Deck 13: Financial Industry Structure

Question 1

The dual banking system in the U.S.today refers to:

A)a bank's ability to issue checking and saving accounts.
B)a bank's ability to own another financial institution.
C)the ability of banks to be either federally or state chartered.
D)a deposit institution's decision to be either a bank or a savings and loan.

Answer 1

C

Question 2

In the U.S.today:

A)most banks are federally chartered.
B)most banks are state chartered.
C)there are approximately equal numbers of state and federally chartered banks.
D)all new banks are federally chartered.

Answer 2

B

Question 3

Many states prohibited bank branching because of all of the following except:

A)they feared the concentration and monopoly power of large banks.
B)they generated significant revenue from issuing bank charters.
C)they wanted to protect the profits of banks since they generated tax revenue from these profits.
D)the McFadden Act of 1927.

Answer 3

D

Question 4

In the early years of the Great Depression, 1929-1933:

A)over one half of all U.S.banks failed.
B)two-thirds of U.S.banks failed.
C)more than a third of all U.S.banks failed.
D)a little less than one-quarter of U.S.banks failed.

Question 5

If someone wants to start a bank today they would have to:

A)obtain a charter from the federal government.
B)simply have $5 million is startup capital, a charter is no longer needed.
C)obtain a charter either from the federal or state government.
D)obtain a state charter, the federal government stopped issuing charters in 1970.

Question 6

Banks exert some control over who will regulate them because banks:

A)spend a lot of money contributing to political campaigns.
B)can switch their charter from state to federal and vice versa.
C)have the right to decide on which regulator will oversee their bank.
D)pay the salary of the regulator.

Question 7

The number of banks in the U.S.today is approximately:

A)6,100.
B)500.
C)100.
D)15,300.

Question 8

A unit bank is a bank that:

A)only makes one type of loan, (i.e.; home mortgages).
B)only offers savings accounts.
C)provides a myriad of financial services, so customers get all or most of their financial needs taken care of at the bank.
D)has no branches.

Question 9

The Federal Deposit Insurance Corporation (FDIC) was created:

A)in 1933 as a part of the Glass-Steagall Act.
B)when the Federal Reserve was created in 1914.
C)prior to the stock market crash of 1929.
D)in 1927 as a part of the McFadden Act.

Question 10

The U.S.has many banks because:

A)small banks are more profitable than large banks.
B)many states outlawed bank branching.
C)the Great Depression caused the failure of the large banks, leaving many small banks.
D)the Glass-Steagall Act forced the splitting up of large banks.

Question 11

One of the results of the limit on bank branching was:

A)increased diversification in the loan portfolio of small banks.
B)curtailment of credit availability for borrowers in small towns.
C)lower profits for banks.
D)increased efficiency in the operations of banks.

Question 12

The Glass-Steagall Act of 1933:

A)required commercial banks to sell off their investment banking operations.
B)eliminated the FDIC.
C)required federally chartered banks to meet the branching restrictions of the states.
D)required all state banks to get federal charters.

Question 13

The bank failures that occurred during the early years of the Great Depression:

A)hurt large depositors the most since it was the large money center banks that failed.
B)hurt small depositors the most since it was mainly small banks that failed.
C)hurt the government insurance funds since FDIC covered most of the losses of depositors.
D)totaled about 30% of total bank customer deposits.

Question 14

When compared to Canada or Japan, the U.S.is unusual in that it has:

A)far fewer banks than either of those countries.
B)fewer banks than Japan but more than Canada.
C)more banks than Japan but fewer than Canada.
D)more banks than either Japan or Canada.

Question 15

Which of the following statements most accurately describes the state of banking in the U.S.?

A)A large number of large banks and a small number of small banks
B)A large number of large and small banks
C)A small number of large and small banks
D)A large number of small banks and a small number of large banks

Question 16

In recent years the U.S.banking structure has changed in such a way that there are now:

A)more banks.
B)fewer branches.
C)fewer banks but more branches.
D)fewer banks and fewer banks with branches.

