Deck 11: Commercial Banks: Industry Overview

Question 1

Banking may be subdivided into at least three categories of banks. Match up the definitions with the appropriate name.
I) A bank that specializes in retail or consumer banking in a local market.
II) A bank that engages in a complete array of wholesale commercial banking activities and usually also provides retail banking services.
III) A bank that is located in a financial center and relies on nondeposit or borrowed sources of funds for a significant portion of its liabilities.

A) Money center bank; Community bank; Super-regional bank
B) Community bank; Money center bank; Super-regional bank
C) Super-regional bank; Money center bank; Community bank
D) Money center bank; Super-regional bank; Community bank
E) Community bank; Super-regional bank; Money center bank

Answer 1

E

Question 2

Loans comprise the single largest asset category for a bank.

Answer 2

True

Question 3

In comparison to small banks, larger banks typically have

A) more equity capital
B) more core deposits
C) more off-balance-sheet activities
D) larger net interest margins
E) all of the above

Answer 3

C

Question 4

The largest single category of loans on the typical bank's balance sheet in 2010 was

A) U.S. government securities
B) commercial and industrial loans
C) consumer loans
D) real estate loans
E) interbank loans

Question 5

The majority of banks are nationally chartered and insured by the FDIC.

Question 6

In terms of profitability, a well-run bank usually has an ROA of

A) 0.5-3%
B) 3-5%
C) 5-10%
D) 10-15%
E) 15-20%

Question 7

Nationally chartered banks receive chartering and merger approval from the

A) Federal Deposit Insurance Corporation
B) Office of Comptroller of the Currency
C) Federal Reserve System
D) Office of Thrift Supervision
E) Any of the above may grant a charter and approve a merger.

Question 8

Small banks control about 70% of banking industry assets.

Question 9

In 2010, the notional value of bank off-balance-sheet activities was greater than bank industry assets.

Question 10

Nontransaction deposits at banks include NOW accounts and demand deposits.

Question 11

Equity capital at commercial banks in 2010 comprised about ____________ of liabilities and equity.

A) 25%
B) 21%
C) 55%
D) 11%
E) 5%

Question 12

Which of the following could result in a negative NIM?

A) Growth in net interest income
B) Lower non interest expense
C) Decline in net interest income
D) Higher non interest income
E) Positive net interest spread

Question 13

Business loans have dropped in importance since 1987 as measured by the proportion of these loans on the bank balance sheet.

Question 14

Most of the changes in size, structure, and composition of the banking industry in recent years are due to

A) bank failures
B) increasing regulations
C) new charters granted
D) declines in the number of branch offices
E) mergers and acquisitions

Question 15

On average, bank liabilities tend to have shorter maturities and greater liquidity than bank assets.

Question 16

About __________________ of federally insured banks are nationally chartered and about __________________ of federally insured banks are members of the Federal Reserve.

A) 77%; 65%
B) 65%; 77%
C) 34%; 22%
D) 22%; 34%
E) 40%; 60%

Question 17

Since 1980 the number of banks in the United States has been increasing dramatically due to deregulation of the industry.

Question 18

State chartered banks ________________ be members of the Federal Reserve System and nationally chartered banks ________________ be members of the Federal Reserve System.

A) must; may
B) must; must
C) may; must
D) may; may

Question 19

Bank assets tend to have _____________ maturities and _____________ liquidity than/as bank liabilities.

A) longer; greater
B) longer; lower
C) shorter; greater
D) shorter; lower
E) equal; equal

Question 20

Banks have an average total debt ratio of about 90%.

Question 21

The provision of banking services to other banks, such as check clearing, foreign exchange trading, etc., are examples of

A) correspondent banking
B) trust services
C) off-balance-sheet assets
D) economies of scope
E) credit derivatives

Question 22

A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest bearing liabilities. However, the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points, the bank's new pre-tax net interest income will be __________.

A) $600,000
B) $450,000
C) $300,000
D) $250,000
E) $175,000 (1.50% -0.50%) x $30 million

Question 23

What are the major advantages a bank gains by expanding into international bank services? What are three disadvantages of international expansion?

Question 24

Loans past due 90 days or more and loans that are not accruing interest because of problems of the borrower are called

A) loan losses
B) net charge-offs
C) provisional loans
D) noncurrent loans
E) contra loans

Question 25

The ROA for financial institutions such as banks is typically quite low as compared to non-financial firms. Why? With such a low ROA, how can banks attract stockholders?

Question 26

A bank is earning 6% on its $150 million in earning assets and is paying 4.75% on its liabilities. The bank's NIM is __________________.

A) 6.00%
B) 4.75%
C) 1.25%
D) 10.75%
E) 1.26% 6% - 4.75% = 1.25%

Question 27

Which of the following is the primary regulator of bank holding company activities?

A) Federal Bank Holding Company Board
B) FDIC
C) Federal Reserve
D) State regulatory agency in the chartering states
E) U.S. Treasury

Question 28

Why did bank profitability decline beginning in late 2006 and through 2008?

Question 29

Reasons behind the drop in bank profitability in the second half of this decade include
I) flattening of the yield curve.
II) increase in competitive pressures on asset pricing.
III) increases in foreclosures in the mortgage market.
IV) increases in net interest margin.

A) I only
B) II and III only
C) I, II, and III only
D) II, III, and IV only
E) III and IV only

Question 30

Banks differ from other types of depository institutions in that
I) banks have more diversified asset portfolios.
II) banks obtain funds from more different types sources.
III) the average size bank is larger than other depository institutions.

A) I only
B) I and II only
C) I and III only
D) II and III only
E) I, II, and III

Question 31

Commercial banks are the __________________ financial intermediary in the United States as measured by asset size.

A) largest
B) second-largest
C) third-largest
D) fourth-largest
E) fifth-largest

Question 32

Why are loans such a high percentage of total assets at the typical bank? What four broad classes of loans do banks engage in?

Question 33

What are the major sources of funds for banks? Provide a breakdown of all the major sources of funds at a bank and briefly describe the different types of deposits/non-deposit sources.

Question 34

A contingent promise by a bank to pay a bill when it comes due if the bill's originator fails to pay is an example of a

A) swap agreement
B) standby letters of credit
C) forward contract
D) loan commitment
E) commitment to buy foreign exchange

Question 35

Discuss the major differences between large banks and small banks. Which have had higher ROAs? Why?

Question 36

Most non-financial firms would never hold as much of their assets in safe liquid securities as banks do. Why do banks maintain such a high percentage of investment in securities?

Question 37

Why are banks different from other depository institutions?

Question 38

Advantages of going global for U.S. banks include all but which one of the following?

A) Diversification of earnings
B) Greater opportunities to exploit economies of scale
C) Greater sources of funds
D) Conducting business in less regulated environments
E) Low fixed costs involved in international expansion

Question 39

An ILC is a type of

A) finance company
B) thrift institution
C) credit card bank
D) nonbank bank
E) foreign-owned loan corporation

Question 40

A contingent item that may eventually be placed on the right-hand side of the balance sheet or expensed on the income statement is a(n)

A) loan commitment
B) off-balance-sheet liability
C) off-balance-sheet asset
D) net charge-off
E) loan sold without recourse