Deck 21: Thrift Operations

Question 1

When a savings institution uses interest rate swaps to hedge interest rate risk, it would likely exchange ____ outflows for ____ inflows.

A)variable-rate; fixed-rate
B)variable-rate; variable-rate
C)fixed-rate; variable-rate
D)fixed-rate; fixed-rate

Answer 1

C

Question 2

Which of the following statements is incorrect?

A)A mutual-to-stock conversion allows savings institutions to obtain additional capital by issuing stock.
B)Because of the difference in owner control, mutual savings institutions are more susceptible to unfriendly takeovers.
C)When a mutual savings institution is involved in an acquisition, it first converts to a stock-owned savings institution.
D)Consolidation and acquisitions have caused the number of mutual and stock savings institutions to decline consistently over the years.

Answer 2

B

Question 3

A contract that allows for the purchase of a specified debt security for a specified price at a future point in time is known as a(n)

A)interest rate futures contract.
B)interest rate swap contract.
C)interest cap contract.
D)security swap contract.

Answer 3

A

Question 4

To measure ____ risk, some savings institutions measure the duration of their respective assets and liabilities.

A)credit
B)interest rate
C)liquidity
D)none of the above

Question 5

Adjustable-rate mortgages ____ of rising interest rates on a typical savings institution's spread. They ____ of declining interest rates on the spread.

A)reduce the adverse impact; reduce the favorable impact
B)reduce the adverse impact; increase the favorable impact
C)increase the adverse impact; increase the favorable impact
D)increase the adverse impact; reduce the favorable impact

Question 6

Savings institutions obtain most of their funds from

A)savings and time deposits.
B)loans.
C)mortgages.
D)repurchase agreements.

Question 7

The ____ savings institutions hold the most assets in aggregate.

A)stock owned
B)mutual
C)closely-held
D)privatized

Question 8

The insuring agency for savings institutions is the

A)Securities and Exchange Commission (SEC).
B)Federal Deposit Insurance Corporation (FDIC).
C)U.S. Treasury.
D)Federal Reserve

Question 9

When savings institutions are unable to attract sufficient deposits, they can

A)borrow in the federal funds market.
B)borrow from the Federal Reserve.
C)borrow through a repurchase agreement.
D)all of the above

Question 10

If a savings institutions' assets have considerably longer duration than its liabilities, it can reduce its exposure to interest rate risk by

A)reducing its proportion of assets in the short duration categories.
B)increasing its proportion of liabilities in the short duration categories.
C)increasing its proportion of liabilities in the long duration category.
D)A and B

Question 11

Savings institutions use most of their funds for ____. Commercial banks use most of their funds for ____.

A)mortgages; mortgages
B)mortgages; business loans and commercial real estate loans
C)business loans; commercial real estate loans and mortgages
D)commercial real estate loans and mortgages; business loans

Question 12

The capital of savings institutions is primarily composed of retained earnings and funds obtained from issuing stock.

Question 13

An interest rate swap reduces the favorable impact of declining interest rates.

Question 14

Most mortgages originated by savings institutions are for

A)commercial buildings.
B)land for commercial purposes.
C)single-family homes or multifamily dwellings.
D)none of the above.

Question 15

Federally-chartered savings institutions are regulated by the

A)Securities and Exchange Commission (SEC).
B)National Credit Union Administration.
C)Federal Reserve.
D)U.S. Treasury.

Question 16

Savings institutions that reduce their amount of ____ will best reduce their exposure to interest rate risk.

A)fixed-rate mortgages
B)consumer loans
C)commercial loans
D)short-term securities

Question 17

____ do not represent an asset of credit unions.

A)Mortgage-backed securities
B)Home equity loans
C)Automobile loans
D)Stocks

Question 18

If depositors move money from their checking account to short-term CDs, this would ____ the rate-sensitivity of the savings institution's liabilities to interest rate movements.

A)increase
B)have no effect on
C)decrease
D)A or C, depending on the size of the savings institution

Question 19

____ are the primary asset of savings institutions.

A)Mortgages
B)Cash balances
C)Investment securities
D)Business loans

Question 20

Which of the following is not an asset of savings institutions?

A)loans
B)mortgages
C)NOW accounts
D)mortgage-backed securities

Question 21

Savings institutions can obtain capital by:

A)issuing stock.
B)repurchasing stock.
C)borrowing from the Federal Reserve.
D)borrowing in the federal funds market.

Question 22

____ are non-profit organizations composed of members with a common bond.

A)Credit unions
B)Savings banks
C)Savings and loan associations
D)Commercial banks

Question 23

The primary use of credit union funds is

A)loans to credit union members.
B)the purchase of government securities.
C)the purchase of agency securities.
D)the purchase of corporate bonds.
E)none of the above

Question 24

Checkable accounts offered by credit unions are called

A)NOW accounts.
B)money market deposit accounts.
C)share certificates.
D)share drafts.

Question 25

Because credit unions ____ stock, they are technically owned by the ____.

