Deck 10: Banking Industry: Structure and Competition

Question 1

The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the ________.

A) central bank
B) commercial bank
C) bank of settlement
D) monetary fund

Answer 1

A

Question 2

Rising interest-rate risk ________.

A) increased the cost of financial innovation
B) increased the demand for financial innovation
C) reduced the cost of financial innovation
D) reduced the demand for financial innovation

Answer 2

B

Question 3

Financial innovations occur because of financial institutions search for ________.

A) profits
B) fame
C) stability
D) recognition

Answer 3

A

Question 4

The most significant change in the economic environment that changed the demand for financial products in recent years has been ________.

A) the aging of the baby-boomer generation
B) the dramatic increase in the volatility of interest rates
C) the dramatic increase in competition from foreign banks
D) the deregulation of financial institutions

Question 5

Financial instruments whose payoffs are linked to previously issued securities are called ________.

A) grandfathered bonds
B) financial derivatives
C) hedge securities
D) reversible bonds

Question 6

The regulatory system that permitted the organization of a bank by any group that met certain criteria is known as a ________.

A) bilateral regulatory system
B) tiered regulatory system
C) two-tiered regulatory system
D) free banking system

Question 7

Which bank became the government's fiscal agent in 1864?

A) The Bank of Canada
B) The Chartered Bank of Upper Canada
C) The Bank of Montreal
D) The US Treasury

Question 8

The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is ________.

A) a put option
B) a call option
C) a futures contract
D) a mortgage-backed security

Question 9

Both ________ and ________ were financial innovations that occurred because of interest rate risk volatility.

A) adjustable-rate mortgages; commercial paper
B) adjustable-rate mortgages; financial derivatives
C) sweep accounts; financial derivatives
D) sweep accounts; commercial paper

Question 10

Explain how the dual banking system arose in the United States.

Question 11

The U.S. banking system is considered to be a dual system because ________.

A) banks offer both chequing and savings accounts
B) it actually includes both banks and thrift institutions
C) it is regulated by both state and federal governments
D) it was established before the Civil War, requiring separate regulatory bodies for the North and South

Question 12

Adjustable rate mortgages ________.

A) protect households against higher mortgage payments when interest rates rise
B) keep financial institutions' earnings high even when interest rates are falling
C) benefit homeowners when interest rates are falling
D) generally have higher initial interest rates than on conventional fixed-rate mortgages

Question 13

Uncertainty about interest-rate movements and returns is called ________.

A) market potential
B) interest-rate irregularities
C) interest-rate risk
D) financial creativity

Question 14

An instrument developed to help investors and institutions hedge interest-rate risk is ________.

A) a bond
B) a sweep account
C) a financial derivative
D) a mortgage-backed security

Question 15

In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 5.5 percent; in the 1980s it fluctuated between ________ percent and ________ percent.

A) 7; 20
B) 4; 11.5
C) 4; 18
D) 5; 10

Question 16

________ is the process of researching and developing profitable new products and services by financial institutions.

A) Financial engineering
B) Financial manipulation
C) Customer manipulation
D) Customer engineering

Question 17

The Finance Act of 1914 required that ________.

A) local banks be subject to the same regulations as national banks
B) national banks establish branches in large cities
C) the Department of Finance to act as a lender of last resort
D) the Bank of Canada to act as a lender of last resort

Question 18

The most important source of the changes in supply conditions that stimulate financial innovation has been the ________.

A) deregulation of financial institutions
B) dramatic increase in the volatility of interest rates
C) improvement in computer and telecommunications technology
D) dramatic increase in competition from foreign banks

Question 19

Currency circulated by banks that could be redeemed for gold was called ________.

A) junk bonds
B) banknotes
C) gold bills
D) state money

Question 20

The modern Canadian banking system began with ________.

A) the Chartered Bank of Upper Canada in 1821
B) the Bank of Montreal in 1817
C) the Bank of Lower Canada in 1801
D) the Bank of New Brunswick in 1820

Question 21

A firm issuing credit cards earns income from ________.

A) loans it makes to credit card holders
B) subsidies from the local governments
C) payments made to it by manufacturers of the products sold in stores on credit card purchases
D) sales of the card in foreign countries

Question 22

The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known as ________.

