Deck 12: Depository Financial Institutions

Question 1

The assets of a bank are its __________ of funds

A) uses
B) sources
C) reserves
D) excess

Answer 1

A

Question 2

With overnight repos, __________ earn interest while sacrificing virtually no liquidity.

A) corporations
B) banks
C) governments
D) consumers

Answer 2

A

Question 3

Regulation Q was responsible for the drop in importance of __________ as a source of bank funds.

A) time deposits
B) transactions deposits
C) savings deposits
D) equity

Answer 3

B

Question 4

Which of these qualifies as a "miscellaneous liability" of a bank?

A) repurchase agreements
B) negotiable CDs
C) transactions deposits
D) savings deposits

Question 5

Which of these does not qualify as a "miscellaneous liability" of a bank?

A) borrowings from the Federal Reserve
B) repurchase agreements
C) borrowing from foreign branches
D) large-sized negotiable CDs

Question 6

The decline in the relative importance of transactions deposits as a source of bank funds between 1970 and 1997 can be attributed to

A) the general increase in interest rates on other types of assets.
B) movements of transactions deposits to thrifts.
C) the extension of unlimited check writing privileges to many non-transactions deposits.
D) the increase in large-sized negotiable CDs as sources of bank funds.

Question 7

A package of nontraded financial instruments can be transformed into a traded financial instrument through the process of

A) collateralization.
B) repurchasing.
C) securitization.
D) underwriting.

Question 8

As a source of bank funds, __________ has fallen by nearly two-thirds in relative importance since 1970.

A) time deposits
B) transactions deposits
C) savings deposits
D) equity

Question 9

Non-transactions deposits are different from transactions deposits in that

A) transactions deposits have unlimited check writing privileges while non-transactions deposits do not.
B) transactions deposits have limited check writing privileges while non-transactions deposits have unlimited check writing privileges.
C) transactions deposits have no check writing privileges while non-transactions deposits do.
D) transactions deposits have no check writing privileges while non-transactions deposits have limited check writing privileges.

Question 10

A bank with some monopoly power may be able to __________ the rate on its deposits and so __________ its net interest income.

A) lower, lower
B) lower, raise
C) raise, lower
D) raise, raise

Question 11

Since 1970 there has been a clear increase in the proportion of the banking industry assets made up of

A) mortgage loans.
B) state and local government securities.
C) cash.
D) business loans.

Question 12

A bank's net interest income is

A) the same as net operating income.
B) the difference between interest on loans and interest expense.
C) the same as net operating income before expenses.
D) the difference between total interest income and interest expense.

Question 13

Banks are prohibited from holding __________ in their portfolio of assets.

A) commercial paper
B) local government securities
C) farm mortgages
D) corporate stock

Question 14

A bank's net interest margin can be adversely affected by all of the following except

A) credit risk.
B) interest rate risk.
C) leverage risk.
D) stock market risk.

Question 15

A bank's net interest income is roughly analogous to a manufacturing firm's

A) total reserves.
B) gross profit.
C) total cost.
D) gross interest income.

Question 16

Since 1970 there has been a huge increase in the relative importance of __________ as a source of bank funds.

A) negotiable CDs
B) time deposits
C) foreign deposits
D) transactions deposits

Question 17

Depository institutions are the most important source of credit to

A) mutual funds.
B) large businesses.
C) small businesses.
D) state governments.

Question 18

What type of loan led the wave of bank lending in the 1970s and 1980s?

A) consumer loan
B) commercial mortgage
C) loans to state and local governments
D) commercial paper

Question 19

With overnight repos, __________ gain access to short-term funds to lend.

A) corporations
B) banks
C) governments
D) consumers

Question 20

The largest type of depository institution in the United States is

A) savings-and-loans.
B) commercial banks.
C) credit unions.
D) mutual funds.

Question 21

A forward looking measure of a bank's credit risk is

A) the ratio of loan charge-offs as a percent of total loans.
B) the ratio of non-performing loans to total loans.
C) ratio of non-performing loans to total assets.
D) the ratio of equity to total loans.

