Deck 4: Banks and Other Deposit Taking Institutions

Question 1

The four major banks in Australia are:

A) Commonwealth, Westpac, Macquarie and St George.
B) Commonwealth, National, Westpac and ANZ.
C) Commonwealth, National, Westpac and St George.
D) Commonwealth, National, Macquarie and St George.

Answer 1

B

Question 2

The term 'bank bashing' refers to the practice of:

A) tight restrictions imposed by the RBA on the banking sector.
B) excessive use of bank lines of credit by the corporate sector.
C) end- of- year parties for bank money market dealing staff.
D) unjustified criticism of banks.

Answer 2

D

Question 3

In the balance sheets of Australian banks:

A) there was a significant decline in the percentage of current deposits in the total.
B) there has been an increase in the percentage of assets held in cash and liquid assets by banks because of continuing reductions in, and the ultimate removal of, required reserve ratios and the reduced need for liquidity as a result of the increased feasibility of asset/liability management.
C) there has been a decrease in the proportion of term deposits, arising largely from the normal (upward- sloping) yield curve in Australia.
D) certificates of deposit have declined in importance.

Answer 3

A

Question 4

A building society specialises in:

A) wholesale lending.
B) corporate advisory.
C) funds management.
D) retail lending.

Question 5

Which of the following statements is true?

A) Interest margins earned by banks bear no relation to the true cost of banking services.
B) Deregulation has seen a widening of bank interest margins in Australia.

Question 6

Licensing for deposit- taking institutions (ADIs) is provided by the:

A) Australian Financial Markets Association.
B) Federal Treasury.
C) Reserve Bank of Australia.
D) Australian Prudential Regulation Authority.

Question 7

If IR = interest received on assets, IP = interest paid on liabilities, and TA = total assets, then the bank's interest rate margin is defined as:

A) IR + IP.
B) IR - IP.
C) (IR - IP)/ TP.
D) (IR + IP)/ TP.

Question 8

Overdraft facilities and standby letters of credit offered by banks are examples of:

A) contingent claims.
B) on- balance- sheet activities.
C) underwriting activities.
D) none of the above.

Question 9

The so- called 'Four Pillars' policy rules out:

A) a takeover of a major bank by a foreign bank.
B) mergers between major banks and insurance companies.
C) mergers between the four major banks.
D) all of the above.

Question 10

'Liquidity transformation' is a unique function of which entity?

A) Loan customers.
B) Derivatives dealers.
C) Banks.
D) Managed funds.

Question 11

The study of deposit- taking institutions:

A) is hampered by lack of data on the funds management industry.
B) is essential to understanding the funds management industry.
C) shows that funds managers are essentially the same as banks.
D) does not include the funds management industry because such institutions are not ADIs.

Question 12

Credit unions tend to focus strongly on:

A) personal finance.
B) payments systems.
C) leasing.
D) funds management.

Question 13

Which of the following best describes the business of retail banking?

A) Banking transactions that involve high- denomination transactions with the business sector.
B) Banking services specially designed for high- net- worth individuals.
C) Banking transactions in debt securities.
D) Banking transactions that involve low- denomination transactions with the household sector.

Question 14

What affects interest rate margins?

A) Interest paid on liabilities.
B) Total assets.
C) Interest rate received on assets.
D) All of the above.

Question 15

In a bank's balance sheet, the main item on the liabilities side is:

A) loans.
B) government securities.
C) deposits.
D) bill acceptances.

Question 16

Australia's state banks:

A) are outside APRA control.
B) have a reputation today for high profitability.
C) have all been privatised.
D) have origins that lie mostly in foreign bank subsidiaries.

Question 17

As a banking market becomes more competitive, we would expect interest margins to become:

A) negative.
B) zero.
C) wider.
D) narrower.

Question 18

Per head of population, Australia has:

A) more bank branches than Canada.
B) more bank branches than ATM machines.
C) more bank branches than it did 10 years ago.
D) none of the above.

Question 19

Which of the following statements is INCORRECT?

A) A bank seeking economies of scale should try to become a financial 'supermarket'.
B) Smaller banks' overheads will be higher per unit of output.
C) Economies of scale mean that it is cheaper to produce a product in conjunction with another product.
D) Economies of scale mean that larger banks have lower unit costs.

Question 20

The term 'bill line' refers to:

A) a type of small business loan in which the borrower can draw down every 90 days.
B) a new commercial bill product that a bank might introduce.
C) corporate loans in large denominations.
D) where the surety on a security consists of a parcel of bills.

Question 21

As of January 2010, there were 10 foreign bank branches in Australia.

Question 22

Because they are community- based organisations, building societies and credit unions experience little difficulty attracting capital.

Question 23

'Asset/liability management' is defined as:

A) changing the structure of the balance sheet to achieve the bank's objectives.
B) investing of assets on behalf of clients by funds managers.
C) RBA buying and selling of CGS to manage market liquidity.
D) none of the above.