A)issue; depositors
B)do not issue; depositors
C)issue; stockholders
D)do not issue; management

Question 26

The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) prohibited

A)savings institutions from merging.
B)commercial banks from acquiring savings institutions.
C)savings institutions.
D)savings institutions from making loans to foreign governments.

Question 27

Which of the following was not a major reason for the savings institution crisis in the late 1980s?

A)a large proportion of loan losses on real estate loans
B)a large proportion of loan losses on loans by savings institutions to less-developed countries
C)fraud
D)illiquidity
E)increased interest expenses

Question 28

Money market deposit accounts (MMDAs) represent

A)trust accounts managed by savings institutions.
B)checking accounts that do not pay interest.
C)accounts offered primarily by money market funds.
D)deposit accounts offering limited checking and close-to-market interest rates.

Question 29

A savings institution owned by its depositors is a ____ savings institution.

A)mutual
B)stock
C)credit
D)closed-end

Question 30

Savings institutions ____ allowed to borrow funds in the federal funds market; savings institutions ____ allowed to borrow funds from the Federal Reserve.

A)are; are
B)are; are not
C)are not; are not
D)are not; are

Question 31

Which of the following is not an advantage of credit unions?

A)They can offer attractive rates to their member savers and borrowers because they are nonprofit and therefore are not taxed.
B)Their noninterest expenses are relatively low, because their labor, office, and furniture are often donated or provided at a very low cost through the affiliation of their members.
C)Their large membership allows them to effectively diversify geographically.
D)All of the above are advantages of credit unions.

Question 32

____ risk is probably the least concern for savings institutions.

A)Liquidity
B)Exchange rate
C)Credit
D)Interest rate

Question 33

Credit unions obtain most of their funds from

A)issuing common stock.
B)retained earnings.
C)share deposits by members.
D)issuing long-term bonds.

Question 34

A savings institution's cash flows are ____ related to interest rate movements.

A)positively related to
B)negatively related to
C)unrelated to
D)none of the above

Question 35

To obtain short-term funds, savings institutions commonly borrow funds in the ____ market.

A)stock
B)bond
C)mortgage
D)federal funds
E)futures

Question 36

The risk that a credit union will experience an unanticipated wave of withdrawals without an offsetting amount of new deposits is ____ risk.

A)credit (default)
B)interest rate
C)liquidity
D)exchange rate
E)none of the above

Question 37

The ____ acts as a temporary lender to credit unions.

A)World Bank
B)Central Liquidity Facility
C)Federal Home Loan Bank
D)National Credit Union Administration

Question 38

The sensitivity of cost of funds to interest rate movements has been

A)greater for credit unions than savings institutions.
B)greater for credit unions than commercial banks.
C)lower for credit unions than for savings institutions or commercial banks.
D)similar for credit unions as savings institutions and commercial banks.

Question 39

Stock-owned savings institutions ____ susceptible to unfriendly takeovers. Mutual savings institutions ____ susceptible to unfriendly takeovers.

A)are; are not
B)are; are
C)are not; are
D)are not; are not

Question 40

Savings institutions commonly ____ to reduce their risk.

A)purchase futures contracts on stock indexes
B)purchase futures contracts on treasury bonds
C)sell futures contracts on stock indexes
D)sell futures contracts on treasury bonds

Question 41

The majority of maturities on consumer loans offered by credit unions are ____ term, causing income generated on their asset portfolio to be ____ to interest rate movements.

A)long; insensitive
B)short or medium; sensitive
C)long; sensitive
D)short or medium; insensitive

Question 42

In general, savings institutions are larger than commercial banks.

Question 43

Because credit unions' sources and uses of funds are generally interest rate ____, movements in interest revenues and interest expenses of credit unions are ____.

A)sensitive; negatively correlated
B)insensitive; highly correlated
C)sensitive; uncorrelated
D)sensitive; highly correlated
E)insensitive; uncorrelated

Question 44

Credit unions differ from savings institutions in that they use a ____ proportion of their funds for mortgages and are ____ institutions.

A)smaller; non-profit
B)larger; non-profit
C)smaller; for-profit
D)larger; for-profit

Question 45

Because savings institutions commonly use long-term liabilities to finance short-term assets, they depend on additional deposits to accommodate withdrawal requests.

Question 46

Credit unions use the majority of their funds to

A)purchase investment securities.
B)provide commercial real estate loans.
C)provide small business loans to members.
D)provide consumer loans to members.

Question 47

Comparing credit unions with commercial banks and savings institutions

A)credit unions are less able to quickly generate additional deposits.
B)savings institutions and commercial banks can borrow from the Central Liquidity Facility, but credit unions cannot.
C)savings institutions and commercial banks are less able to quickly generate additional deposits.
D)credit unions have less exposure to liquidity risk.

Question 48

Today, credit unions are regulated as to the

A)types of services they can offer.
B)rates they offer on deposits.
C)maturity of residential loans they make.
D)size of residential mortgage loans.

Question 49

According to your text, about ____ percent of credit unions are insured by the National Credit Union Share Insurance Fund.

