Deck 21: Product and Geographic Expansion

Question 1

The U.S. Financial Services Modernization Act repealed the Glass-Steagall barriers between commercial banking and investment banking.

Answer 1

True

Question 2

In recent years, commercial banks have attempted to expand their activities into nonbanking areas, but securities firms have not been interested in expanding into commercial banking.

Answer 2

False

Question 3

Banks increasingly have been susceptible to nonbank competition on both sides of the balance sheet.

Answer 3

True

Question 4

In late 2012, shadow banking activities came under OSFI'S regulation.

Question 5

The conflict of interest that occurs when a bank suggests the issuance of capital market debt for the purpose of reducing bank loans under conditions of deteriorating or questionable firm financial health is commonly referred to as bankruptcy risk transference.

Question 6

Chinese walls are barriers within organizations that limit the flow of confidential information between departments of business areas.

Question 7

The process of using lending power to coerce a loan customer to use products sold by a securities affiliate is called information transfer.

Question 8

The commercial paper market is an example of nonbank competition on the asset side of the balance sheet that has become increasingly intense for banks.

Question 9

Economies of scope opportunities seem to be available in the financial services industry, but economies of scale opportunities do not seem to exist.

Question 10

In the U.S. the Glass-Steagall Act limited the integration of commercial banking and securities activities.

Question 11

The Glass-Steagall Act in the U.S. allowed commercial banks to underwrite new issues of Treasury securities.

Question 12

The specialized nature in which credit intermediation is performed by shadow banks makes the process less cost efficient than if done by traditional banks.

Question 13

Information transfer refers to the conflict of interest that occurs when banks have the power to sell nonbank products.

Question 14

Research suggests that the total risk exposure of a financial services organization could actually increase if there is excessive product expansion in some nonbank lines.

Question 15

A fully integrated universal bank allows a bank to engage in securities activities only through a separately owned securities affiliate.

Question 16

The safety and soundness of a holding company that has both a bank subsidiary and a securities affiliate can be enhanced over time by the product diversification benefits of a more stable earnings stream caused by having well-diversified financial services.

Question 17

In the banking environment, economic and legal firewalls often have been designed to separate the risks of investment bank affiliate activities from commercial banks.

Question 18

Historically, commercial banks have been prohibited from acting as an underwriter of insurance products.

Question 19

Of the ten largest financial service firms in the world, none are headquartered in Canada.

Question 20

A universal FI is an FI that has expanded its operations across country lines.

Question 21

The European Community Second Banking Directive has aided the international competitive position of European banks by creating a single banking market in Europe.

Question 22

The NAFTA agreement and other agreements reached through the help of the World Trade Organization should reduce some of the restrictions that have faced Canadian banks in attempts to enter emerging market countries.

Question 23

Success in a merger from revenue enhancement is more likely if the markets into which expansion occurs are less than fully competitive.

Question 24

The effect of the International Banking Act of 1978 was to accelerate the expansion of foreign bank activities in the U.S. primarily because of their access to the Federal Reserve's discount window, Fedwire, and FDIC insurance.

Question 25

The purpose of the Foreign Bank Supervision Enhancement Act of 1991 was to extend federal authority over foreign banking organizations in the U.S.

Question 26

The existence of the "too big to fail" doctrine may encourage large banks to take excessive risks in securities underwriting activities.

Question 27

Banks typically have faced few restrictions in expanding their businesses, while securities firms and insurance companies have faced complex rules regarding expansion.

Question 28

Research on bank mergers for the decade of the 1990s found that improved performance of the merged bank occurred because of both revenue enhancements and cost reduction.

Question 29

Expansion on a de novo basis implies the establishment and construction of a new office in a location where previously no office existed.

Question 30

The International Banking Act of 1978 attempted to provide a level playing field for domestic and foreign banks in U.S. banking markets.

Question 31

The emergence of the Euro as a uniform medium of exchange is expected to cause the importance of the dollar to increase among major European countries.

Question 32

Canadian financial institutions have expanded abroad in recent years, although their foreign counterparts have been prohibited from expanding into Canada.

Question 33

Merger premiums tend to be higher for target banks in competitive environments, but for which the target bank's loan portfolios are of high quality.

Question 34

In order to achieve a more stable revenue stream in a merger, the asset and liability portfolios of the two institutions should have similar credit, interest rate, and liquidity characteristics.

