Deck 4: The Future of the Financial System and the Money and Capital Markets

Question 1

Financial-services competition is increasingly taking the place of government rules in the hope that the public will benefit in terms of more convenient services at lower cost.

Answer 1

True

Question 2

The money and capital markets and the financial institutions that operate within them depend heavily on public confidence.

Answer 2

True

Question 3

Many members of the public regard financial institutions as less secure today than in the past, especially in the wake of failing banks, securities firms and other financial institutions in a number of countries around the world (especially in Japan, Argentina, Asia and the former Soviet Union).

Answer 3

True

Question 4

Both government and the private sector may offer effective remedies in ensuring the continued viability of existing financial institutions and public confidence in them.

Question 5

As a result of the passage of the FDIC Insurance Act of 2005 federal insurance coverage of qualified retirement accounts was increased from $100,000 to $250.000.

Question 6

The public-sponsored insurance idea could be extended to include other financial instruments in which the public saves its money, such as life insurance policies or annuities.

Question 7

One solution mandated by the U.S. Congress for the FDIC was to tie the size of government insurance premiums charged an issued bank directly to the amount of risk taken on. Thus, the risk exposure to the insurance fund becomes the determinant of the insurance paid by private financial institutions.

Question 8

The trend toward market-expanding operations has encompassed not only financial firms that have traditionally served broad markets (such as insurance companies, money-center banks and security brokerage firms) but also locally oriented financial institutions (such as credit unions and savings banks).

Question 9

The initiatives of developing larger financial institutions to deal with greater risk of failure has been most evident in the rise of interstate banking in the United States and the emergence of highly service-diversified financial holding companies. The former came partly as a result of the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, while the latter came partly as a result of the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999.

Question 10

Mere knowledge of existing risk-management tools does not guarantee that all risk exposures will be adequately dealt with. Continuing innovation in the risk-management field is absolutely essential to the future smooth operation of the financial system and to the continuing maintenance of public confidence in that system.

Question 11

Fast technological advances in information technology literally make every financial-service customer into a mobile "branch office."
There will be less and less need to ever visit the brick-and-mortar office facilities of a financial institution. Fewer employees will be needed in the financial institutions sector and, eventually hundreds, if not thousands, of full-service branch offices may be closed. The financial-services business clearly is in transition from a labor-intensive industry to a capital-intensive one that relies more and more upon automation and electronic processing.

Question 12

Personal communication between financial institutions and their customers will always be important in the delivery of some financial services, especially to older customers and smaller businesses. However, the cost of these traditional communications methods is rising, so their economic advantage over electronic methods continues to decline.

Question 13

Most of the remaining vestiges of the traditional distinctions between one type of financial-service institution and another will be swept away in the years ahead-a process we have called homogenization.

Question 14

There will be a need for new institutions to facilitate the continuing trend toward securitization of many of the credit-related assets held by lending institutions and other corporations.

Question 15

The mega-mergers involving multi-billion-dollar-size institutions within the U.S. financial system are generally of two types: consolidations, which bring together financial firms serving the same industry; and convergences, where firms from two or more different financial industries combine their operations.

Question 16

The dual concern-letting markets and competition do their essential work to benefit customers, while preserving safety and soundness to protect the most vulnerable customers-has led to the development of several different regulatory approaches, any one of which may come to dominate the future of the financial-services business.

Question 17

The recent Financial Services Modernization (Gramm-Leach-Bliley) Act, passed in the U.S. in November 1999, now allows banks, thrifts, insurance companies and securities firms to enter each other's backyard through a centuries-old financial structure, the holding company. In the holding company, different affiliated firms offer different groups of services but all are owned by one controlling company at the top of the organization. A model of this kind is called the "Financial Holding Company Model."

Question 18

In the financial holding company model, each firm has its own capital and management and its own net earnings or earnings losses, which are independent of the earnings or losses of other affiliated companies belonging to the same holding company.

Question 19

One model entitled the "Single Regulator"
approach calls upon one regulatory agency to oversee an entire financial-services company with all of its component parts.

Question 20

The challenge of the "Single Regulator"
approach is that such a regulator has to know many different financial businesses well in order to do a good job of supervising the safety of complex financial institutions.

Question 21

An approach adopted in the Financial Services Modernization (Gramm-Leach--Bliley) Act, calls for functional regulation in the future--letting specialized regulators oversee those financial firms about which they know the most and then pooling their regulatory reports to get an overall picture of the condition of a large, complex financial company. A model of this kind may be called the "Functional Regulator"
Model.

Question 22

To cope with the trend of forming more diversified financial firms, we need more disclosure of information to the public on the true condition of financial institutions and we also need more international regulatory cooperation (known as harmonization) to prevent global contagion and panics by investors and public at large. We need to use recent technological advances to improve monitoring and warning systems so that regulators can spot troubled financial firms earlier and have a chance to quickly head off service problems.

Question 23

Failure to effectively coordinate and control the diverse activities, such as: service quality, pricing, employee benefits, recruiting and portfolio selection, may weaken the diversified financial institution's performance at a time when competition in financial services is increasing.

