Deck 19: Banking Industry: Structure and Competition

Question 1

The modern commercial banking system began in America when the

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

Answer 1

Bank of North America was chartered in Philadelphia in 1782.

Question 2

Although federal banking legislation in the 1860s attempted to eliminate state-chartered banks by imposing a prohibitive tax on banknotes, these banks have been able to stay in business by

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

Answer 2

issuing deposits.

Question 3

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.

Answer 3

President Andrew Jackson.

Question 4

With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System ________ to purchase FDIC insurance for their depositors, while nonmember 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

Question 5

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 6

Before 1863,

A)the Federal Reserve System regulated only federally chartered banks.
B)the Comptroller of the Currency regulated both state and federally chartered banks.
C)the number of federally chartered banks grew at a much faster rate than at any other time since the end of the Civil War.
D)none of the above occurred.

Question 7

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 nonmember 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 nonmember commercial banks could choose to buy deposit insurance.
C)both member and nonmember banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors.
D)both member and nonmember banks of the Federal Reserve System could choose, but were not required, to purchase FDIC insurance for their depositors.

Question 8

The Federal Reserve Act 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 9

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)Treasury Department.

Question 10

A major controversy involving the U.S. 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 11

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)the Federal Reserve System regulated only federally chartered banks.
E)the Comptroller of the Currency regulated both state and federally chartered banks.

Question 12

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

A)National Banking 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 Banking Act of 1863; Office of Thrift Supervision
D)Federal Reserve Act of 1863; Office of Thrift Supervision

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 Glass-St. Germain Act of 1982.
C)the National Bank Act of 1863.
D)none of the above.

Question 14

Investment banking activities of the commercial banks were blamed for many bank failures. This led to

A)the passage of the National Bank Charter Amendments Act of 1918.
B)the passage of the Garn-St. Germain Act of 1982.
C)the passage of the National Bank Act of 1863.
D)the passage of the Glass-Steagall Act of 1933.
E)the establishment of the Federal Deposit Insurance Corporation in 1933.

Question 15

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)all of the above be done.

Question 16

The Glass-Steagall Act prohibited commercial banks from

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

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

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)First Bank of the United States in 1812.
B)Bank of North America in 1814.
C)Second Bank of the United States in 1816.
D)Federal Reserve System in 1813.

Question 19

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

A)the Federal Deposit Insurance Corporation
B)the Comptroller of the Currency
C)the Federal Bank Holding Company Agency
D)the Federal Reserve System

Question 20

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

A)created a banking system of federally chartered banks.
B)established the Office of the Comptroller of the Currency.
C)broadened the regulatory powers of the Federal Reserve.
D)did all of the above.
E)did only A and B of the above.

Question 21

Which of the following are important factors in determining the degree and timing of financial innovation?

A)changes in technology
B)changes in financial market conditions
C)changes in regulation
D)all of the above
E)only A and B of the above

Question 22

The entry of Sears, 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 23

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

A)Federal Reserve System.
B)Federal Deposit Insurance Corporation.
C)Federal Home Loan Bank System.
D)Comptroller of the Currency.

Question 24

Large fluctuations in interest rates lead to

A)substantial capital gains and losses to owners of securities.
B)greater uncertainty about returns on investments.
C)greater interest-rate risk.
D)all of the above.

Question 25

In the 1950s, the interest rate on three-month Treasury bills fluctuated between 1.0% and 3.5%. In the 1980s, the three-month Treasury bill rate ranged from 5% to over 15%. From this, one could predict that in the 1980s interest-rate risk was ________ and the demand for financial innovation was ________.

A)greater; lower
B)greater; greater
C)lower; lower
D)lower; greater

Question 26

Which of the following statements concerning bank regulation in the United States are 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 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)All of the above are true.
E)Only A and B of the above are true.

Question 27

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 national banks.
B)The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System.
C)The Fed has sole regulatory responsibility over bank holding companies.
D)All of the above are true.
E)Only A and B of the above are true.

Question 28

Which of the following is not a financial innovation stimulated by information technology?

A)credit card
B)debit card
C)adjustable-rate mortgage
D)electronic banking

Question 29

Adjustable-rate mortgages

A)benefit homeowners when interest rates are falling.
B)reduce financial institutions' interest-rate risk.
C)reduce households' risk of having to pay higher mortgage payments when interest rates rise.
D)do only A and B of the above.

Question 30

Rising interest-rate risk ________ the ________ financial innovation.

A)increased; cost of
B)increased; demand for
C)reduced; cost of
D)reduced; demand for

Question 31

Examples of financial services that became practical realities as the result of new computer technology include

A)credit cards.
B)electronic banking facilities.
C)checking accounts.
D)all of the above.
E)only A and B of the above.