Question 35

The use of the Herfindahl-Hirschman Index (HHI) to measure market concentration is encouraged for banks because of the ease of separating banks from thrifts and insurance companies.

Question 36

The USA Patriot Act of 2001 prohibits U.S. banks from providing banking services to foreign banks.

Question 37

Large size is an important characteristic in international banking because it gives a bank a greater ability to diversify across borders.

Question 38

Increased competition for securities underwritings should reduce the spreads and thus lower the price paid for the securities by the investing public.

Question 39

A Canadian bank subsidiary in the U.S. is restricted to using only funds borrowed on the wholesale and money markets.

Question 40

The required monitoring and surveillance efforts of several regulatory bodies in the case of large holding companies with multi-subsidiaries may actually decrease the efficiency of regulatory oversight.

Question 41

One result of the FBSEA was the increase in the regulatory burden of foreign banks in the U.S.

Question 42

International expansion by a commercial bank should provide increased access to funding sources.

Question 43

The economic value of narrowly defined bank franchises has declined because

A)product line restrictions inhibit the ability of an FI to optimize the set of financial services it can offer.
B)product restrictions limit the ability of FI managers to adjust flexibly to shifts in the demand for financial products.
C)product restrictions limit the ability of FI managers to adjust flexibly to shifts in costs due to technology and related innovations.
D)All of these.
E)product line restrictions inhibit the ability of an FI to optimize the set of financial services it can offer, and limit the ability of FI managers to adjust flexibly to shifts in the demand for financial products.

Question 44

despite a sovereign debt problem that plagued Greece in 2010, by 2012 Canadian banks had increased their exposure to Greek debt.

Question 45

Offices of foreign banks may be examined by the Federal Reserve under the FBSEA of 1991.

Question 46

The U.S. Financial Services Modernization Act allowed for

A)the creation of financial services holding companies.
B)the replacement of all previous regulatory agencies with one super regulator.
C)the placement of some securities underwriting in bank subsidiaries.
D)All of these.
E)the creation of financial services holding companies, and the placement of some securities underwriting in bank subsidiaries.

Question 47

The U.S. Financial Services Modernization Act of 1999

A)stipulates that a financial services holding company that engages in commercial banking, investment banking, and insurance activities will be functionally regulated.
B)allows bank holding companies to open insurance underwriting affiliates.
C)requires banks that underwrite and sell insurance to operate under the same set of state regulations as insurance companies.
D)All of these.
E)stipulates that a financial services holding company that engages in commercial banking, investment banking, and insurance activities will be functionally regulated, and allows bank holding companies to open insurance underwriting affiliates.

Question 48

Identify the action taken by OCC and the U.S. Federal Reserve in 1997, to expand the permitted activities of bank holding companies.

A)Repealed the Glass-Steagall barriers between commercial banking and investment banking.
B)Allowed commercial banks to acquire directly existing investment banks.
C)Allowed investment banks to offer banking products.
D)Allowed investment banks to offer deposit products.
E)All of these.

Question 49

A disadvantage to international bank expansion is the potential increase in the monitoring and information collection costs in some overseas markets.

Question 50

International expansion often produces revenue-risk diversification benefits for Canadian banks.

Question 51

Nonbank institutions have NOT gained competitive momentum for which of the following financial products?

A)Commercial paper.
B)Money market mutual funds.
C)Annuities.
D)Business credit market.
E)Savings accounts.

Question 52

As of the end of 2012, the total worldwide assets of the shadow banking system was approximately

A)US$12 trillion
B)US$37 trillion
C)US$52 trillion
D)US$67 trillion
E)US$91 trillion

Question 53

If the firm commitment price is $15 and one million shares are sold in the primary market for $15.50 and then resold in the secondary market for $15.75, what is the underwriter's profit/loss?

A)-$500,000.
B)$500,000.
C)$750,000.
D)-$750,000.
E)0

Question 54

If the firm commitment price is $15 and one million shares are sold in the primary market for $13 and then resold in the secondary market for $13.25, what is the underwriter's profit/loss?

A)-$2,000,000.
B)$2,000,000.
C)-$1,750,000.
D)$1,750,000.
E)0

Question 55

Which of the following has proven to be strong competition for bank deposit and transaction account products?

