Deck 10: Innovation and Structure in Banking and Finance

Question 1

One of the 3s in the 3-6-3 rule refers to the interest rate on assets.

Answer 1

False

Question 2

The increase in nominal interest rates during the 1970s led to an increase in the size of the traditional banking industry.

Answer 2

False

Question 3

ATMs have reduced a bank's expenses.

Answer 3

True

Question 4

In the past, excessive competition led to a low rate of innovation within the banking industry.

Question 5

Banks chartered by the Federal government are called national banks.

Question 6

SWEEP accounts are an example of loophole mining.

Question 7

Disintermediation occurs when investors take their money out of banks to buy assets that could provide a market rate of return.

Question 8

Regulation Q (the restriction on interest paid on deposits) and rising nominal interest rates during the Great Inflation were responsible for an increase the size of the mutual fund industry.

Question 9

Regulation Q (the restriction on interest paid on deposits) was responsible for the rise in nominal interest rates in the 1970s.

Question 10

Unit banks have no branches.

Question 11

The Great Inflation led to a decline in the size of the traditional commercial bank industry.

Question 12

Loophole mining is a way for banks to get around regulations.

Question 13

Adjustable rate mortgages are a financial innovation appearing in the 1990s.

Question 14

SWEEP accounts allow deposit rate to adjust with market rates.

Question 15

Unit banks and national banks comprise all the banks in the United States.

Question 16

Banks operating in more than one state used to be illegal.

Question 17

SWEEP accounts allow banks to make interest on reserves.

Question 18

Unit banks are banks that operate in only one state.

Question 19

Junk bonds are a financial innovation that took business away from traditional banks.

Question 20

The introduction of mutual funds has made reserve requirements largely ineffective.

Question 21

The Herfindahl index is a measure of banking innovation.

Question 22

According to the Herfindahl index, the U.S. banking industry is more concentrated than Canada's banking industry.

Question 23

The Great Inflation affected the banking industry through the following channels.

A) higher nominal interest rates
B) decline in deposits
C) increase in disintermediated borrowing
D) all of the above

Question 24

Which of the following is an example of disintermediation?

A) stock market brokers
B) insurance companies
C) adjustable rate mortgages
D) none of the above

Question 25

ARMs

A) force borrowers to assume interest rate risk.
B) became more prevalent during the Great Inflation.
C) both of the above.
D) neither of the above.

Question 26

Commercial banks are the only institutions in the United States that take transactions deposits.

Question 27

According to the Herfindahl index, the United States has one of the most concentrated banking industries in the world.

Question 28

The Great Inflation affected the banking industry through the following channels.

A) lower nominal interest rates
B) decline in deposits
C) decreased competition among banks
D) all of the above

Question 29

Unit banks

A) have no branches.
B) have a local monopoly.
C) had little incentive to innovate.
D) all of the above.

Question 30

According to the Herfindahl index, the U.S. banking industry has become increasingly concentrated in the last few decades.

Question 31

ARMs allow lenders to pass the default risk on to the borrower.

Question 32

Mortgage backed assets are an example of a securitized asset.

Question 33

Today, a few large banks have a larger share of

A) assets.
B) deposits.
C) capital
D) all of the above.

Question 34

Junk bonds are an example of a securitized asset.

Question 35

The United States allows individuals to establish

A) savings and loans associations.
B) mutual savings banks.
C) credit unions.
D) all of the above.

Question 36

The Great Inflation eventually led to an increase in bank profits.

Question 37

Government regulation is relatively permissive in the United States compared to other countries.

Question 38

The number of FDIC commercial banks has steadily increased since World War II.

Question 39

Unit banks

A) have no branches.
B) are highly competitive.
C) are an increasingly common type of financial institution.
D) all of the above.

Question 40

The process of bundling loans and selling pieces of the group is known as securitization.

Question 41

Technology has helped to make possible which of the following innovations?

A) ATMs
B) credit cards
C) mortgage backed securities
D) all of the above

Question 42

Which of the following is a measure of bank consolidation?