Question 22

Because banks are act as dealers in financial instruments such as bonds, foreign currency and derivatives, they are exposed to

A) credit risk.
B) liquidity risk.
C) trading risk.
D) interest risk.

Question 23

In 2007 ROA for banks in the United States stood at a little under __________ percent.

A) one
B) five
C) eight
D) twenty

Question 24

The ratio of equity to total assets is a measure of a bank's __________ risk.

A) credit
B) leverage
C) interest rate
D) liquidity

Question 25

A bank that improves its service may be able to __________ the rate on its loans and so __________ its net interest income.

A) lower; lower
B) lower; raise
C) raise; lower
D) raise; raise

Question 26

A bank's net interest margin is

A) total interest income minus total interest expense.
B) net interest income as a percent of bank equity.
C) net interest income as a percent of total bank assets.
D) net interest as a percent of total income.

Question 27

For banks, net interest income is becoming a __________ proportion of their total operating income as the banks are __________ nontraditional sources of revenue.

A) rising; shifting into
B) rising; pulling out of
C) falling; shifting into
D) falling; pulling out of

Question 28

The GAP ratio is a measure of __________ risk.

A) credit
B) leverage
C) interest rate
D) liquidity

Question 29

The one-year re-pricing GAP is a measure of __________ risk.

A) credit
B) leverage
C) interest rate
D) liquidity

Question 30

For S&Ls in the early 1980s the __________ cost of short-term deposits turned their net interest margin __________.

A) increasing; positive
B) increasing; negative
C) decreasing; positive
D) decreasing; negative

Question 31

Because transactions deposits can be withdrawn at any time, banks are exposed to

A) credit risk.
B) liquidity risk.
C) trading risk.
D) interest risk.

Question 32

Because banking is very __________-intensive, a bank generally becomes successful if it can __________ the ratio of salary and wages to total assets.

A) capital; raise
B) capital; lower
C) labor; raise
D) labor; lower

Question 33

A bank can lower its leverage risk by

A) issuing more stock.
B) buying more securities and making fewer loans.
C) more closely matching the average maturity of its assets and liabilities.
D) taking in fewer deposits and relying more in miscellaneous liabilities to raise funds.

Question 34

A 25-year floating rate mortgage has its rate adjusted twice a year. This gives it a re-pricing maturity of

A) six months.
B) twenty-four years and six months.
C) twenty-five years.
D) fifty years.

Question 35

The ratio of cash and securities to total assets is a traditional measure of __________ risk.

A) credit
B) leverage
C) interest rate
D) liquidity

Question 36

Banks can lower their liquidity risk by having more __________ on their balance sheet.

A) government securities
B) transactions deposits
C) loans
D) savings deposits

Question 37

If a security held by a bank falls in market value, that loss

A) must be recorded by the bank, no matter what.
B) will be recorded by the bank only if the security is of the type they hold to maturity.
C) will be recorded by the bank only if the security is of the type they often sell before maturity.
D) will be recorded by the bank only if it sells the security.

Question 38

The difference between a bank's assets that will be re-priced in less than one year and the bank's liabilities that will be re-priced in less than one year expressed as a percent of total assets is

A) a measure of liquidity risk.
B) called the GAP ratio.
C) earnings at risk ratio.
D) a measure of credit risk.

Question 39

The ratio of non-performing loans to total loans is a measure of a bank's __________ risk.

A) credit
B) leverage
C) interest rate
D) liquidity

Question 40

The leverage ratio for the U.S. banking system in 2007 was about __________ percent.

A) two
B) five
C) ten
D) eighteen

Question 41

From 1980 to the mid 1990s the number of independent banking organizations in the United States

A) rose about 10%.
B) stayed roughly constant.
C) fell about 10%.
D) fell about 35%.