A)Commercial paper market.
B)Money market mutual funds.
C)Finance company business credit.
D)Hedge funds.
E)None of these.

Question 56

The banking industry in Canada has faced increased competition

A)on the liability side of the balance sheet from the commercial paper market.
B)on the asset side of the balance sheet from money market mutual funds.
C)on the liability side of the balance sheet from money market mutual funds.
D)on the asset side of the balance sheet from the commercial paper market.
E)on the liability side of the balance sheet from money market mutual funds, and on the asset side of the balance sheet from the commercial paper market.

Question 57

Which of the following describes a firm commitment underwriting?

A)Finding a large institutional buyer or investor such as another FI for a private placement.
B)Investment bankers acting as agents on a fee basis related to their success in placing the issue.
C)Investment bankers act as agents and purchase securities from the issuer at one price for sale to the public at a different price.
D)Bank using its lending powers to coerce customers to buy the products sold by its securities affiliate.
E)Purchase of securities from the issuer at one price for resale to the public at a slightly higher price.

Question 58

Commercial banks have expanded their activities in each of the following ways EXCEPT

A)opening nonbank banks.
B)grandfathering previously permitted activities.
C)expanding off shore.
D)petitioning regulators for enhanced powers.
E)acquiring nonfinancial firms.

Question 59

In firm commitment underwriting, the underwriter's spread is

A)the bid ask spread in the secondary market.
B)the interest spread earned by the FI.
C)the difference between the underwriter's buy and sell price.
D)the difference between the offer price under a firm commitments as opposed to a best efforts underwriting contract.
E)the commission per share.

Question 60

An investment bank may take a big loss when underwriting an issue on a firm commitment basis because

A)it may overestimate the demand for the shares by the market.
B)it may underestimate the demand for the shares by the market.
C)interest rates may rise during the offering period.
D)security prices in general may increase during this period.
E)All of these.

Question 61

Concern about potential abuses of fiduciary responsibility has been used to justify product segmentation on the grounds of

A)safety and soundness issues.
B)economy of scale and scope issues.
C)conflict of interest issues.
D)deposit insurance issues.
E)regulatory oversight issues.

Question 62

Concern about the ability to analyze a more complex corporate structure has been used to justify product segmentation on the grounds of

A)safety and soundness issues.
B)economy of scale and scope issues.
C)conflict of interest issues.
D)deposit insurance issues.
E)regulatory oversight issues.

Question 63

Which action of the holding company to help its securities affiliate can damage the financial health of its banking subsidiary?

A)Downstreaming funds from the subsidiary and then upstreaming it to the securities affiliate.
B)Upstreaming funds from the securities affiliate and then downstreaming it to the bank subsidiary.
C)Indulging in product diversification.
D)Upstreaming funds from the bank subsidiary and then downstreaming it to the securities affiliate.
E)Diversifying the earnings stream of a banking company geographically.

Question 64

According to economists, this is the main reason for underpricing of new issues.

A)Lack of competition among existing investment banks.
B)Entry of banks into the investment banking sector.
C)Monopoly power of the existing investment banks.
D)Mismatch of demand and supply of securities.
E)Risk premium for information advantage possessed by issuers.

Question 65

Concern about the improper transfer of inside information has been used to justify product segmentation on the grounds of

A)safety and soundness issues.
B)economy of scale and scope issues.
C)conflict of interest issues.
D)deposit insurance issues.
E)regulatory oversight issues.

Question 66

A bank threatens to credit ration unless the customer agrees to let the bank's securities affiliate do its securities underwritings. Identify the conflict of interest in this scenario.

A)Salesperson's Stake.
B)Stuffing fiduciary accounts.
C)Tie-ins.
D)Third-party loans.
E)Information transfer.

Question 67

Concern about the financial impact of an extension of the federal safety net has been used to justify product segmentation on the grounds of

A)safety and soundness issues.
B)economy of scale and scope issues.
C)conflict of interest issues.
D)deposit insurance issues.
E)regulatory oversight issues.

Question 68

Firewalls are

A)barriers introduced to protect the bank against losses.
B)mechanisms to insure bank shareholders against loss.
C)regulations restricting the proliferation of Section 20 subsidiaries.
D)limitations on capital flows to the parent company.
E)safety codes required in tall skyscrapers.

