Deck 21: Product and Geographic Expansion

Question 1

The Glass-Steagall Act allowed commercial banks to underwrite new issues of Treasury securities.

Answer 1

True

Question 2

The Financial Services Modernization Act repealed the Glass-Steagall barriers between commercial banking and investment banking.

Answer 2

True

Question 3

The Financial Services Modernization Act of 1999 prohibits insurance companies from opening commercial banks.

Answer 3

False

Question 4

The barriers among nonbank financial service firms and commercial firms are generally much stronger than the barriers separating banking and commercial sector activities.

Question 5

The Financial Services Modernization Act of 1999 allows bank holding companies to open insurance underwriting affiliates.

Question 6

Banks increasingly have been susceptible to nonbank competition on both sides of the balance sheet.

Question 7

A fully integrated universal bank allows a bank to engage in securities activities only through a separately owned securities affiliate.

Question 8

In recent years, commercial banks have attempted to expand their activities into nonbanking areas, but securities firms have not been interested in expanding into commercial banking.

Question 9

Section 20 affiliates allow banks to transact previously ineligible securities activities.

Question 10

A universal FI is an FI that has expanded its operations across country lines.

Question 11

Of the ten largest financial service firms in the world, none are headquartered in the U.S.

Question 12

Historically, commercial banks have been prohibited from acting as an underwriter of insurance products.

Question 13

In the banking environment, economic and legal firewalls often have been designed to separate the risks of investment bank affiliate activities from commercial banks.

Question 14

The commercial paper market is an example of nonbank competition on the asset side of the balance sheet that has become increasingly intense for banks.

Question 15

In the U.S., the Glass-Steagall Act limited the integration of commercial banking and securities activities.

Question 16

The specialized nature in which credit intermediation is performed by shadow banks makes the process less cost efficient than if done by traditional banks.

Question 17

The Financial Services Modernization Act of 1999 has provided for more standardized relationships among financial service sectors and commerce.

Question 18

In late 2012, shadow banking activities came under federal government regulation.

Question 19

Under the Financial Services Modernization Act of 1999, commercial banks can own and actively manage nonfinancial corporations.

Question 20

Banks have been permitted to acquire existing investment banks since 1997.

Question 21

The safety and soundness of a holding company that has both a bank subsidiary and a securities affiliate can be enhanced over time by the product diversification benefits of a more stable earnings stream caused by having well-diversified financial services.

Question 22

Banks typically have faced few restrictions in expanding their businesses, while securities firms and insurance companies have faced complex rules regarding expansion.

Question 23

A one bank holding company is a parent bank holding company with only one subsidiary involved in banking activities.

Question 24

By the early 1990s interstate banking pacts basically had opened the doors for nearly all banks to practice interstate branching in any geographic locations.

Question 25

The required monitoring and surveillance efforts of several regulatory bodies in the case of large holding companies with multi-subsidiaries may actually decrease the efficiency of regulatory oversight.

Question 26

Interstate banking barriers have deteriorated in part because of the decisions to deal with the failing thrift industry by allowing acquiring firms to cross state lines.

Question 27

Increased competition for securities underwritings should reduce the spreads and thus lower the price paid for the securities by the investing public.

Question 28

Research suggests that the total risk exposure of a financial services organization could actually increase if there is excessive product expansion in some nonbank lines.

Question 29

The conflict of interest that occurs when a bank suggests the issuance of capital market debt for the purpose of reducing bank loans under conditions of deteriorating or questionable firm financial health is commonly referred to as bankruptcy risk transference.

Question 30

Expansion on a de novo basis implies the establishment and construction of a new office in a location where previously no office existed.

Question 31

Historically, regulations have encouraged the expansion of bank offices domestically.

Question 32

The process of using lending power to coerce a loan customer to use products sold by a securities affiliate is called information transfer.

Question 33

Economies of scope opportunities seem to be available in the financial services industry, but economies of scale opportunities do not seem to exist.

Question 34

Chinese walls are barriers within organizations that limit the flow of confidential information between departments of business areas.

Question 35

Reciprocal banking pacts allowed the non-state companies to purchase banks as long as the purchase permission went in both directions.

