Deck 2: Financial Services: Depository Institutions

Question 1

Large banks tend to make business decisions based on personal knowledge of customer's creditworthiness and business conditions in the local communities.

Answer 1

False

Question 2

Prior to the financial crisis of 2008, the return on equity for small community banks had been larger than for large money center banks.

Answer 2

False

Question 3

A major difference between banks and other nonfinancial firms is the low amount of leverage in commercial banks.

Answer 3

False

Question 4

All banks with assets greater than $10 billion are considered money center banks.

Question 5

By converting to a bank holding company, an investment bank gains access to Federal Reserve lending facilities.

Question 6

Retail nontransaction savings and time deposits comprise the largest portion of deposits for commercial banks.

Question 7

Lehman Brothers failed during the recent financial crisis despite having access to the low cost sources of funds offered by the Federal Reserve.

Question 8

Most of the change in the number of commercial banks since 1990 has been due to bank failures.

Question 9

Money center banks rely more heavily on wholesale and borrowed funds as sources of liability funding than do community banks.

Question 10

The growth of the commercial paper market has led to a decline in the demand for business loans from commercial banks.

Question 11

In terms of total assets, commercial banks with under $1 billion in assets have become a larger segment of the industry in recent years.

Question 12

Money market mutual funds have attracted large amounts of retail savings and retail time deposits from commercial banks in recent years.

Question 13

In recent years, the number of commercial banks in the U.S.has been increasing.

Question 14

The securitization of mortgages involves the pooling of mortgage loans for sale in the financial markets.

Question 15

Because of the large amount of equity on a typical commercial bank balance sheet, credit risk is not a significant risk to bank managers.

Question 16

Large money center banks finance most of their activities by using retail consumer deposits as the primary source of funds.

Question 17

Since 1990, commercial banks decreased the proportion of business loans and increased the proportion of mortgages in their portfolios.

Question 18

Currently, federal standards do not allow investment banks to convert to a bank holding company structure.

Question 19

Large money center banks are often primary dealers in the U.S.Treasury markets.

Question 20

Commercial banks have had limited power to underwrite corporate securities since 1987.

Question 21

The use of off-balance-sheet activities and instruments will always reduce the risk to a bank.

Question 22

The Riegle-Neal Act of 1994 removed many of the restriction on interstate banking that were originally imposed by the 1933 Glass Steagall Act.

Question 23

The primary objective of the 1927 McFadden Act was to restrict interstate bank branching.

Question 24

The dual banking system in the U.S.refers to the operation and establishment of large regional as well as small community banks.

Question 25

Although growing, the notional value of bank OBS activities remained less than the value of on-balance-sheet activities as of mod-2015.

Question 26

The Federal Reserve System has regulatory supervision over all holding company banks whether they include national- or state-chartered banks.

Question 27

The movement of an off-balance-sheet asset or liability to an on-balance-sheet item is dependent on the occurrence of a contingent event.

Question 28

Savings banks and savings associations are savings institutions; with savings banks serving as the primary providers of residential mortgage loans, and savings associations concentrating on commercial loans and corporate bonds as well as mortgage assets.

Question 29

The maturity structure of the assets of commercial banks tends to be shorter than the maturity structure of liabilities.

Question 30

Small banks make proportionately larger amounts of real estate loans than large banks.

Question 31

In general, the banking industry performed at higher levels of profitability in the decade of the 1990s than the decade of the 1980s.

Question 32

As of 2015, the number of nationally chartered banks was greater than the number of state chartered banks.

Question 33

Negotiable certificates of deposits are differentiated from fixed time deposits by their negotiability and active trading in the secondary markets.

Question 34

The growth in off-balance-sheet activities during the decade of the 1990s was due, in large part, to the use of derivative contracts.

Question 35

Commercial banks in the U.S.often are subject to more than one of four regulatory agencies.

Question 36

All commercial banks must be members of the Federal Reserve System.

Question 37

The primary objective of the 1933 Glass-Steagall Act was to prevent commercial banks from competing directly with commercial insurance companies.

Question 38

The use of off-balance-sheet activities allows banks to practice regulatory tax-avoidance.

Question 39

The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 and the Garn-St.Germain Depository Institutions Act (DIA) of 1982 were the initial laws that began deregulation of the commercial banking industry.

Question 40

The Financial Services Modernization Act of 1999 allows commercial banking activities and securities underwriting to operate simultaneously under the same ownership structure.

Question 41

The number of savings associations has been declining since 1990.

Question 42

The primary reason for the decline of the S&L industry was the passage of legislation that gave commercial lending powers to the SL industry.

Question 43

A significant disadvantage for credit unions in competing with commercial banks is the severe restriction in the variety of products and services that they can offer.

Question 44

Unlike commercial banks, credit unions may only be chartered in the state in which they operate.

Question 45

The primary objective of the Reigle-Neal Act (1994) was to ease branching across state lines by banks.

Question 46

According to the American Bankers Association, the tax-exempt status of credit unions is the equivalent of a $1 billion per-year subsidy to the industry.

Question 47

Commercial banks that have invested in Internet and mobile banking services and products have significantly outperformed those banks that have chosen to avoid these markets.

Question 48

Savings institutions enjoyed record profitability during the late 1990s and early 2000s.

Question 49

As with other DIs, profits or return on assets (ROA) is the primary goal of credit union management.

Question 50

A significant advantage for credit unions in competing with commercial banks is the tax-exempt status that has been granted to credit unions.

Question 51

Savings associations and savings banks are chartered and regulated by the Federal Reserve Bank.