Question 32

Which of the following is an example of a financial innovation introduced to avoid regulations?

A)securitization
B)junk bond
C)debit card
D)sweep account

Question 33

Credit cards date back to

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

Question 34

A smart card is a form of

A)stored-value card.
B)credit card.
C)debit card.
D)e-cash card.

Question 35

Which regulatory body charters national banks?

A)the Federal Reserve
B)the Federal Deposit Insurance Corporation
C)the Comptroller of the Currency
D)none of the above

Question 36

A firm issuing credit cards earns income from

A)loans it makes to credit card holders.
B)payments made to it by stores on credit card purchases.
C)payments made to it by manufacturers of the products sold in stores on credit card purchases.
D)all of the above.
E)only A and B of the above.

Question 37

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 38

The most significant change in the economic environment that changed the demand for financial products since 1970 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 39

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

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

Question 40

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)have many attractive attributes, explaining why so few households now seek fixed-rate mortgages.
D)do only A and B of the above.
E)do none of the above.

Question 41

Since the late 1970s, thrift institutions' importance as a source of funds for borrowers has shrunk markedly, from above ________ percent of total credit advanced to below ________ percent today.

A)30; 20
B)30; 15
C)40; 5
D)20; 10

Question 42

Which of the following is not a reason for the disappointing revenue growth and profits of Internet-only banks?

A)high cost per transaction
B)security concerns
C)customer preferences
D)technical problems

Question 43

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 computer technology.
D)the relaxation of regulatory restrictions on credit card operations.

Question 44

Burdensome regulations, along with inflation and rising interest rates, help to explain

A)the rapid pace of financial innovations in banking in the 1960s and 1970s.
B)the low rate of bank failures in the 1980s.
C)both A and B of the above.
D)neither A nor B of the above.

Question 45

In 1977, ________ 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 Ichan

Question 46

It now appears that the predominant delivery system for banking services in the future will be

A)Internet-only banks.
B)traditional banks.
C)traditional banks supplemented with online services.
D)none of the above.

Question 47

The practice of creating marketable debt instruments that are backed by otherwise illiquid assets is known as ________.

A)standardization
B)homogenization
C)securitization
D)adverse selection

Question 48

So-called fallen angels differ from junk bonds in that

A)junk bonds refer to previously issued bonds which have had their credit ratings fall below Baa.
B)fallen angels refer to newly issued bonds with low credit ratings.
C)junk bonds refer to newly issued bonds with low credit ratings.
D)they are both A and B of the above.

Question 49

The Federal Reserve's Regulation Q

A)set maximum interest rates banks could pay on deposits.
B)set minimum interest rates banks could pay on deposits.
C)set maximum interest rates banks could charge on loans.
D)discouraged disintermediation.

Question 50

When disintermediation occurs, the banking system ________ deposits and bank lending ________.

A)gains; increases
B)gains; decreases
C)loses; increases
D)loses; decreases

Question 51

In the usual GNMA pass-through security, the ________ has direct ownership of a pro-rata share of the portfolio of mortgage loans.

A)seller
B)buyer
C)financial institution issuing the mortgage loan
D)financial institution securitizing the mortgage loan

Question 52

Bank managers look on reserve requirements as a

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

Question 53

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 which have had their credit ratings fall below Baa.
B)junk bonds refer to previously issued bonds which 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 54

Since 1974, commercial banks' importance as a source of funds for borrowers has shrunk dramatically, from around ________ percent of total credit advanced to near ________ percent by 2009.

A)60; 30
B)40; 25
C)25; 20
D)30; 15

Question 55

The bundling of mortgages into a saleable security (usually for large institutional investors)is called ________.

A)disintermediation
B)quasi-intermediation
C)futures bundling
D)hedge optioning
E)securitization

Question 56

Thrift institutions' importance as a source of funds for borrowers

A)has shrunk from around 40 percent of total credit advanced in the late 1970s to below 30 percent today.
B)has shrunk from over 20 percent of total credit advanced in the late 1970s to below 10 percent today.
C)has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 25 percent today.
D)has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 30 percent today.

Question 57

Checking accounts that earn interest (such as NOW accounts)were not available until ________.

A)1962
B)1972
C)1982
D)1992

Question 58

The growing use and proliferation of ATMs has been stimulated by

A)lower transaction costs.
B)greater customer convenience.
C)declining cost of the ATM equipment.
D)all of the above.

Question 59

"Stripping" a Treasury bond

A)means selling each of its future payments as a separate zero-coupon bond.
B)decreases the total present discounted value of future payments.
C)both A and B.
D)none of the above.

