Q&A Hero

Q: An essential characteristic of credit unions is that A) they are typically large. B) branching across state lines is prohibited. C) their lending is primarily for mortgage loans. D) they are organized for individuals with a common bond.

Q: Mutual savings banks are primarily regulated by A) the states in which they are located. B) the Federal Reserve. C) the FDIC. D) the National Credit Union Administration.

Q: Mutual savings banks are owned by A) shareholders. B) partners. C) depositors. D) foreign investors.

Q: The FHLBS gives loans to S&Ls and thus performs a function similar to the ________ for commercial banks. A) Federal Reserve B) U.S. Treasury C) Office of the Comptroller of the Currency D) U.S. Mint

Q: Thrift institutions include A) commercial banks. B) brokerage firms C) insurance companies. D) mutual savings banks.

Q: Unlike banks, ________ have been allowed to branch statewide since A) federally-chartered S&Ls B) state-chartered S&Ls C) financially troubled S&Ls D) technically insolvent S&Ls

Q: Like the dual banking system for commercial banks, thrifts can have either ________ or ________ charters. A) state; federal B) state; local C) local; federal D) municipal; federal

Q: A major difference between the United States and Japanese banking systems is thatA) American banks are allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks cannot.B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot.C) bank holding companies are illegal in the United States.D) Japanese banks are usually organized as bank holding companies.

Q: In a ________ banking system, commercial banks engage in securities underwriting, but legal subsidiaries conduct the different activities. Also, banking and insurance are not typically undertaken together in this system. A) universal B) British-style universal C) short-fence D) compartmentalized

Q: In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity. A) universal B) severable C) barrier-free D) dividerless

Q: As a result of the global financial crisis several of the large, free-standing investment banking firms chose to become bank holding companies. This means that they will now be regulated by A) the Federal Reserve. B) the FDIC. C) the state banking authorities. D) the Treasury.

Q: Under the Gramm-Leach-Bliley Act the oversight of the securities activities of bank holding companies belongs to A) the SEC. B) the Comptroller of the Currency. C) the U.S. Treasury. D) the Federal Reserve.

Q: Under the Gramm-Leach-Bliley Act states retain regulatory authority over A) bank holding companies. B) securities activities. C) insurance activities. D) bank subsidiaries engaged in securities underwriting.

Q: The legislation overturning the Glass-Steagall Act is A) the McFadden Act. B) the Gramm-Leach-Bliley Act. C) the Garn-St. Germain Act D) the Riegle-Neal Act.

Q: As the banking system in the United States evolves, it is expected thatA) the number and importance of small banks will increase.B) the number and importance of large banks will decrease.C) small banks will grow at the expense of large banks.D) the number and importance of large banks will increase.

Q: Nationwide banking might reduce bank failures due to A) reduced competition. B) reduced lending to small businesses. C) diversification of loan portfolios across state lines. D) elimination of community banks.

Q: One of the concerns of increased bank consolidation is the reduction in community banks which could result in A) less lending to small businesses. B) loss of cultural identity. C) higher interest rates. D) more bank regulation.

Q: Critics of nationwide banking fear A) an elimination of community banks. B) increased lending to small businesses. C) cutthroat competition. D) banks with economies of scale problems.

Q: Bank consolidation will likely result in A) less competition. B) the elimination of community banks. C) increased competition. D) a shift in assets from larger banks to smaller banks.

Q: Experts predict that the future structure of the U.S. banking industry will have A) an increased number of banks. B) as few as ten banks. C) several thousand banks. D) a few hundred banks.

Q: Although it has a population about half that of the United States, Japan has A) many more banks. B) about 25 percent of the number of banks. C) more than 5000 commercial banks. D) fewer than 100 commercial banks.

Q: The legislation that overturned the prohibition on interstate banking is A) the McFadden Act. B) the Gramm-Leach-Bliley Act. C) the Glass-Steagall Act. D) the Riegle-Neal Act.

Q: The business term for economies of scope is A) economies of scale. B) diversification. C) cooperation. D) synergies.

Q: The ability to use one resource to provide different products and services is A) economies of scale. B) economies of scope. C) diversification. D) vertical integration.

Q: Allowing bank branching across state lines gives banks greater ability to coordinate bank operations. This makes it easier for them to receive the benefits of A) the dual banking system. B) economies of scale. C) disintermediation. D) interest-rate irregularities.

Q: Bank holding companies that rival money center banks in size, but are not located in money center cities are A) superregional banks. B) bank clearing houses. C) international banks. D) local banks.

Q: The primary reason for the recent reduction in the number of banks is A) bank failures. B) re-regulation of banking. C) restrictions on interstate branching. D) bank consolidation.

Q: What financial innovations helped banks to get around the bank branching restrictions of the McFadden Act?

Q: Financial innovations that grew out of the bank branching restrictions were A) bank holding companies and automated teller machines. B) bank holding companies and securitization. C) automated teller machines and sweep accounts. D) automated teller machines and bank credit cards.