Question 52

Regulator forbearance is a policy of allowing economically insolvent FIs to continue in operation.

Question 53

Bigger banks tend to fund themselves in national markets and lend to larger corporations.

Question 54

Savings associations and savings banks both are insured by insurance funds that are managed by the FDIC.

Question 55

Compared to the average commercial bank, credit unions tend to have higher overhead expenses per dollar of assets.

Question 56

The credit union industry avoided much of the financial distress of the 1980s because of the short maturity and relatively lower credit risk of their assets.

Question 57

The savings association industry continues to be the primary lender of residential mortgages.

Question 58

As a percent of total assets, savings institutions hold lower amounts of cash and U.S.Treasury securities than commercial banks.

Question 59

Credit unions operate on a common bond principle which emphasizes the depository and lending needs of credit union members.

Question 60

All credit unions are nationally chartered and regulated by the National Credit Union Administration.

Question 61

Money center banks are considered to be any bank which

A)has corporate headquarters in either New York City, Chicago, San Francisco, Atlanta, Dallas, or Charlotte.
B)is a net supplier of funds on the interbank market.
C)relies almost entirely on nondeposit and borrowed funds as sources of liabilities.
D)does not participate in foreign currency markets.
E)is not characterized by any of the above.

Question 62

Which of the following FIs does not provide a business lending function?

A)Depository institutions.
B)Insurance companies.
C)Finance companies.
D)Pension funds.
E)Mutual funds.

Question 63

State-chartered commercial banks may be regulated by

A)the FDIC only.
B)the FDIC and the Federal Reserve System.
C)the Federal Reserve System only.
D)the FDIC, the Federal Reserve System, and the Comptroller of the Currency.
E)the FDIC, the Federal Reserve System, the Comptroller of the Currency, and state banking commissions.

Question 64

National-chartered commercial banks are most likely to be regulated by

A)the FDIC only.
B)the FDIC and the Federal Reserve System.
C)the Federal Reserve System only.
D)the FDIC, the Federal Reserve System, and the Comptroller of the Currency.
E)the Federal Reserve System and the Comptroller of the Currency.

Question 65

Which of the following FIs does not currently provide a payment function for their customers?

A)Depository institutions.
B)Insurance companies.
C)Finance companies.
D)Pension funds.
E)Mutual funds.

Question 66

A consumer lending function is performed by each of the following FIs EXCEPT

A)mutual funds.
B)finance companies.
C)pension funds.
D)depository institutions.
E)insurance companies.

Question 67

Trust services department of a bank includes estate assets and pension fund assets.

Question 68

A large number of the savings institution failures during the in the 1980s was a result of

A)interest rate risk exposure.
B)excessively risky investments.
C)fraudulent behavior on the part of managers.
D)All of the options.
E)excessively risky investments and fraudulent behavior on the part of managers.

Question 69

The largest liability on U.S.commercial banks' combined balance sheet as of June 30.2015 was

A)investment securities.
B)non-transaction accounts.
C)transaction accounts.
D)borrowings.
E)cash.

Question 70

Net interest margin is defined as the interest income plus interest expense multiplied by earning assets.

Question 71

The largest asset class on U.S.commercial banks' combined balance sheet as of June 30, 2015 was

A)investment securities.
B)commercial and industrial loans.
C)real estate loans.
D)cash.
E)deposits.

Question 72

As of 2015, commercial banks with over $10 billion in assets constituted approximately ____ percent of the industry assets and numbered approximately _____.

A)53; 310
B)63; 65
C)73; 525
D)83; 95
E)93; 440

Question 73

The largest liability on FDIC-insured savings institutions' balance sheet as of mid-2015 was

A)commercial paper.
B)small time and savings deposits.
C)repurchase agreements.
D)FHLBB advances.
E)cash.

Question 74

The future viability of the savings association industry in traditional mortgage lending has been questioned because of

A)securitization practices of other FIs.
B)the additional risk exposure of long-term mortgage lending.
C)intense competition from other FIs.
D)the liquidity risks associated with mortgage lending.
E)All of the options.

Question 75

By late 2015, the number of branches of existing commercial banks in the U.S.approximated ________, which was a(an) _________ from 1985.

A)96,000; increase
B)43,8000; increase
C)68,200; decrease
D)103,000; decrease
E)82,500; increase

Question 76

The strong performance of commercial banks during the decade before 2007 was due to

A)the stability of interest rates during this period.
B)the ability of banks to shift credit risk from their balance sheets to financial markets.
C)the contraction of the number of banks and thrifts.
D)the growth in the number of thrifts and credit unions.
E)All of the options.

Question 77

A spread is defined as the difference between lending and deposit rates.

Question 78

Nonbank banks are firms that undertake many of the activities of a commercial bank without meeting the legal definition of a bank.

Question 79

The largest asset class on FDIC-insured savings institutions' balance sheet as of mid-2015 was

A)mortgage loans.
B)cash.
C)investment securities.
D)deposits.
E)non-mortgage Loans.

Question 80

One of the primary reasons that investment banks were allowed to convert to bank holding companies during the recent financial crisis was recognition that

A)their operating activities were too risky and they needed the cushion of bank deposits to alleviate funding risks.
B)the industry had acquired too much capital during the previous decade.
C)bank holding companies needed the ability to underwrite new issues of corporate securities.
D)it was the only way an investment bank could qualify for federal bailout funds.
E)the Federal Reserve was unable to purchase troubled assets from investment banks, but they could from bank holding companies.