Question 69

A bank holding company has a banking affiliate and a securities affiliate. If the securities affiliate fails, it could cause the bank to also fail because

A)the bank holding company could use funds from the banking affiliate to provide funds to the securities affiliate by downstreaming.
B)the bank holding company could use funds from the banking affiliate to provide funds to the securities affiliate by upstreaming.
C)the bank holding company could induce the banking affiliate to make loans to the securities affiliate.
D)None of these.
E)the bank holding company could use funds from the banking affiliate to provide funds to the securities affiliate by upstreaming, and the bank holding company could induce the banking affiliate to make loans to the securities affiliate.

Question 70

Concern about the cost of managing a widely diversified financial company has been used to justify product segmentation on the grounds of

A)safety and soundness issues.
B)economy of scale and scope issues.
C)conflict of interest issues.
D)deposit insurance issues.
E)regulatory oversight issues.

Question 71

An organization form that establishes bank subsidiaries rather than branches to expand is

A)an unit bank.
B)a multibank holding company.
C)a one-bank holding company.
D)a representative office.
E)a nonbank bank.

Question 72

Identify a condition under which conflicts of interest are exploitable.

A)Market for bank service is very competitive.
B)Banks have monopoly power over their customers.
C)Information flows between the customer and the bank are symmetric.
D)Bank does not possess any information advantage over its customers.
E)Bank places a relatively high value on its reputation.

Question 73

What is the impact of underpricing a securities issue?

A)The underwriter loses while the issuing firm gains.
B)Both the underwriter and the outside investor gains while the issuing firm loses.
C)The outside investor loses while the issuing firm gains.
D)Both the underwriter and the outside investor loses while the issuing firm gains.
E)All three parties lose when the securities are underpriced.

Question 74

An underwriter is quoting the following rates for the issue of new securities on behalf of a firm on a firm commitment basis: $64.00-64.25. 2,000,000 shares are being offered.

A)The maximum amount that can be earned by the underwriter (ignoring other costs) $1,000,000.
B)The maximum amount that can be earned by the underwriter (ignoring other costs) is $500,000.
C)The minimum amount that can be earned (ignoring other costs) by the underwriter is $0.
D)The minimum amount that can be earned (ignoring other costs) by the underwriter is -$500,000.
E)The minimum amount that can be earned (ignoring other costs) by the underwriter is -$1,000,000.

Question 75

Concern about bank solvency has been used to justify product segmentation on the grounds of

A)safety and soundness issues.
B)economy of scale and scope issues.
C)conflict of interest issues.
D)deposit insurance issues.
E)regulatory oversight issues.

Question 76

Which of the following is not a reasonable argument for the increase in the number of banks that can compete in security underwriting activities?

A)Small firms gain increased access to the capital markets.
B)Lower commission and fee expense for firms issuing securities.
C)Issuing firms realize an increase in the degree of underpricing of new issues.
D)The market for securities underwriting will see a decline in market concentration.
E)More competition will increase the new issue proceeds to the issuing firm.

Question 77

Identify the procompetitive effect of banks' expansion of their securities activities.

A)Reduces the degree of underpricing of new issues.
B)Encourages stuffing of fiduciary accounts.
C)Increased provision of cheap loans on the implicit condition that this loan is used to purchase securities.
D)Use of lending powers by a bank to coerce a customer to buy the products sold by its securities affiliate.
E)Use of inside information by a bank to set the prices, or help the distribution of securities offerings by its affiliate.

Question 78

An organization form that limits business transactions to a single location is

A)an unit bank.
B)a multibank holding company.
C)a one-bank holding company.
D)an interstate bank.
E)a fully integrated universal bank.

Question 79

Which of the following is NOT a potential conflict of interest identified by regulators and academics?

A)Salesperson's stake.
B)Stuffing fiduciary accounts.
C)Bankruptcy risk transference.
D)Procompetitive effects.
E)Third-party loans.

Question 80

Chinese Walls are

A)internally imposed barriers that limits the flow of confidential client information among departments or areas.
B)regulatory barriers that are introduced to insulate the bank against losses.
C)regulations that prohibit a bank from lending anything at all to its securities affiliates.
D)restrictions on a bank holding company that prevents the use of subsidiary funds to support ailing affiliates.
E)hurdles created by excessive drain in the form of dividends and fees from a bank.