A)20
B)40
C)60
D)90

Question 50

In general, when interest rates fall, a savings institution's cost of obtaining funds declines more than the decline in the interest earned on its loans and investments.

Question 51

If credit union members have a particular affiliation with their employers and large layoffs occur, the credit union's exposure to ____ risk may increase.

A)settlement
B)interest rate
C)credit
D)none of the above

Question 52

Deposits at credit unions are called

A)NOW accounts.
B)money market deposit accounts.
C)shares.
D)credit union deposit accounts.

Question 53

High economic growth results in more risk for a savings institution, since its consumer loans, mortgage loans, and investments in debt securities are more likely to default.

Question 54

Because credit unions do not issue stock, they are technically sole proprietorships.

Question 55

Savings institutions do not really know the actual maturity of the mortgages they hold and cannot perfectly match the interest rate sensitivity of their assets and liabilities.

Question 56

The National Credit Union Share Insurance Fund (NCUSIF) requires all

A)federal-chartered credit unions to obtain insurance from the NCUSIF.
B)state-chartered credit unions to obtain insurance from the NCUSIF.
C)credit unions to pay an annual supplemental insurance premium each year.
D)depository institutions to pay a supplemental insurance premium each year.

Question 57

Federal credit unions are regulated and supervised by the

A)Central Liquidity Facility.
B)National Credit Union Administration.
C)Securities and Exchange Commission.
D)Corporate Credit Union Network.
E)none of the above

Question 58

Today, savings institutions are not permitted to invest in junk bonds.

Question 59

The maximum insurance per depositor by the National Credit Union Insurance Fund is

A)$250,000.
B)$50,000.
C)$40,000.
D)$25,000.

Question 60

Savings institutions commonly measure the gap between their rate-sensitive assets and rate-sensitive liabilities in order to determine their exposure to credit risk.

Question 61

____ are not a main source of funds for savings institutions.

A)Deposits
B)Borrowed funds
C)Capital
D)Mortgages

Question 62

During the credit crisis of 2008-2009, savings institutions experienced all of the following except:

A)high default rates on loans to finance leveraged buyouts.
B)a decline in the level of mortgage originations.
C)high default rates on subprime mortgages.
D)losses on investments in mortgage-backed securities.

Question 63

Credit unions are unregulated as to the types of services they offer.

Question 64

The Financial Reform Act of 2010 did all of the following except:

A)strengthened the standards required to obtain a mortgage.
B)required more disclosures by financial institutions regarding the quality of the underlying assets when they sell mortgage-backed securities.
C)required savings institutions to sell off any holdings of junk bonds and prohibited them from investing in junk bonds in the future.
D)established the Consumer Financial Protection Bureau.

Question 65

All federally chartered credit unions are required to obtain insurance from the National Credit Union Share Insurance Fund (NCUSIF).

Question 66

Because credit unions are for-profit organizations, their income is taxable.

Question 67

During the credit crisis of 2008-2009, some credit unions suffered losses on second mortgages and home-equity loans that they had provided, and some credit unions experienced losses on mortgage-backed securities in which they had invested.

Question 68

Which of the following is not a deposit source of funds for savings institutions?

A)passbook savings
B)retail CDs
C)money market deposit accounts
D)negotiable order of withdrawal (NOW) accounts
E)All of the above are deposit sources of funds for savings institutions.

Question 69

Credit unions obtain most of their funds by borrowing from the U.S. government.

Question 70

The primary source of funds for credit unions is

A)share certificates.
B)share deposits.
C)share drafts.
D)borrowed funds from the Central Liquidity Facility (CLF).
E)none of the above

Question 71

Under the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), all federally chartered savings institutions are to be regulated by the Federal Reserve, so these savings institutions no longer have an incentive to go regulator shopping.

Question 72

To manage interest rate risk, a savings institution could use

A)fixed-rate mortgages.
B)currency options.
C)interest rate futures contracts.
D)letters of credit.

Question 73

Credit unions use the majority of their funds to invest in the stock market.

Question 74

Savings institutions were adversely affected by the credit crisis because of their exposure to ____.

A)deposits
B)mortgages
C)commercial loans
D)loans from the Federal Reserve

Question 75

____ is not a main use of funds for savings institutions.

A)Capital
B)Mortgages
C)Consumer and commercial loans
D)Mortgage-backed securities

Question 76

During the credit crisis of 2008-2009:

A)the Resolution Trust Corporation was formed to deal with insolvent savings institutions.
B)several large savings institutions failed, including Countrywide Financial and Washington Mutual.
C)savings institutions were insulated because their regulator subsidized any of them that experienced large loan defaults.
D)the main problem for savings institutions was exposure to interest rate risk.

Question 77

The National Credit Union Administration (NCUA) is responsible for regulating savings institutions.

Question 78

Which of the following is not an objective of a credit union?

A)to satisfy credit union members
B)to act as an intermediary for members by repackaging deposits
C)to provide loans to members who are in need of funds
D)all of the above are objectives of credit unions.