Q: ATMs were developed because of breakthroughs in technology and as a A) means of avoiding restrictive branching regulations. B) means of avoiding paying interest to corporate customers. C) way of concealing transactions from the SEC. D) increasing the competition from foreign banks.

Q: A financial innovation that developed as a result of banks avoidance of bank branching restrictions was A) money market mutual funds. B) commercial paper. C) junk bonds. D) bank holding companies.

Q: Which of the following is a TRUE statement concerning bank holding companies? A) Bank holding companies own few large banks. B) Bank holding companies have experienced dramatic growth in the past three decades. C) The McFadden Act has prevented bank holding companies from establishing branch banks. D) Bank holding companies can own only banks.

Q: Lack of competition in the United States banking industry can be attributed to A) the fact that competition does not benefit consumers. B) the fact that branching has eliminated competition. C) recent legislation restricting competition. D) nineteenth-century populist sentiment.

Q: The large number of banks in the United States is an indication of A) vigorous competition within the banking industry. B) lack of competition within the banking industry. C) only efficient banks operating within the United States. D) consumer preference for local banks.

Q: The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the A) McFadden Act. B) National Bank Act. C) Glass-Steagall Act. D) Garn-St.Germain Act.

Q: 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) separated the commercial banks and investment banks.

Q: The presence of so many commercial banks in the United States is most likely the result of A) consumers' strong desire for dealing with only local banks. B) adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks. C) prior regulations that restricted the ability of these financial institutions to open branches. D) consumers' preference for state banks.

Q: Why did the interest rate volatility of the 1970s spur financial innovation?

Q: The decline in traditional banking internationally can be attributed to A) increased regulation. B) improved information technology. C) increasing monopoly power of banks over depositors. D) increased protection from competition.

Q: Banks have attempted to maintain adequate profit levels by A) making fewer riskier loans, such as commercial real estate loans. B) pursuing new off-balance-sheet activities. C) increasing reserve deposits at the Fed. D) decreasing capital accounts.

Q: The most important developments that reduced banks' income advantages include A) the increase in off-balance sheet activities. B) the growth of securitization. C) the elimination of Regulation Q ceilings. D) the competition from money market mutual funds.

Q: The most important developments that reduced banks cost advantages include A) the growth of the junk bond market. B) the competition from money market mutual funds. C) the growth of securitization. D) the growth in the commercial paper market.

Q: One factor contributing to the decline in cost advantages that banks once had is the A) decline in the importance of checkable deposits from over 60 percent of banks' liabilities to 2 percent today. B) decline in the importance of savings deposits from over 60 percent of banks' liabilities to under 15 percent today. C) decline in the importance of checkable deposits from over 40 percent of banks' liabilities to 15 percent today. D) decline in the importance of savings deposits from over 40 percent of banks' liabilities to under 20 percent today.

Q: Banks responded to disintermediation by A. supporting the elimination of interest rate regulations, enabling them to better compete for funds. B. opposing the elimination of interest rate regulations, as this would increase their cost of funds. C. demanding that interest rate regulations be imposed on money market mutual funds. D. supporting the elimination of interest rate regulations, as this would reduce their cost of funds.

Q: The experience of disintermediation in the banking industry illustrates that A. more regulation of financial markets may avoid such problems in the future. B. banks are unable to remain competitive with other financial intermediaries. C. consumers no longer desire the services that banks provide. D. markets invent alternatives to costly regulations.

Q: Disintermediation resulted from A. interest rate ceilings combined with inflation-driven increases in interest rates. B. elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits). C. increases in federal income taxes. D. reserve requirements.

Q: Financial innovation has caused A. banks to suffer declines in their cost advantages in acquiring funds, although it has not caused a decline in income advantages. B. banks to suffer a simultaneous decline of cost and income advantages. C. banks to suffer declines in their income advantages in acquiring funds, although it has not caused a decline in cost advantages. D. banks to achieve competitive advantages in both costs and income.

Q: Since 1980 A. banks have decreased risk taking to offset the decline in profits. B. banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities. C. banks have offset the decline in profits from off-balance-sheet activities with increased income from traditional activities. D. bank profits have grown rapidly due to deregulation.

Q: 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 by 2014. B. has shrunk from over 20 percent of total credit advanced in the late 1970s to around 3 percent by 2014. C. has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 25 percent by 2014. D. has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 30 percent by 2014.

Q: Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers A. has shrunk dramatically, from around 40 percent of total credit advanced to around 25 percent by 2014. B. has shrunk dramatically, from around 70 percent of total credit advanced to below 50 percent by 2014. C. has expanded dramatically, from around 50 percent of total credit advanced to above 70 percent by 2014. D. has expanded dramatically, from around 30 percent of total credit advanced to above 50 percent by 2014.

Q: Sweep accounts A. have made reserve requirements nonbinding for many banks. B. sweep funds out of deposit accounts into long-term securities. C. enable banks to avoid paying interest to corporate customers. D. reduce banks' assets.