Question 17

The financial crisis in the United States in 2007-2009 brought about all but which of the following changes:

A)a rise in the number of unit banks.
B)an increase in the deposit share of the top four U.S.commercial banks.
C)the placement of the two government-sponsored enterprises for housing finance into conservatorship.
D)a run on money-market mutual funds.

Question 18

Prior to the Civil War most state banks issued their own banknotes.This resulted in all of the following problems except:

A)their values decreased as the holder moved further from the bank.
B)they were worthless if the bank failed.
C)they were not efficient as a means of payment if the holder was far from the bank.
D)they were usually redeemable in gold.

Question 19

Unit banks are:

A)banks with no branches.
B)more numerous in the United States than they were in previous decades.
C)no longer permitted to exist in the United States.
D)commercial banks that have combined into one unit with an investment bank.

Question 20

The actual results of the McFadden Act included:

A)increased efficiency of banking across the country.
B)a tight network of interconnected banks across the country.
C)the continued operation of small inefficient banks.
D)the elimination of banking monopolies.

Question 21

Bank holding companies developed:

A)to get around the limitations on bank branching.
B)so foreign banks could open branches in the U.S.
C)to circumvent the regulation by the Office of the Comptroller of the Currency.
D)so that unit banks could combine into larger banks.

Question 22

The Bank Holding Company Act of 1956:

A)significantly broadened the scope of what bank holding companies could do.
B)limited bank holding companies to operating only within their chartered state.
C)limited the scope of bank holding companies in terms of services offered.
D)repealed the McFadden Act of 1927.

Question 23

One of the results of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was:

A)a reversal of the branching restrictions of the McFadden Act.
B)an increase in the number of banks in the U.S.
C)a decrease in the average size of banks.
D)a decrease in commercial banks but an increase in the number of savings and loans and savings banks.

Question 24

An Edge Act Corporation is:

A)a company created so a U.S.bank can operate in more than one state.
B)a subsidiary of a bank created to provide insurance and securities services.
C)a company created by a non-bank corporation used to purchase and operate banks.
D)a subsidiary of a domestic bank that is established specifically to engage in international banking transactions.

Question 25

As a result of technology, many small businesses today:

A)are located closer to their bank.
B)are located further from their bank.
C)have more face-to-face interactions with their banker.
D)no longer need banks.

Question 26

Which of the following is an example of the economies of scale argument for increased profits for large financial holding companies?

A)Financial holding companies offer a wide array of services under one name.
B)Financial holding companies need only one CEO, one Board of Directors, and one accounting system regardless of size.
C)Financial holding companies are well diversified so risk is reduced.
D)The profitability of financial holding companies does not rely on one particular line of business.

Question 27

The growth of international banking has:

A)decreased the competition that domestic banks face.
B)decreased the efficiency of most banks.
C)enhanced economic growth in many countries.
D)increased the monopoly power of most banks.

Question 28

Eurodollars are:

A)the currency of the European Economic Union.
B)euro-denominated deposits in U.S.Banks.
C)dollar-denominated deposits in banks outside the United States.
D)dollars that are specially printed for use abroad to minimize counterfeiting.

Question 29

The interest rate at which banks lend each other Eurodollars is known as:

A)the international federal funds rate.
B)the London Interbank Offered Rate.
C)the discount rate.
D)the International Prime Rate.

Question 30

The sharp reduction in the number of banks that has occurred since the mid-1990s has been due primarily to:

A)bank failures from increased competition.
B)bank mergers.
C)the closing of banks by federal regulators.
D)the revoking of state bank charters.

Question 31

One way that a bank could offer non-bank services across more than one state was to:

A)file for a foreign bank charter.
B)be a federally chartered bank rather than a state chartered bank.
C)create a bank holding company.
D)become a central bank.

Question 32

Often Eurodollar deposits earn higher returns than U.S.bank deposits for all of the following reasons except:

A)Eurodollar deposits are not subject to U.S.reserve requirements.
B)the bank does not have to pay deposit insurance premiums on these deposits.
C)regulatory compliance may be more costly for a foreign bank than a U.S.bank.
D)taxes on the profits on banks outside the U.S.may be lower on banks inside the U.S.