A) securitization
B) internationalization
C) arbitrage
D) program trading

Question 23

So-called fallen angels differ from junk bonds in that ________.

A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously bonds that have had their credit ratings fall below Baa
B) junk bonds refer to previously bonds that have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings
C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C
D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C

Question 24

Loophole mining refers to financial innovation designed to ________.

A) hide transactions from the CRA
B) conceal transactions from the Bank of Canada
C) get around regulations
D) conceal transactions from the Department of Finance

Question 25

A disadvantage of virtual banks (clicks) is that ________.

A) their hours are more limited than physical banks
B) they are more secure than physical banks
C) they are more costly to operate than physical banks
D) customers worry about the security of on-line transactions

Question 26

In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status.

A) Michael Milken
B) Roger Milliken
C) Ivan Boskey
D) Carl Ichan

Question 27

The declining cost of computer technology has made ________ a reality.

A) brick and mortar banking
B) commercial banking
C) virtual banking
D) investment banking

Question 28

New computer technology has ________.

A) increased the cost of financial innovation
B) increased the demand for financial innovation
C) reduced the cost of financial innovation
D) reduced the demand for financial innovation

Question 29

Prior to 2008, bank managers in the U.S. looked on reserve requirements ________.

A) as a tax on deposits
B) as a subsidy on deposits
C) as a subsidy on loans
D) as a tax on loans

Question 30

Automated teller machines ________.

A) are more costly to use than human tellers, so banks discourage their use by charging more for use of ATMs
B) cost about the same to use as human tellers in banks, so banks discourage their use by charging more for use of ATMs
C) cost less than human tellers, so banks may encourage their use by charging less for using ATMs
D) cost nothing to use, so banks provide their services free of charge

Question 31

According to Edward Kane, because the banking industry is one of the most ________ industries in America, it is an industry in which ________ is especially likely to occur.

A) competitive; loophole mining
B) competitive; innovation
C) regulated; loophole mining
D) regulated; innovation

Question 32

A debit card differs from a credit card in that ________.

A) a debit card is a loan while for a credit card purchase, payment is made immediately
B) a debit card is a long-term loan while a credit card is a short-term loan
C) a credit card is a loan while for a debit card purchase, payment is made immediately
D) a credit card is a long-term loan while a debit card is a short-term loan

Question 33

________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans.

A) Diversification
B) Arbitrage
C) Computerization
D) Securitization

Question 34

The driving force behind the securitization of mortgages and automobile loans has been ________.

A) the rising regulatory constraints on substitute financial instruments
B) the desire of mortgage and auto lenders to exit this field of lending
C) the improvement in computer technology
D) the relaxation of regulatory restrictions on credit card operations

Question 35

The entry of GM and Walmart into the credit card business is an indication of ________.

A) government's efforts to deregulate the provision of financial services
B) the rising profitability of credit card operations
C) the reduction in costs of credit card operations since 1990
D) the sale of unprofitable operations by Bank of America and Citicorp

Question 36

Credit cards date back to ________.

A) prior to the second World War
B) just after the second World War
C) the early 1950s
D) the late 1950s

Question 37

Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as ________.

A) municipal bonds
B) Yankee bonds
C) "fallen angels"
D) junk bonds

Question 38

One factor contributing to the rapid growth of the commercial paper market since 1970 is ________.

A) the fact that commercial paper has no default risk
B) improved information technology making it easier to screen credit risks
C) government regulation
D) FDIC insurance for commercial paper

Question 39

The development of money market mutual funds contributed to the growth of ________ since the money market mutual funds need to hold liquid, high-quality, short-terms assets.

A) the commercial paper market
B) the municipal bond market
C) the corporate bond market
D) the junk bond market

Question 40

Bank customers perceive Internet banks as being ________.

A) more secure than physical bank branches
B) a better method for the purchase of long-term savings products
C) better at keeping customer information private
D) prone to many more technical problems

Question 41

The experience of disintermediation in the banking industry illustrates that ________.