Question 24

If governments do not act to free more completely the financial institutions they supervise from today's product-line and geographic restrictions, nonregulated financial intermediaries will move in and eventually drive out the more regulated financial institutions from one market after another.

Question 25

In 2001 the Federal Reserve Board invited public comment on the possibility of allowing banking companies to provide real estate brokerage services.

Question 26

With greater disclosure requirement, more financial institutions will be subject to the risk of public disfavor. Ultimately the "discipline of the market"
will be more completely unleashed to help ensure prudent management and to control risk taking.

Question 27

The debate over protecting the privacy of financial-service consumers is likely to persist far into the foreseeable future as consumer interests are balanced against the demands for efficiency and cost control within the financial-services marketplace.

Question 28

The advocates of the "level playing field"
issue demand more equal taxation of the earnings of different financial institutions and more equal powers to offer a full range of services competitive with other financial-service firms.

Question 29

Securitization opens up additional funding sources for financial institutions, adding liquidity and diversification.

Question 30

Governments will be under continuing pressure to relax regulations against the development of new services and the geographic expansion of various financial institutions.

Question 31

A device used to pay for goods and services without physical contact is a radiofrequency identification card

Question 32

Radiofrequency identification cards can be passed in front of scanners without physical contact to pay for goods and services.

Question 33

Which of the following are the newer financial instruments and services that appear to have good prospects for rapid market development in the future?

A) Loans to remodel residential dwellings (due to the aging of existing homes and greater availability of home equity credit)
B) Small business loans
C) Credit swaps and other credit risk derivatives, which permit a lending institution to seek protection . against loan defaults and depreciation in asset values
D) None of the above
E) All of the above

Question 34

The recent trend toward deregulation of the worldwide financial sector is likely to continue. Governments will be under continuing pressure to

A) Amend and relax regulations against product-line and geographic diversification
B) Lift or liberalize any restrictions placed on the cost of credit (interest rates) and currency prices
C) Either A or B
D) Both A and B
E) None of the above

Question 35

The more likely future developments in deregulation will be

A) Reduced barriers to geographic diversification in order to allow financial institutions to find new customers anywhere
B) Reduced restrictions on the portfolio choices made by financial institutions except as may be required to preserve public confidence in financial institutions and the financial system
C) Reorganization of regulatory agencies to avoid duplication and to minimize the burden of regulation on financial institutions
D) Reduced barriers to product-line diversification (especially in securities underwriting and sales and in . the underwriting of insurance, merchant banking and real estate brokerage)
E) Ll of the above are likely future developments

Question 36

Regulators are likely to be looking closely in the years ahead at which of the following rules that apply to each financial institution?

A) The adequacy of owners' equity capital, loan-loss reserves, eligibility for low-cost government insurance
B) Permissible risk exposure
C) Financial disclosure
D) Only A and B
E) All of the above

Question 37

The recent trend toward deregulation of the worldwide financial sector is likely to continue. Governments will be under continuing pressure to

A) Amend and relax regulations against product-line and geographic diversification
B) Lift or liberalize any restrictions placed on the cost of credit (interest rates) and currency prices
C) Establish new regulatory structures
D) Both A and B
E) None of the above

Question 38

Why are financial innovation and deregulation significant factors in today's money and capital markets?
Are they also likely to be important to the future of the financial system?

Question 39

What is meant by the term market broadening? Why is this phenomenon taking place inside today's financial marketplace?

Question 40

Please explain the reasoning behind the concept known as the life-cycle hypothesis? How will the life-cycle idea affect the financial system of the future, in your opinion?

Question 41

What is meant by the term homogenization? What do you think is motivating this trend toward service homogenization today? Why is it likely to be more important in the future?

Question 42

How can we reduce risk in the financial sector?

Question 43

What are the principal types of risk encountered by financial institutions?

Question 44

In what ways can we promote and protect public confidence in the financial-services sector of the economy? Why is this important to the public and to financial institutions?

Question 45

What technological changes are likely to have the greatest impact on the production and delivery of financial services to the public in future years?

Question 46

Why do you think consolidation and convergence are taking place today in the financial-services sector of the economy? What are their consequences for the managers of financial institutions? For regulators of finance-service institutions?

Question 47

What exactly is meant by the concept of functional regulation? What are its advantages and disadvantages for financial institutions and their customers?

Question 48

In what ways is regulation of the financial-services sector changing? What new types of regulation and deregulation can be expected in the future?

Question 49

What is happening to the global payments system today? What changes in the payments system seem likely for the future? Why are these changes important to both financial institutions and to their customers?

Question 50

Why was passage of the Gramm-Leach-Bliley (Financial Services Modernization) Act so important for American banks and other financial-service institutions?

Question 51

What regulations in the financial sector are likely to grow in the future?

Question 52

What is the disclosure issue and what is its significance?

Question 53

List the principal trends in the economy, society and population that you believe will affect financial institutions and financial services the most over the next five years. How about the next 10 years?

Question 54

If you were managing a small bank or insurance agency in your local community, what future trends in financial services and financial institutions are likely to have the greatest impact on your institution? Why? What response or responses could you make to each trend you have listed?