Deck 14: The Commercial Banking Industry: Structure, Products, and Management

Question 1

Most commercial banks in the U.S. are charted by the federal government rather than by the states.

Answer 1

False

Question 2

All national banks must be insured by the Federal Deposit Insurance Corporation but have a choice as to whether or not to join the Federal Reserve System.

Answer 2

False

Question 3

Bank holding companies control over 90 percent of U.S. bank assets.

Answer 3

False

Question 4

The failure rate in the U.S. banking industry is between one and two percent of the industry population over most of the industry's history.

Question 5

Funds held by a bank in the form of cash and deposits in other banks are known as secondary reserves.

Question 6

In recent years the proportion of bank loans with floating as opposed to fixed interest rates declined, while the average maturity of loans (particularly commercial loans) rose.

Question 7

Commercial banks are the largest source of construction finance in the U.S.

Question 8

Transaction accounts include negotiable orders of withdrawal and automatic transfer services.

Question 9

Per dollar of deposits, bank deposit costs have actually declined.

Question 10

Recent regulatory changes in the banking community have made banking more stable.

Question 11

Today bankers are willing to accept greater risk in their operations.

Question 12

Approximately 98 percent of all commercial bank deposits are covered by the Federal Deposit Insurance Corporation.

Question 13

U.S. Treasury securities are attractive to banks because of their high yields compared to most other securities.

Question 14

Investment banks accept deposits, but make only commercial loans.

Question 15

Banks can create money from excess reserves.

Question 16

Written loan policies help keep a bank safe but are not used to help train new loan officers.

Question 17

Bank deposits have recently shifted toward less expensive, less market-responsive deposits and away from market-linked deposit accounts.

Question 18

Under the terms of the Maastricht Treaty the European Community (EC) is supposed to have a single currency and central bank.

Question 19

Collateralized mortgage obligations allow banks to invest in a marketable, diversified pool of mortgage loans.

Question 20

Over the years, the number of U.S. banks has declined while the number of bank branches has actually increased.

Question 21

While commercial lending is growing rapidly, individual homeowners are finding that home equity loans and credit cards are harder to get, due to a lack of competitive pressures.

Question 22

Between 1984 and 2005 the largest banks, with more than $25 billion in assets, saw their industry market share grow from 40% to more than 76%.

Question 23

Between 1984 and 2005 the US banking industry's assets accounted for by the smallest banks, each with less than $1 billion in assets, fell from 23% to 12%.

Question 24

There are approximately ____ commercial banking institutions headquartered in the United States.

A) 8,500
B) 12,500
C) 15,500
D) 20,500
E) 25,500

Question 25

Approximately ____ percent of all U.S. banks are branch banking organizations.

A) 10
B) 20
C) 80
D) 70
E) 30

Question 26

Customers have not readily accepted POS terminals because:

A) Of the loss of checking account float
B) They are not readily available
C) They are expensive to use
D) All of the above
E) None of the above

Question 27

The NAFTA Agreement provides banks in North America with national treatment which m

A) U.S. and Canadian banks cannot branch into Mexico
B) Foreign investment is subject to domestic laws
C) Regulations of the home country are dominant
D) Foreign banks operate under same rules as domestic banks

Question 28

The primary reasons why the American banking industry has experienced an extremely low failure rate are that:

A) The U.S. banking market is the least regulated and most entrepreneurial
B) All American depositors are insured
C) Extensive regulation and conservative management
D) Any bank in danger of failure is taken over by the Federal Reserve
E) None of the above, the statement is untrue

Question 29

Banks with over $1T in assets are

A) Citigroup Inc. and Bank of America Corp
B) J. P. Morgan Chase & Co. and Bank of America Corp
C) Citigroup Inc. and Wells Fargo & Co
D) A and B above
E) None of the above

Question 30

Between 1984 and 2005 the largest banks, with more than $25 billion in assets, raised their industry market share from around 40% to more than an

A) 51%
B) 66%
C) 76%
D) 69%
E) None of the above

Question 31

Between 1984 and 2005 the US banking industry's assets accounted for by the smallest banks, each with less than $1 billion in assets, fell from 23% to

A) 5%
B) 8%
C) 9%
D) 12%
E) 15%

Question 32

In what ways are commercial banks of special importance to the functioning of the money and capital markets and the economy?

Question 33

Four dominant movements in the structure of U.S. banking in recent years have been:
a. The spread of branch banking
b. The growth of financial holding companies
c. The rise of interstate banking
d. The convergence of bank and nonbank firms
Explain what has happened in these four areas and why.

Question 34

What is consolidation in banking? What appears to be driving this particular trend in the banking industry?

Question 35

How numerous are bank failures and what seem to be their most important causes?

Question 36

What changes are underway in bank technology and why?

Question 37

What are the principal uses of commercial bank funds? Major sources of funds?

Question 38

What new sources and uses of funds have been developed in the banking industry in recent years?

Question 39

Explain how the securitization of loans helps a bank raise new funds.

Question 40

What benefits do standby credit letters provide for banks and their customers?

Question 41

What are a bank's principal revenue and expense items?

Question 42

What is net interest margin? Noninterest margin? Why are they important to banks?

Question 43

How are banks able to create money?

Question 44

Is the ability of banks to create money of significance for the economy and the creation of new jobs?

Question 45

What are the dangers of money creation by banks?

Question 46

How do banks destroy money?

Question 47

Why is money creation and destruction of importance in the pursuit of public policy?

Question 48

*Expressed on a taxable-equivalent basis. Income taxes are adjusted accordingly.
$\begin{array}{|l|r|}\hline \text {Net Operating Income (\$ 504,000-\$ 321,000)= } & \$ 183,000 \\\hline\text { Less: Applicable Income Taxes} & -50,000 \\\hline \text {Net Income after Taxes and Before Extraordinary }& \$ 133,000 \\\text {Charges }\\\hline\text { Less: Extraordinary Items (including securities gains} \\\text {and losses)} & 0 \\\hline \text {Net Income After Taxes }& \$ 133,000 \\\hline\end{array}$

The Bank's Operating Expenses include

$\begin{array}{|l|r|}\hline\text { Salaries and Employee Benefits} &\$ 80,000\\\hline\text { Interest on Deposits }& 170,000 \\\hline\text { Interest on Nondeposit Borrowings} & 30,000 \\\hline\text { Occupancy Costs} & 11,000 \\\hline\text { Provisions for Loan Losses }& 22,000 \\\hline\text { Misc. Expenses} & 8,000 \\\hline \text { Total Operating Expenses } & \$ 321,000 \\\hline\end{array}$

The Bank's Operating Income is:

$\begin{array}{|l|r|}\hline\text { Interest on Loans }& \$ 320,000 \\\hline\text { Interest from U.S. Treasury Securities }& 75,000 \\\hline\text { Interest from Municipal Securities*} & 86,000 \\\hline \text {Service Charges on Deposits} & 10,000 \\\hline \text {Misc. Operating Revenues }& 13,000 \\\hline \text {Total Operating Income } & \$ 504,000 \\\hline\end{array}$

Given the following information on the revenues and expenses of First National Bank, determine the bank's net income after taxes for the year just concluded.