Question 33

One result of the Riegle-Neal Interstate Banking and Branching Efficiency Act was that:

A)banking system efficiency decreased.
B)banks became less geographically diversified.
C)banking system efficiency increased.
D)banks became less geographically diversified and banking system efficiency decreased.

Question 34

The gap between LIBOR and the expected Federal Reserve policy interest rate provides a key measure of which of the following:

A)the direction of movement of the Euro relative to the U.S.dollar on the foreign exchange market.
B)the persistence and intensity of the liquidity crisis.
C)the expected length of a coming global recession.
D)the movement of the U.S.stock market.

Question 35

Which of the following is not a reason to create large financial holding companies?

A)Financial holding companies offer a wide array of services under one brand name.
B)Financial holding companies need only one CEO, one Board of Directors, and one accounting system regardless of size.
C)Financial holding companies are well diversified so risk is reduced.
D)Financial holding companies are exempt from having to pay for FDIC insurance on deposits.

Question 36

Citigroup is an example of:

A)an Edge Act corporation.
B)a foreign bank.
C)a financial holding company.
D)a unit bank.

Question 37

Over the last twenty years in the U.S., the number of banks has:

A)steadily increased.
B)stayed about the same.
C)steadily decreased.
D)more than doubled.

Question 38

Which of the following is an accurate statement about universal banks?

A)In Germany universal banks do everything under one roof, including direct investment in the shares of nonfinancial firms.
B)In Germany the provision of insurance, banking, and securities must be done by separate corporations.
C)As in Germany, universal banks in the United States do everything under one roof, including direct investment in the shares of nonfinancial firms.
D)Universal banks in the United States account for the largest share of financial intermediary assets.

Question 39

Universal banks are:

A)firms that engage in banking services across many countries.
B)firms that engage a wide array of financial and non-financial activities.
C)banks that make direct investment in non-financial firms.
D)multinational corporations that own U.S.banks.

Question 40

The Gramm-Leach-Bliley Act:

A)repealed the Riegle-Neal Interstate Banking and Branching Efficiency Act.
B)repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms.
C)repealed the McFadden Act's restriction on bank branching.
D)reinforced the Glass-Steagall Act's limitation on commercial banks' availability to merge with insurance or securities firms by increasing the penalties for doing so.

Question 41

Whole life insurance differs from term life in which of the following ways?

A)Whole life has a rising premium as the policyholder ages, but term life has a fixed premium.
B)Term life has a savings component while whole life is pure insurance.
C)Term life is usually more expensive than whole life.
D)Whole life is a combination of term life insurance and a savings account.

Question 42

Whole life insurance has decreased in popularity due to:

A)many whole life insurance companies becoming bankrupt.
B)cheaper savings alternatives that have developed, making whole life policies expensive savings vehicles.
C)mergers with property and casualty companies, raising the cost of all insurance.
D)lower interest rates on alternative savings vehicles.

Question 43

Which of the following is an example that can help explain increased profits for large financial holding companies?

A)Financial holding companies offer a wide array of services under many brand names.
B)Financial holding companies need only one CEO, one Board of Directors, and one computer system regardless of size.
C)Financial holding companies are not well diversified and receive a higher return for the higher risk.
D)Financial holding companies are exempt from having to pay for FDIC insurance.

Question 44

Which of the following statements best completes the following statement: "Over the past 40 years, the percentage(s) of assets for all financial intermediaries…"?

A)controlled by banks has increased while the percentage for mutual funds has decreased.
B)controlled by banks has decreased as has the percentage for mutual funds while insurance companies have increased their percentage.
C)controlled by insurance companies and mutual funds has decreased and the percentage controlled by banks has increased.
D)controlled by banks has decreased while the percentage for mutual funds has increased.

Question 45

A young father needing to provide his family with financial security would be better off purchasing:

A)a whole life insurance policy.
B)a term life insurance policy.
C)as much life insurance as they can afford.
D)no life insurance; instead he should focus on saving.

Question 46

Because most insurance companies insure many people, they do not have to worry about the problem of:

A)moral hazard.
B)adverse selection.
C)spreading of risk.
D)information asymmetry.