Question 36

Information transfer refers to the conflict of interest that occurs when banks have the power to sell nonbank products.

Question 37

Tie-ins and third-party loans are prohibited by current bank regulations.

Question 38

In the middle part of the twentieth century, large banks addressed the issue of interstate branch banking restrictions by forming multibank holding companies with bank subsidiaries in different states.

Question 39

The existence of the "too big to fail" doctrine may encourage large banks to take excessive risks in securities underwriting activities.

Question 40

The establishment of a presence in local markets by insurance companies is reasonably inexpensive because of low capital requirements established by state regulators.

Question 41

U.S. financial institutions have expanded abroad in recent years, although their foreign counterparts have been prohibited from expanding into the U.S.

Question 42

Success in a merger from revenue enhancement is more likely if the markets into which expansion occurs are less than fully competitive.

Question 43

The purpose of the Foreign Bank Supervision Enhancement Act of 1991 was to extend federal authority over foreign banking organizations in the U.S.

Question 44

The USA Patriot Act of 2001 prohibits U.S. banks from providing banking services to foreign banks.

Question 45

The International Banking Act of 1978 attempted to provide a level playing field for domestic and foreign banks in U.S. banking markets.

Question 46

The FBSEA of 1991 required a foreign bank to have Fed approval to establish a branch as a new entry, but does not require such approval if the entry is by acquisition.

Question 47

A foreign bank subsidiary in the U.S. is restricted to using only funds borrowed on the wholesale and money markets.

Question 48

Offices of foreign banks may be examined by the Federal Reserve under the FBSEA of 1991.

Question 49

The Garn-St Germain Act is an interstate banking law that allows banks to branch on an interstate basis rather than building more expensive holding company structures.

Question 50

Merger premiums tend to be higher for target banks in competitive environments, but for which the target bank's loan portfolios are of high quality.

Question 51

The European Community Second Banking Directive has aided the international competitive position of European banks by creating a single banking market in Europe.

Question 52

The use of the Herfindahl-Hirschman Index (HHI) to measure market concentration is encouraged for banks because of the ease of separating banks from thrifts and insurance companies.

Question 53

U.S. banking offices abroad normally are permitted by the Federal Reserve System to engage in activities that are allowed in the foreign country even when such activities are not permitted in the U.S.

Question 54

The emergence of the Euro as a uniform medium of exchange is expected to cause the importance of the dollar to increase among major European countries.

Question 55

Large size is an important characteristic in international banking because it gives a bank a greater ability to diversify across borders.

Question 56

In order to achieve a more stable revenue stream in a merger, the asset and liability portfolios of the two institutions should have similar credit, interest rate, and liquidity characteristics.

Question 57

The effect of the International Banking Act of 1978 was to accelerate the expansion of foreign bank activities in the U.S. primarily because of their access to the Federal Reserve's discount window, Fedwire, and FDIC insurance.

Question 58

Research on bank mergers for the decade of the 1990s found that improved performance of the merged bank occurred because of both revenue enhancements and cost reduction.

Question 59

One result of the FBSEA was the increase in the regulatory burden of foreign banks in the U.S.

Question 60

The NAFTA agreement and other agreements reached through the help of the World Trade Organization should reduce some of the restrictions that have face U.S. banks in attempts to enter emerging market countries.

Question 61

How could insurance companies get around the restrictive provisions imposed by the bank holding company act of 1956?

A)Through the organizational mechanism of establishing nonbank bank subsidiaries.
B)By opening federally chartered thrifts.
C)By offering credit-related life, accident, health, or unemployment loans.
D)By buying a full-service bank and then divesting its demand deposits or commercial loans.
E)Answers A and D only.

Question 62

Commercial banks have expanded their activities in each of the following ways EXCEPT

A)opening nonbank banks.
B)grandfathering previously permitted activities.
C)expanding off shore.
D)petitioning regulators for enhanced powers.
E)acquiring nonfinancial firms.

Question 63

Identify the action taken by OCC and the Federal Reserve in 1997, to expand the permitted activities of bank holding companies.

A)Repealed the Glass-Steagall barriers between commercial banking and investment banking.
B)Allowed commercial banks to acquire directly existing investment banks.
C)Allowed investment banks to offer banking products.
D)Allowed investment banks to offer deposit products.
E)All of the above.