A) Regulation Q
B) The Gini coefficient
C) The Herfindahl index
D) The Greenspan index

Question 43

Bank consolidation is desirable because

A) banks are able to do specialized lending.
B) banks are more diversified.
C) banks are more able to serve small business.
D) all of the above.

Question 44

Bank holding companies allows bankers to circumvent

A) Regulation Q.
B) interstate banking restrictions.
C) reserve requirements.
D) none of the above.

Question 45

With an ARM, who must take on the interest rate risk?

A) borrower
B) lender
C) both
D) neither

Question 46

Bank consolidation is potentially a problem because

A) larger banks are harder to regulate.
B) banks are less diversified.
C) banks are less able to innovate.
D) all of the above.

Question 47

Near monopolization of in banks led to

A) stagnancy in innovation.
B) increased innovation.
C) greater depositors.
D) none of the above

Question 48

Bank consolidation is desirable because

A) small banks with little capital are eliminated.
B) banks are more diversified.
C) both of the above.
D) neither of the above.

Question 49

The erosion of Glass-Steagall allowed financial institutions to take advantage of

A) economies of scale.
B) economies of scope.
C) interstate banking.
D) all of the above.

Question 50

Regulators do not consider a financial institution to be a bank if it does not

A) hold bonds.
B) make loans.
C) both of the above.
D) neither of the above.

Question 51

Bank consolidation is potentially a problem because

A) it is harder for large banks to implement technological innovations.
B) some consumers may get worse service.
C) banks are less able to innovate.
D) all of the above.

Question 52

Which of the following generate fees for banks?

A) credit cards
B) securitized loans
C) ATMs
D) all of the above

Question 53

Which of the following changes or innovations depends on computer technology?

A) banker's acceptances
B) ATMs
C) SWEEP accounts
D) all of the above

Question 54

The biggest reason for the consolidation of the banking industry in the 1980s was

A) mergers.
B) bankruptcy.
C) bailouts.
D) all of the above.

Question 55

Which of the following generate fees for banks?

A) credit cards
B) securitized loans
C) reserves
D) none of the above

Question 56

Bank consolidation is potentially a problem because

A) larger banks are harder to regulate.
B) a failure of a large bank has a big effect on the economy.
C) both of the above.
D) neither of the above.

Question 57

Regulators do not consider a financial institution to be a bank if it does not

A) take deposits.
B) borrow from the Fed.
C) both of the above.
D) neither of the above.

Question 58

According to the Herfindahl index, the U.S banking industry is _____ concentrated than that of most developed economies.

A) more
B) less
C) equally
D) The Herfindal index is not a measure of concentration.

Question 59

Securitization has allowed some banks to concentrate on

A) origination of loans.
B) credit risk.
C) specialized lending.
D) all of the above.

Question 60

Bank consolidation is potentially a problem because

A) larger banks tend to be more diversified.
B) larger banks tend to take greater risks.
C) both of the above.
D) neither of the above.

Question 61

Why does the lack of a prepayment clause matter to the interest rate risk involved in taking a fixed rate mortgage?

Question 62

Why is it easier for financial innovation in a permissive regulatory system?

Question 63

Why have some argued that securitization has increased risk across the whole economy, increasing the severity of the recession in 2009?

Question 64

Why would larger banks be less risky?

Question 65

What is the advantage of online banking for banks?

Question 66

What type of regulation did holding companies circumvent?

Question 67

Why would larger banks be a problem for regulators?

Question 68

What is a national bank?

Question 69

How did a lack of competition among banks give rise to mutual funds?

Question 70

What is a unit bank?

Question 71

Explain how a lack of competition gave rise to the commercial paper market.

Question 72

Explain how the combination of Regulation Q and the high inflation of the 1970s led to an increase in the use of mutual funds and junk bonds.

Question 73

A small bank in a rural community proposes to merge with a large national bank. Give one reason customers of the small bank might object to the proposal. Give a reason they might be in favor.

Question 74

The Erosion of Glass-Steagall has allowed financial institutions to take advantage of economies of scale or scope. Explain.

Question 75

What regulation do SWEEP accounts circumvent? How do banks benefit?