Question 47

A person who discovers that he/she has advanced stages of cancer and calls his/her life insurance agent to double his/her insurance policy is an example of:

A)a moral hazard risk.
B)the risk of adverse selection.
C)the problem of information symmetry.
D)risk spreading.

Question 48

Insurance companies can predict fairly accurately:

A)the percentage of policyholders who will have a claim and which policyholders will have a claim.
B)which policyholders will suffer a loss but not the percentage of policyholders that will do so.
C)the type of losses policyholders will incur but not the percentage of policyholders that will file claims.
D)the percentage of policyholders that will file claims but not the policyholders that will file them.

Question 49

In order for insurance companies to generate predictable payouts, they need to:

A)spread the risk across many policies.
B)accept policyholders from a very specific geographic area.
C)focus on insuring only specific events, for example only fire.
D)offer only life insurance.

Question 50

Which of the following is not a nondepository institution?

A)A savings and loan
B)An insurance company
C)A mutual fund company
D)A pension fund

Question 51

Which of the following is an example of the economies of scope argument for increased profits for large financial holding companies?

A)Financial holding companies offer a wide array of services under one name.
B)Financial holding companies need only one CEO, one Board of Directors, and one accounting system regardless of size.
C)Financial holding companies face declining average costs per dollar of deposits.
D)The profitability of financial holding companies relies on one particular line of business.

Question 52

Insurance companies perform all of the following functions performed by financial intermediaries except:

A)transferring risk.
B)pooling the resources of small savers.
C)making large investments.
D)supplying liquidity.

Question 53

Modern forms of insurance can be traced back to around:

A)the early 1900s.
B)the early 1400s.
C)the mid 1800s.
D)the late 1700s.

Question 54

Lloyd's of London has a reputation for insuring:

A)only low risk stable enterprises.
B)unique and sometimes very odd situations.
C)only physical structures to minimize the risks to their underwriters.
D)only marine-related risks.

Question 55

Insurance companies offer two basic type of insurance; these are:

A)life insurance and property and casualty insurance.
B)life insurance and mutual funds.
C)property and casualty companies.
D)whole life and term life insurance companies.

Question 56

Lloyd's of London is perhaps most known for:

A)being the largest insurance company in the world.
B)going out of business when it insured too many odd risks.
C)offering insurance against unusual risks.
D)being the oldest insurance company in the world.

Question 57

Property and casualty insurers will hold assets of shorter maturities than life insurance companies because:

A)shorter maturity assets usually have higher returns.
B)life insurance companies may find they need to get liquid unexpectedly.
C)property and casualty insurers can find themselves needing to get liquid unexpectedly.
D)life insurance companies generally take on more risk than property and casualty companies.

Question 58

Insurance company assets will include:

A)stocks and bonds.
B)only bonds.
C)only stocks.
D)only U.S.Treasury securities.

Question 59

Which of the following statements best completes the following statement: "Over the past 40 years, the percentage(s) of assets for all financial intermediaries…"?

A)controlled by banks has decreased as has the percentage for mutual funds while insurance companies have increased their percentage.
B)controlled by insurance companies and mutual funds has decreased and the percentage controlled by banks has increased.
C)controlled by banks and insurance companies has decreased while the percentage controlled by mutual funds and pensions has increased.
D)controlled by banks, insurance companies, mutual funds and pensions have all increased.

Question 60

A typical automobile insurance policy is an example of:

A)liability insurance only.
B)property and casualty insurance.
C)property insurance only.
D)casualty insurance only.

Question 61

Pension plans can be thought of as the opposite of life insurance because life insurance:

A)costs far more than pension plans.
B)companies spread risk while pension plans are only spread within the company.
C)pays off when you die while the pension plan pays off if you don't.
D)pools the savings of many and pension plans do not.

Question 62

In many cases, life insurance companies will require applicants to take a physical.This is done to avoid the problem of:

A)adverse selection.
B)moral hazard.
C)free riding.
D)transaction costs.

Question 63

An insurance company provides liability insurance to a restaurant protecting the owner against claims from customers.One area of coverage is protections against food poisoning claims.The insurance company may periodically send an employee into the restaurant to observe food preparation and food storage processes.The insurance company is trying to avoid:

A)free riding.
B)moral hazard.
C)adverse selection.
D)transaction costs.