A) more regulation of financial markets may avoid such problems in the future
B) banks are unable to remain competitive with other financial intermediaries
C) consumers no longer desire the services that banks provide
D) markets invent alternatives to costly regulations

Question 42

Banks have attempted to maintain adequate profit levels by ________.

A) making fewer riskier loans, such as commercial real estate loans
B) pursuing new off-balance-sheet activities
C) increasing reserve deposits at the Bank of Canada
D) decreasing capital accounts

Question 43

Money market mutual funds ________.

A) function as interest-earning chequing accounts
B) are legally deposits
C) are subject to reserve requirements
D) have an interest-rate ceiling

Question 44

Sweep accounts ________.

A) have made reserve requirements nonbinding for many banks
B) sweep funds out of deposit accounts into long-term securities
C) enable banks to avoid paying interest to corporate customers
D) reduce banks' assets

Question 45

What bonds are commonly called "junk bonds"? Why innovations in computer technology helped the "junk bonds" market?

Question 46

Financial innovation has caused ________.

A) banks to suffer declines in their cost advantages in acquiring funds, although it has not caused a decline in income advantages
B) banks to suffer a simultaneous decline of cost and income advantages
C) banks to suffer declines in their income advantages in acquiring funds, although it has not caused a decline in cost advantages
D) banks to achieve competitive advantages in both costs and income

Question 47

Sweep accounts which were created to avoid reserve requirements became possible because of a change in ________.

A) demand conditions
B) supply conditions
C) government rules
D) bank mergers

Question 48

Why did the interest rate volatility of the 1970s spur financial innovation?

Question 49

Prior to 2008, a U.S. bank's cost of holding reserves equaled ________.

A) the interest paid on deposits times the amount of reserves
B) the interest paid on deposits times the amount of deposits
C) the interest earned on loans times the amount of loans
D) the interest earned on loans times the amount on reserves

Question 50

Prior to 1980, the Fed set an interest rate ________ that is a maximum limit on the interest rate that could be paid on time deposits.

A) floor
B) ceiling
C) wall
D) window

Question 51

Disintermediation resulted from ________.

A) interest rate ceilings combine with inflation-driven increases in interest rates
B) elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits)
C) increases in federal income taxes
D) reserve requirements

Question 52

What are the adjustable-rate mortgages?

Question 53

The process in which people take their funds out of the banking system seeking higher-yielding securities is called ________.

A) capital mobility
B) loophole mining
C) disintermediation
D) deposit jumping

Question 54

What important changes in banking have occurred as the result of low cost information technology? Discuss four examples of these changes.

Question 55

One factor contributing to the decline in cost advantages that banks once had is the ________.

A) decline in the importance of chequable deposits as part of a banks' source of funds
B) decline in the importance of savings deposits as part of a banks' source of funds
C) increase in the importance of chequable deposits as part of a banks' source of funds
D) increase in the importance of savings deposits as part of a banks' source of funds

Question 56

Explain why the profitability of traditional banking has declined and how banks have responded.

Question 57

In this type of arrangement, any balances above a certain amount in a corporation's chequing account at the end of the business day are "removed" and invested in overnight securities that pay the corporation interest. This innovation is referred to as a ________.

A) sweep account
B) share draft account
C) removed-repo account
D) stockman account

Question 58

How banks suffered a decline in income advantages on uses of funds (assets) due to financial innovation?

Question 59

In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as "breaking the buck." This means that ________.

A) they could no longer afford to redeem shares at the par value of $1
B) they required shareholders to contribute a dollar more in fees each month
C) shareholders were able to redeem shares for more than a $1
D) shares earned more than a dollar in interest

Question 60

The decline in traditional banking internationally can be attributed to ________.

A) increased regulation
B) improved information technology
C) increasing monopoly power of banks over depositors
D) increased protection from competition

Question 61

Which of the following is a true statement concerning bank holding companies?

A) Bank holding companies own few large banks.
B) Bank holding companies are an important advantage to circumvent restrictive branching regulations.
C) The McFadden Act has prevented bank holding companies from establishing branch banks.
D) Bank holding companies can own only banks.

Question 62

The separation of the banking and other financial services industries was known as ________.