Question 60

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 61

The presence of so many commercial banks in the United States is most likely the result of

A)consumers' strong preference for dealing with only local banks.
B)adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks.
C)regulations that restrict the ability of banks to open branches.
D)all of the above.

Question 62

The McFadden Act's prohibition against interstate branching

A)was weakened by the introduction of shared electronic banking facilities that provide banking services nationwide.
B)was weakened by regional compacts that allowed banks to own banks in other states in their region.
C)impeded banks' ability to diversify their loans and take advantage of economies of scale.
D)did all of the above.

Question 63

A bank with a large credit-card customer base can market other financial products to these customers at a low cost. This is an example of

A)economies of scale.
B)economies of scope.
C)becoming a superregional bank.
D)none of the above.

Question 64

Bank failures and mergers have caused the number of commercial banks in the U.S. to decline from around ________ in the 1970s to below ________ today.

A)25,000; 10,000
B)15,000; 10,000
C)25,000; 20,000
D)15,000; 5,000

Question 65

The most important developments that have reduced banks' income advantages in the past twenty years include

A)the growth of the commercial paper market.
B)the growth of the junk bond market.
C)the growth of securitization.
D)all of the above.
E)only A and B of the above.

Question 66

One factor contributing to the decline in cost advantages that banks once had is the decline in the importance of checkable deposits from over ________ percent of banks' source of funds to ________ percent today.

A)70; 30
B)60; 5
C)50; 20
D)40; 15

Question 67

Which of the following is not expected to result from bank consolidation in the U.S.?

A)The disappearance of small community banks.
B)The acceleration of the decline in the number of banks.
C)Banks will be more efficient.
D)Banks will be less likely to fail.

Question 68

The McFadden Act of 1927

A)effectively prohibited banks from branching across state lines.
B)required that banks maintain bank capital equal to at least 6 percent of their assets.
C)effectively required that banks maintain a correspondent relationship with large money center banks.
D)did all of the above.

Question 69

Which of the following is an advantage of forming a bank holding company?

A)It allows ownership of several banks where branching is prohibited.
B)It allows owners to engage in activities related to banking that are prohibited to banks.
C)Both A and B of the above.
D)None of the above.

Question 70

The most important developments that have reduced banks' income advantages in the past twenty years include

A)the growth of the commercial paper market.
B)the growth of the junk bond market.
C)the elimination of Regulation Q ceilings.
D)all of the above.
E)only A and B of the above.

Question 71

The most important developments that have reduced banks' cost advantages in the past twenty years include

A)the growth of the junk bond market.
B)the competition from money market mutual funds.
C)the growth of securitization.
D)all of the above.
E)only A and B of the above.

Question 72

Which of the following are true statements concerning bank holding companies?

A)Bank holding companies own almost all large banks.
B)Bank holding companies have experienced dramatic growth in the past twenty-five years.
C)Through a loophole in the McFadden Act, bank holding companies have successfully evaded interstate branching restrictions.
D)All of the above are true.
E)Only A and B of the above are true.

Question 73

As a result of shared electronic banking facilities,

A)barriers to branching have become less burdensome.
B)banking has become less competitive.
C)both of the above have occurred.
D)neither of the above has occurred.

Question 74

The process in which people seeking higher interest rates take their money out of financial institutions is called ________.

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

Question 75

As a result of restrictive banking regulations, the United States

A)has too few banks when compared to other industrialized countries.
B)has banks that are quite large relative to those in other countries.
C)has too many banks when compared to other industrialized countries.
D)has both A and B of the above.

Question 76

One factor contributing to the decline in income advantages that banks once had is the increased competition from the commercial paper market, which has grown in size to over ________ percent of commercial and industrial bank loans today.

A)20
B)30
C)40
D)50

Question 77

The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations of the state in which they reside is the

A)McFadden Act.
B)National Banking Act.
C)Glass-Steagall Act.
D)Garn-St. Germain Act.

Question 78

The most important developments that have reduced banks' cost advantages in the past twenty years include

A)the elimination of Regulation Q ceilings.
B)the competition from money market mutual funds.
C)the growth of securitization.
D)all of the above.
E)only A and B of the above.

Question 79

The traditional financial intermediation role of banking has been to make ________-term loans and to fund them with ________-term deposits.

A)short; long
B)long; short
C)short; short
D)long; long

Question 80

Rising market interest rates in the 1960s and the 1970s, combined with regulated deposit rate ceilings,

A)worked in the short-run to give mortgage-issuing institutions a source of low-cost funds.
B)led eventually to an outflow of deposits from depository institutions.
C)led to financial innovations that worked to avoid these regulations.
D)did all of the above.
E)did only A and C of the above.