Question 64

This legislation explicitly stated that banking and insurance were not closely related activities.

A)The McCarran-Ferguson Act of 1945.
B)Savings and Loan Holding Company Act of 1968.
C)The Garn-St.Germain Depository Institutions Act of 1982.
D)The Competitive Equality Banking Act of 1987.
E)The International Banking Act of 1978.

Question 65

As of the end of 2012, the total worldwide assets of the shadow banking system was approximately

A)$12 trillion
B)$37 trillion
C)$52 trillion
D)$67 trillion
E)$91 trillion

Question 66

This legislation restricts insurance companies from owning or being affiliated with full service banks.

A)The McCarran-Ferguson Act of 1945.
B)The Bank Holding Company Act of 1956.
C)The Garn-St.Germain Depository Institutions Act of 1982.
D)Savings and Loan Holding Company Act of 1968.
E)The International Banking Act of 1978.

Question 67

This legislation defines a bank as any institution that accepts deposit insurance coverage.

A)The McCarran-Ferguson Act of 1945.
B)The Bank Holding Company Act of 1956.
C)The Garn-St.Germain Act of 1982.
D)The Competitive Equality Banking Act of 1987.
E)The International Banking Act of 1978.

Question 68

Which of the following has proven to be strong competition for bank deposit and transaction account products?

A)Commercial paper market.
B)Money market mutual funds.
C)Finance company business credit.
D)Hedge funds.
E)None of the above.

Question 69

Permissible section 20 subsidiary activities include

A)insurance activities.
B)hedging.
C)factoring.
D)extensions of lines of credit.
E)investment banking activities.

Question 70

The Financial Services Modernization Act of 1999

A)stipulates that a financial services holding company that engages in commercial banking, investment banking, and insurance activities will be functionally regulated.
B)allows bank holding companies to open insurance underwriting affiliates.
C)requires banks that underwrite and sell insurance to operate under the same set of state regulations as insurance companies.
D)All of the above.
E)Answers A and B only.

Question 71

The economic value of narrowly defined bank franchises has declined because

A)product line restrictions inhibit the ability of an FI to optimize the set of financial services it can offer.
B)product restrictions limit the ability of FI managers to adjust flexibly to shifts in the demand for financial products.
C)product restrictions limit the ability of FI managers to adjust flexibly to shifts in costs due to technology and related innovations.
D)All of the above.
E)Answers A and B only.

Question 72

A disadvantage to international bank expansion is the potential increase in the monitoring and information collection costs in some overseas markets.

Question 73

The Pecora Commission's findings about the 1929 stock market crash resulted in the

A)Financial Services Modernization Act.
B)Glass-Steagall Act.
C)Federal Reserve Act.
D)International Banking Act.
E)Garn St.Germain Depository Institutions Act.

Question 74

The banking industry in the U.S. has faced increased competition

A)on the liability side of the balance sheet from the commercial paper market.
B)on the asset side of the balance sheet from money market mutual funds.
C)on the liability side of the balance sheet from money market mutual funds.
D)on the asset side of the balance sheet from the commercial paper market.
E)Answers C and D only.

Question 75

International expansion often produces revenue-risk diversification benefits for U.S. banks.

Question 76

A bank holding company must obtain the approval of the Fed before acquiring more than _____ of the shares of an additional bank, bank holding company, or financial services firm.

A)5 percent
B)10 percent
C)15 percent
D)25 percent
E)50 percent

Question 77

Nonbank institutions have NOT gained competitive momentum for which of the following financial products?

A)Commercial paper.
B)Money market mutual funds.
C)Annuities.
D)Business credit market.
E)Savings accounts.

Question 78

despite a sovereign debt problem that plagued Greece in 2010, by 2012 U.S. Banks had increased their exposure to Greek debt.

Question 79

The Financial Services Modernization Act allowed for

A)the creation of financial services holding companies.
B)the replacement of all previous regulatory agencies with one super regulator.
C)the placement of some securities underwriting in bank subsidiaries.
D)All of the above.
E)Answers A and C only.

Question 80

International expansion by a commercial bank should provide increased access to funding sources.