A) convergence
B) consolidation
C) the four-pillar approach
D) underwriting

Question 63

Which of the following are true statements?

A) Schedule I and Schedule II banks have different powers.
B) Widely held foreign banks can own 50 percent of a Canadian bank subsidiary.
C) Any widely held and regulated Canadian financial institution, other than a bank, may own 100 percent of a bank.
D) Schedule I banks have the same powers than Schedule II banks.

Question 64

Experts predict that the future structure of the banking industry will have ________.

A) an increased number of banks
B) as few as ten banks
C) large, complex banking organizations
D) many, small banking organizations

Question 65

The difference between a Schedule II and a Schedule III bank is that ________.

A) a Schedule II bank is a Canadian subsidiary of a foreign bank
B) a Schedule III bank is a foreign bank is not allowed to branch directly into Canada
C) a foreign bank may enter the Canadian banking industry only as a Schedule III bank
D) widely held foreign banks can own 50 percent of a Canadian bank subsidiary

Question 66

The presence of so many commercial banks in the United States is most likely the result of ________.

A) consumers' strong desire for dealing with only local banks
B) adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks
C) prior regulations that restrict the ability of these financial institutions to open branches
D) consumers' preference for state banks

Question 67

A financial innovation that developed as a result of banks avoidance of bank branching restrictions was ________.

A) money market mutual funds
B) commercial paper
C) junk bonds
D) bank holding companies

Question 68

ATMs were developed because of breakthroughs in technology and as a ________.

A) means of avoiding restrictive branching regulations
B) means of avoiding paying interest to corporate customers
C) way of concealing transactions from the SEC
D) increasing the competition from foreign banks

Question 69

Bank consolidation will likely result in ________.

A) less competition
B) the elimination of credit unions
C) large, complex banking organizations
D) a shift in assets from larger banks to smaller banks

Question 70

The six largest chartered banks in Canada together hold ________ of the assets in the industry.

A) over 90 percent
B) nearly 75 percent
C) just over 50 percent
D) 25 percent

Question 71

The primary reason for the recent reduction in the number of financial institutions is ________.

A) financial failures
B) re-regulation of banking
C) restrictions on branching
D) financial consolidation

Question 72

The ability to use one resource to provide different products and services is ________.

A) economies of scale
B) economies of scope
C) diversification
D) vertical integration

Question 73

Lack of competition in the United States banking industry can be attributed to ________.

A) the fact that competition does not benefit consumers
B) the fact that branching has eliminated competition
C) recent legislation restricting competition
D) past regulations that the ability of banks to open branches

Question 74

Which of the following are true statements?

A) Schedule I banks have more powers than Schedule II banks.
B) A Schedule II bank may enter the Canadian banking industry only as a Schedule II bank.
C) A Schedule II bank may have a significant shareholder (more than 10 percent) for up to 10 years after chartering.
D) A foreign bank may enter the Canadian banking industry only as a Schedule III bank.

Question 75

The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from ________.

A) issuing equity to finance bank expansion
B) engaging in underwriting and dealing of corporate securities
C) selling new issues of government securities
D) purchasing any debt securities

Question 76

The four-pillars were identified as ________.

A) banking, brokerage, trusts, and mutual funds
B) banking, brokerage, credit unions, and mutual funds
C) banking, brokerage, credit unions, and insurance
D) banking, brokerage, trusts, and insurance

Question 77

The large number of banks in the United States is an indication of ________.

A) vigorous competition within the banking industry
B) lack of competition within the banking industry
C) regulations that restrict branch operations
D) consumer preference for local banks

Question 78

Describe the financial innovations that were stimulated as a response to branching restrictions in the U.S.?

Question 79

Which of the following are true statements?

A) Schedule I banks have more powers than Schedule II banks.
B) Widely held foreign banks can own 50 percent of a Canadian bank subsidiary.
C) A Schedule II bank may have a significant shareholder (more than 10 percent) for up to 10 years after chartering.
D) A Schedule III bank is a foreign bank is not allowed to branch directly into Canada.

Question 80

The business term for economies of scope is ________.

A) economies of scale
B) diversification
C) cooperation
D) synergies