previous decade.
C)bank holding companies needed the ability to underwrite new issues of corporate securities.
D)it was the only way an investment bank could qualify for federal bailout funds.
E)the Federal Reserve was unable to purchase troubled assets from investment banks, but they could from bank holding companies.

Question 62

The strong performance of commercial banks during the decade before 2007 was due to

A)the stability of interest rates during this period.
B)the ability of banks to shift credit risk from their balance sheets to financial markets.
C)the contraction of the number of banks and thrifts.
D)the growth in the number of thrifts and credit unions.
E)All of the above.

Question 63

By late 2012, the number of commercial banks in the U.S. was approximately

A)2,200.
B)4,680.
C)6,170.
D)8,100.
E)12,700.

Question 64

A large number of the savings institution failures during the in the 1980s was a result of

A)interest rate risk exposure.
B)excessively risky investments.
C)fraudulent behavior on the part of managers.
D)All of the above.
E)answers B and C only.

Question 65

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

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

Question 66

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)Answers B and C only.

Question 67

By late 2012, the number of branches of existing commercial banks in the U.S. approximated ________, which was a(an) _________ from 1985.

A)83,000; increase
B)43,000; increase
C)68,000; decrease
D)103,000; decrease
E)72,000; increase

Question 68

Traditionally, the percentage of depository institutions' assets funded by some form of liability is approximately

A)50 percent.
B)75 percent.
C)85 percent.
D)90 percent.
E)40 percent.

Question 69

National-chartered commercial banks are most likely to be regulated by

A)the FDIC only.
B)the FDIC and the Federal Reserve System.
C)the Federal Reserve System only.
D)the FDIC, the Federal Reserve System, and the Comptroller of the Currency.
E)the Federal Reserve System and the Comptroller of the Currency.

Question 70

The future viability of the savings association industry in traditional mortgage lending has been questioned because of

A)securitization practices of other FIs.
B)the additional risk exposure of long-term mortgage lending.
C)intense competition from other FIs.
D)the liquidity risks associated with mortgage lending.
E)All of the above.

Question 71

The FIRREA Act of 1989 introduced the qualified thrift lender test (QLT), which set the percentage of assets required for qualification to be no less than

A)50 percent.
B)55 percent.
C)60 percent.
D)65 percent.
E)68 percent.

Question 72

The largest asset class on U.S. commercial banks' balance sheet as of September 30, 2012 was

A)investment securities.
B)commercial and industrial loans.
C)real estate loans.
D)cash.
E)deposits.

Question 73

The largest liability on FDIC-insured savings institutions' balance sheet as of year-end 2012 was

A)commercial paper.
B)small time and savings deposits.
C)repurchase agreements.
D)FHLBB advances.
E)cash.

Question 74

Money center banks are considered to be any bank which

A)has corporate headquarters in either New York City, Chicago, San Francisco, Atlanta, Dallas, or Charlotte.
B)is a net supplier of funds on the interbank market.
C)relies almost entirely on nondeposit and borrowed funds as sources of liabilities.
D)does not participate in foreign currency markets.
E)is not characterized by any of the above.

Question 75

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

A)Depository institutions.
B)Insurance companies.
C)Finance companies.
D)Pension funds.
E)Mutual funds.

Question 76

A primary advantage for a depository institution of belonging to the Federal Reserve System is

A)direct access to correspondent banking services.
B)the lower deposit reserves required under the Federal Reserve System.
C)direct access to the discount window of the Fed.
D)commission less trading of U.S.government securities.
E)decreased costs of regulatory compliance.

Question 77

State-chartered commercial banks may be regulated by

A)the FDIC only.
B)the FDIC and the Federal Reserve System.
C)the Federal Reserve System only.
D)the FDIC, the Federal Reserve System, and the Comptroller of the Currency.
E)the FDIC, the Federal Reserve System, the Comptroller of the Currency, and state banking commissions.

Question 78

The largest liability on U.S. commercial banks' balance sheet as of September 30. 2012 was

A)investment securities.
B)non-transaction accounts.
C)transaction accounts.
D)borrowings.
E)cash.

Question 79

The largest asset class on FDIC-insured savings institutions' balance sheet as of year-end 2012 was

A)mortgage loans.
B)cash.
C)investment securities.
D)deposits.
E)non-mortgage Loans.

Question 80

As of 2012, commercial banks with over $10 billion in assets constituted approximately ____ percent of the industry assets and numbered approximately _____.

A)50; 310
B)60; 165
C)70; 525
D)80; 90
E)90; 440