Question 64

The Social Security System in the U.S.is best described as a:

A)defined benefits plan.
B)defined contribution plan.
C)employer funded plan.
D)pay-as-you-go system.

Question 65

One way insurance companies deal with the problem of adverse selection is by:

A)charging the same price to everyone.
B)screening applicants.
C)monitoring policyholders after they have purchased insurance.
D)spreading the risk in the same geographic area.

Question 66

In most companies, an employee must work for a number of years before qualifying for pension benefits.This process is referred to as:

A)a defined-benefit period.
B)vesting.
C)regulated contribution period.
D)mandatory benefit pending.

Question 67

Catastrophe bonds or "cat bonds" were developed:

A)by reinsurance companies to finance their growth.
B)as an alternative to purchasing reinsurance.
C)prior to the creation of reinsurance companies but are being phased out.
D)by the U.S.government to provide insurance against national disasters.

Question 68

The use of coinsurance clauses and deductibles is an attempt by insurance companies to deal with the problem of:

A)non-payment of premiums.
B)adverse selection.
C)insufficient government regulation.
D)moral hazard.

Question 69

The reinsurance market is characterized as having:

A)a few buyers and many sellers.
B)many buyers and sellers.
C)few buyers and sellers.
D)many buyers and a few sellers.

Question 70

Which of the following statements is false?

A)Pension plans and life insurance are often both offered by the same institution.
B)Life insurance companies hold more in stocks than pension funds do.
C)Life insurance pays off when you die while the pension plan pays off if you don't.
D)They are both vehicles for saving.

Question 71

Defined-benefit plans:

A)are more common than defined contribution plans.
B)pay a pension based on the amount contributed into the plan by the employee and employer.
C)do not require any responsibility on the part of the employer for the employees' retirement income; it is based on employee contributions.
D)usually require an employee to work a very long time for the same employer in order to reap a large benefit.

Question 72

Reinsurance is used by insurance companies faced with:

A)the prospects of a large but diversified risk.
B)inadequate capital to handle a potential loss.
C)insolvency.
D)the problem of moral hazard.

Question 73

With the U.S.Social Security System, the burden of funding the system rests on:

A)the current workers.
B)the retirees.
C)the federal government.
D)the Social Security Administration.

Question 74

Pension funds resemble life insurance companies in the sense that:

A)the payoff occurs only occurs when a person dies.
B)they accept deposits.
C)they offer the ability to make premium payments today in return for a promised payment under specified future circumstances.
D)they both are better investments the longer you live.

Question 75

In a defined-contribution plan:

A)only the employee makes contributions into the fund.
B)the retirement benefits will vary with both the amount contributed and the performance of the fund.
C)the benefits are determined mainly by years of service.
D)no vesting is required; employees are eligible for benefits from the time they make their first contribution.

Question 76

The category of financial intermediaries called securities firms includes each of the following, except:

A)mutual funds.
B)brokerages.
C)investment banks.
D)credit unions.

Question 77

Pension funds resemble insurance companies by:

A)pooling the savings of only large investors.
B)accepting deposits.
C)spreading risk.
D)becoming better investments the longer you live.

Question 78

Many health insurers require a deductible where the policyholder pays the first part of any loss.The use of a deductible most directly treats the problem of:

A)free riding.
B)adverse selection.
C)people going uninsured.
D)moral hazard.

Question 79

Vesting can make job changes costly because:

A)you may not be able to take your entire pension benefit from your previous job with you.
B)once you leave one job fully vested the only other pension you can be eligible for is Social Security.
C)you can only become fully vested in one company's pension.
D)vested employees earn higher returns on their funds.

Question 80

A homeowner discovers that a large tree in his yard is diseased and may fall in a bad windstorm and if it falls, it will likely destroy the garage.The cost to have the tree cut down is significant but the homeowner has an insurance policy and figures that if the tree falls and destroys the garage, the insurance company will pay, and the deductible is less than the cost to have the tree removed.This is an example of:

A)information symmetry.
B)adverse selection.
C)moral hazard.
D)screening.