Question 42

Suppose that Samsung, a South Korean corporation, issues bonds denominated in dollars. These are called

A) foreign exchange bonds.
B) Eurobonds.
C) shell bonds.
D) IBFs.

Question 43

The Glass-Steagall Act prevented commercial banks from

A) opening branches in other states unless the bank is part of a bank holding company.
B) getting into investment banking.
C) selling shares in themselves in the open market.
D) issuing commercial paper.

Question 44

In 1964 a certain foreign bank opened a branch in the United States. That branch

A) has always been allowed to underwrite securities.
B) has never been allowed to underwrite securities.
C) gained the right to underwrite securities by the International Banking Act of 1978.
D) lost the right to underwrite securities by the International Banking Act of 1978.

Question 45

In a typical year, about __________ of bank business loans in the United States are made by foreign-owned banks through their branches here.

A) ten percent
B) twenty percent
C) one-third
D) one-half

Question 46

The Bahamas and Cayman Islands are known for their warm, sandy beaches and their

A) Edge Act corporations.
B) shell banks.
C) section 20 affiliates.
D) high taxation.

Question 47

Conventional wisdom holds that there are __________ in banking.

A) economies of scope but not scale
B) economies of scale but not scope
C) economies of both scope and scale
D) neither scope nor scale economies

Question 48

The McFadden Act was passed to prevent

A) banks from competing on the basis of deposit rates.
B) foreign banks from operating in the United States.
C) large nationwide banks from forming.
D) banks from holding corporate stock as an asset.

Question 49

A few U.S. commercial banks are allowed to have "section 20 affiliates" that can

A) underwrite corporate debt and equity.
B) operate in foreign markets.
C) branch nationwide regardless of state laws.
D) own majority shares in other banks.

Question 50

The trend in the mortgage-backed securities (MBS)market in the early 2000s was toward more

A) subprime mortgages.
B) prime mortgages
C) bubble mortgages.
D) low-risk mortgages

Question 51

Economies of scope exist when a business becomes more efficient by

A) offering fewer services.
B) offering more services.
C) becoming larger.
D) becoming smaller.

Question 52

Empirical evidence suggests that there are economics of __________ in banking for all bank sizes.

A) scale and scope
B) scale but not scope
C) scope but not scale
D) neither scale nor scope

Question 53

Since 1960 U.S. banks have __________ the proportion of their total lending which is done overseas.

A) reduced to near zero
B) scaled back
C) held nearly constant
D) increased

Question 54

A major loophole was punched through the McFadden Act as banks

A) formed bank holding companies.
B) developed negotiable certificates of deposit.
C) began paying interest on checkable deposits.
D) converted themselves into savings-and-loans.

Question 55

"Reciprocity pacts" started springing up in the

A) 1920s.
B) 1950s.
C) 1960s.
D) 1980s.

Question 56

IBFs are designed to compete with

A) Eurobonds.
B) off-balance-sheet activities.
C) shell branches.
D) letters of credit.

Question 57

A stand-by letter of credit issued by a bank is __________ of that bank.

A) an asset
B) a liability
C) technically both an asset and a liability
D) neither an asset nor a liability

Question 58

The Riegel-Neal Act of 1994 made reciprocity pacts

A) legal.
B) illegal.
C) irrelevant.
D) temporary.

Question 59

Which of the following is not a thrift?

A) a savings-and-loan
B) a commercial bank
C) a credit union
D) a mutual savings bank

Question 60

Eurobonds are bonds that are

A) sold outside the borrowing corporation's home country.
B) sold in Europe.
C) money market instruments.
D) almost always underwritten by a single bank.

Question 61

Credit unions made it through the 1980s in relatively good shape because

A) most of their depositors were individuals.
B) most of their depositors were businesses.
C) they held many mortgages among their assets.
D) they held no mortgages among their assets.

Question 62

Which type of thrift institution was relatively unaffected by the traumas of deregulation in the 1980s?

A) credit unions
B) savings-and-loans
C) mutual savings banks
D) IBFs