Q: Sweep accounts which were created to avoid reserve requirements became possible because of a change in A. deposit ceilings. B. technology. C. government rules. D. bank mergers.

Q: In this type of arrangement, any balances above a certain amount in a corporation's checking account at the end of the business day are "removed" and invested in overnight securities that pay the corporation interest. This innovation is referred to as a A. sweep account. B. share draft account. C. removed-repo account. D. stockman account.

Q: In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as "breaking the buck." This means that A. they could no longer afford to redeem shares at the par value of $1. B. they required shareholders to contribute a dollar more in fees each month. C. shareholders were able to redeem shares for more than a $1. D. shares earned more than a dollar in interest.

Q: Money market mutual funds A. function as interest-earning checking accounts. B. are legally deposits. C. are subject to reserve requirements. D. have an interest-rate ceiling.

Q: The process in which people seeking higher yielding securities take their funds out of the banking system thus restricting the amount of funds banks can lend is called A. capital mobility. B. loophole mining. C. disintermediation. D. deposit jumping.

Q: Prior to 1980, the Fed set an interest rate ________, a maximum limit, on the interest rate that could be paid on time deposits. A. floor B. ceiling C. wall D. window

Q: Prior to 2008, the bank's cost of holding reserves equaled A. the interest paid on deposits times the amount of reserves. B. the interest paid on deposits times the amount of deposits. C. the interest earned on loans times the amount of loans. D. the interest earned on loans times the amount on reserves.

Q: Prior to 2008, bank managers looked on reserve requirements A. as a tax on deposits. B. as a subsidy on deposits. C. as a subsidy on loans. D. as a tax on loans.

Q: Loophole mining refers to financial innovation designed to A. hide transactions from the IRS. B. conceal transactions from the SEC. C. get around regulations. D. conceal transactions from the Treasury Department.

Q: According to Edward Kane, because the banking industry is one of the most ________ industries in America, it is an industry in which ________ is especially likely to occur. A. competitive; loophole mining B. competitive; innovation C. regulated; loophole mining D. regulated; innovation

Q: Because of securitization, a new class of residential mortgages offered to borrowers with less-than-stellar credit records developed. These mortgages are known as A. risk-enhanced mortgages. B. subprime mortgages. C. bundled mortgages. D. adjustable-rate mortgages.

Q: Which of the following is NOT part of the shadow banking system? A. the transformer B. the servicer C. the bundler D. the distributor

Q: Securitization is a process of asset transformation that involves a number of different financial institutions working together. These financial institutions are known collectively as the A. transformers. B. amalgamation. C. movers and shakers. D. shadow banking system.

Q: 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 information technology. D. the relaxation of regulatory restrictions on credit card operations.

Q: ________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans. A. Diversification B. Arbitrage C. Computerization D. Securitization

Q: The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known as A. securitization. B. internationalization. C. arbitrage. D. program trading.

Q: The development of money market mutual funds contributed to the growth of ________ since the money market mutual funds need to hold liquid, high-quality, short-terms assets. A. the commercial paper market B. the municipal bond market C. the corporate bond market D. the junk bond market

Q: One factor contributing to the rapid growth of the commercial paper market since 1970 is A. the fact that commercial paper has no default risk. B. improved information technology making it easier to screen credit risks. C. government regulation. D. FDIC insurance for commercial paper.

Q: In 1977, he 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 Icahn

Q: Newly-issued 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.

Q: 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 that have had their credit ratings fall below Baa. B. junk bonds refer to previously issued bonds that 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.

Q: A disadvantage of virtual banks (clicks) is that A. their hours are more limited than physical banks. B. they are less convenient than physical banks. C. they are more costly to operate than physical banks. D. customers worry about the security of on-line transactions.

Q: Bank customers perceive Internet-only banks as being A. more secure than physical bank branches. B. a better method for the purchase of long-term savings products. C. better at keeping customer information private. D. prone to many more technical problems.

Q: The declining cost of computer technology has made ________ a reality. A. brick and mortar banking B. commercial banking C. virtual banking D. investment banking

Q: Automated teller machines A. are more costly to use than human tellers, so banks discourage their use by charging more for use of ATMs. B. cost about the same to use as human tellers in banks, so banks discourage their use by charging more for use of ATMs. C. cost less than human tellers, so banks may encourage their use by charging less for using ATMs. D. cost nothing to use, so banks provide their services free of charge.

Q: A debit card differs from a credit card in thatA. a debit card is a loan while for a credit card purchase, payment is made immediately.B. a debit card is a long-term loan while a credit card is a short-term loan.C. a credit card is a loan while for a debit card purchase, payment is made immediately.D. a credit card is a long-term loan while a debit card is a short-term loan.

Q: The entry of 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.

Q: A firm issuing credit cards earns income from A. loans it makes to credit card holders. B. subsidies from the local governments. C. payments made to it by manufacturers of the products sold in stores on credit card purchases. D. sales of the card in foreign countries.

Q: Credit cards date back to A. prior to the second World War. B. just after the second World War. C. the early 1950s. D. the late 1950s.