Deck 21: Product and Geographic Expansion

Question 1

21-4 In the U.S.,the Glass-Steagall Act limited the integration of commercial banking and securities activities.

Answer 1

True

Question 2

21-12 The Financial Services Modernization Act of 1999 allows bank holding companies to open insurance underwriting affiliates.

Answer 2

True

Question 3

21-6 Section 20 affiliates allow banks to transact previously ineligible securities activities.

Answer 3

True

Question 4

21-7 Banks have been permitted to acquire existing investment banks since 1997.

Question 5

21-17 A fully integrated universal bank allows a bank to engage in securities activities only through a separately owned securities affiliate.

Question 6

21-3 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 7

21-18 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 8

21-1 A universal FI is an FI that has expanded its operations across country lines.

Question 9

21-13 The Financial Services Modernization Act of 1999 prohibits insurance companies from opening commercial banks.

Question 10

21-10 The Financial Services Modernization Act repealed the Glass-Steagall barriers between commercial banking and investment banking.

Question 11

21-2 Banks increasingly have been susceptible to nonbank competition on both sides of the balance sheet.

Question 12

21-14 Under the Financial Services Modernization Act of 1999,commercial banks can own and actively manage nonfinancial corporations.

Question 13

21-15 The barriers among nonbank financial service firms and commercial firms are generally much stronger than the barriers separating banking and commercial sector activities.

Question 14

21-9 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 15

21-16 The Financial Services Modernization Act of 1999 has provided for more standardized relationships among financial service sectors and commerce.

Question 16

21-20 Economies of scope opportunities seem to be available in the financial services industry,but economies of scale opportunities do not seem to exist.

Question 17

21-19 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 18

21-8 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 19

21-11 Historically,commercial banks have been prohibited from acting as an underwriter of insurance products.

Question 20

21-5 The Glass-Steagall Act allowed commercial banks to underwrite new issues of Treasury securities.

Question 21

21-38 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 22

21-23 The process of using lending power to coerce a loan customer to use products sold by a securities affiliate is called information transfer.

Question 23

21-40 Success in a merger from revenue enhancement is more likely if the markets into which expansion occurs are less than fully competitive.

Question 24

21-21 Information transfer refers to the conflict of interest that occurs when banks have the power to sell nonbank products.

Question 25

21-32 The establishment of a presence in local markets by insurance companies is reasonably inexpensive because of low capital requirements established by state regulators.

Question 26

21-36 Reciprocal banking pacts allowed the non-state companies to purchase banks as long as the purchase permission went in both directions.

Question 27

21-33 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 28

21-37 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 29

21-31 Banks typically have faced few restrictions in expanding their businesses,while securities firms and insurance companies have faced complex rules regarding expansion.

Question 30

21-24 Tie-ins and third-party loans are prohibited by current bank regulations.

Question 31

21-25 Chinese walls are barriers within organizations that limit the flow of confidential information between departments of business areas.

Question 32

21-27 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 33

21-30 Historically regulations have encouraged the expansion of bank offices domestically.

Question 34

21-34 A one bank holding company is a parent bank holding company with only one subsidiary involved in banking activities.

Question 35

21-35 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 36

21-22 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 37

21-26 The existence of the "too big to fail" doctrine may encourage large banks to take excessive risks in securities underwriting activities.

Question 38

21-29 Expansion on a de novo basis implies the establishment and construction of a new office in a location where previously no office existed.

Question 39

21-28 Increased competition for securities underwritings should reduce the spreads and thus lower the price paid for the securities by the investing public.

Question 40

21-39 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 41

21-41 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 42

21-44 U.S.financial institutions have expanded abroad in recent years,although their foreign counterparts have been prohibited from expanding into the U.S.

Question 43

21-54 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

21-51 A foreign bank subsidiary in the U.S.is restricted to using only funds borrowed on the wholesale and money markets.

Question 45

21-53 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 46

21-60 A disadvantage to international bank expansion is the potential increase in the monitoring and information collection costs in some overseas markets.

Question 47

21-50 The European Community Second Banking Directive has aided the international competitive position of European banks by creating a single banking market in Europe.

Question 48

21-59 International expansion often produces revenue-risk diversification benefits for U.S.banks.

Question 49

21-56 Offices of foreign banks may be examined by the Federal Reserve under the FBSEA of 1991.

Question 50

21-55 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 51

21-43 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 52

21-45 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 53

21-47 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

21-48 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 55

21-46 The USA Patriot Act of 2001 prohibits U.S.banks from providing banking services to foreign banks.

Question 56

21-42 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 57

21-52 The International Banking Act of 1978 attempted to provide a level playing field for domestic and foreign banks in U.S.banking markets.

Question 58

21-49 Large size is an important characteristic in international banking because it gives a bank a greater ability to diversify across borders.

Question 59

21-58 International expansion by a commercial bank should provide increased access to funding sources.

Question 60

21-57 One result of the FBSEA was the increase in the regulatory burden of foreign banks in the U.S.

Question 61

21-65 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 62

21-63 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 63

21-69 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 64

21-67 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 65

21-78 An investment bank may take a big loss when underwriting an issue on a firm commitment basis because

A)it may overestimate the demand for the shares by the market.
B)it may underestimate the demand for the shares by the market.
C)interest rates may rise during the offering period.
D)security prices in general may increase during this period.
E)Answers A and D only.

Question 66

21-61 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 67

21-76 Which of the following describes a firm commitment underwriting?

A)Finding a large institutional buyer or investor such as another FI for a private placement.
B)Investment bankers acting as agents on a fee basis related to their success in placing the issue.
C)Investment bankers act as agents and purchase securities from the issuer at one price for sale to the public at a different price.
D)Bank using its lending powers to coerce customers to buy the products sold by its securities affiliate.
E)Purchase of securities from the issuer at one price for resale to the public at a slightly higher price.

Question 68

21-62 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 69

21-79 If the firm commitment price is $15 and one million shares are sold in the primary market for $15.50 and then resold in the secondary market for $15.75,what is the underwriter's profit/loss?

A)?$500,000.
B)$500,000.
C)$750,000.
D)?$750,000.
E)0

Question 70

21-70 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 71

21-74 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 72

21-72 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 73

21-75 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 74

21-66 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 75

21-73 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 76

21-71 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 77

21-68 Permissible section 20 subsidiary activities include

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

Question 78

21-77 In firm commitment underwriting,the underwriter's spread is

A)the bid ask spread in the secondary market.
B)the interest spread earned by the FI.
C)the difference between the underwriter's buy and sell price.
D)the difference between the offer price under a firm commitments as opposed to a best efforts underwriting contract.
E)the commission per share.

Question 79

21-64 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 80

21-80 If the firm commitment price is $15 and one million shares are sold in the primary market for $13 and then resold in the secondary market for $13.25,what is the underwriter's profit/loss?

A)-$2,000,000.
B)$2,000,000.
C)?$1,750,000.
D)$1,750,000.
E)0