Question 24

The set of institutional arrangements for transferring value from one party of the economy to another is known as the system.

A) Austraclear
B) accounting
C) payments
D) acceptance

Question 25

Convergence in the provision of financial services is acting to enhance bank profits.

Question 26

A university student obtains a $1000 loan from his bank. This will be recorded in the first instance in:

A) the bank's exchange settlement account with the RBA.
B) the liability side of the bank's balance sheet.
C) the bank's RITS account.
D) the asset side of the bank's balance sheet.

Question 27

ATMs, mortgage offset accounts and telephone banking are all evidence that:

A) the banks are a law unto themselves and need to be reigned in.
B) bank branches have become completely unnecessary.
C) hybrid securities can be created by combining debt and equity instruments into one.
D) deregulation has produced innovation.

Question 28

A type of loan that allows secured borrowers to increase their credit balance outstanding up to an agreed limit is called a(n) loan.

A) credit foncier
B) interest- only
C) home equity
D) fixed- rate

Question 29

The concept of cross- subsidy refers to the government using the RBA to give a tax holiday to licensed banks.

Question 30

Asset/liability management by banks has become more feasible since financial deregulation because:

A) the exchange rate is floating.
B) interest rate margins have narrowed.
C) government bonds have been introduced.
D) derivatives with high- volume transactions have been developed.

Question 31

Which of the following is NOT an example of an authorised deposit- taking institution (ADI)?

A) Credit union.
B) Bank.
C) Building society.
D) Superannuation fund.

Question 32

Despite being cheaper, in the long term bank customers are not expected to make significantly greater use of electronic techniques for carrying out transactions.

Question 33

Which of the following statements is correct?

A) Building societies and credit unions do not have access to asset- liability management techniques and must hold larger amounts of liquid assets than banks.
B) Mutual organisations have difficulty in accumulating capital because they cannot sell shares and must rely on retained earnings.
C) Small organisations have difficulty meeting the minimum outlays required to keep in step with technological developments.
D) All of the above.

Question 34

An example of a bank that specialises in a 'retail strategy' is:

A) ANZ.
B) St George.
C) Macquarie Bank.
D) Bankers Trust.

Question 35

The largest deposit type in bank balance sheets around Australia is current deposits not bearing interest.

Question 36

Banks increased their fees over the second half of the nineties and their interest margin fell as a result.

Question 37

Banks have to meet:

A) VaR requirements.
B) liquidity requirements.
C) Basel II requirements.
D) all of the above.

Question 38

Which of the following statements is true?

A) Home equity loans allow additional drawings for investment purposes.
B) Home equity loans allow additional drawings for consumption purposes.
C) Home equity loans allow borrowers to increase the balance outstanding on their mortgages up to an agreed limit.
D) All of the above.

Question 39

The largest item in overall bank lending in Australia is:

A) housing loans.
B) personal loans.
C) corporate loans.
D) loans to related financial institutions.

Question 40

Banks perform an intermediation function by providing deposits which are part of the payments system vital to the proper functioning of the economy, and by providing loans as their major assets.

Question 41

Under the regulatory rules, the amount of capital a bank must hold is a reflection of the composition of its assets.

Question 42

The emergence of independent mortgage originators has resulted in a widening of margins on home lending.

Question 43

Prior to deregulation, banks provided 'implicit interest' to customers by undercharging them for transactions on accounts.

Question 44

An example of 'user pays' would be where the bank prices a loan to fully cover the cost of its provision.

Question 45

The regional banking sector in Australia is contracting.

Question 46

Regulators cannot impose liquidity requirements on financial institutions.

Question 47

Although known as 'off- balance- sheet'activities', such transactions as underwriting and loan syndications nevertheless result in an asset or liability being recorded on the bank's balance sheet.

Question 48

One of the objectives of banks' asset/liability management is to insulate the bank against unfavourable interest rate movements.

Question 49

Following deregulation, Australian banks pushed into offshore markets.

Question 50

Stating a two- way price for an asset, at which the bank will buy and sell, is known as position- taking.

Question 51

The 'Citicorp approach' to bank strategy is to specialise in retail loans.

Question 52

Current government policy rules out mergers between the four major banks.

Question 53

Economies of scope exist when it is cheaper to produce a product in conjunction with others rather than on a stand- alone basis.

Question 54

It has been proven that banks are using their monopoly power to obtain large profits from their credit card operations.

Question 55

A bank can create a contingent claim on itself.

Question 56

The Wallis Report of 1997 recommended that banks be permitted to pursue user- pays pricing.

Question 57

Around two- thirds of building society assets consist of residential mortgages.

Question 58

The four largest Australian banks follow a universal banking strategy.

Question 59

The development of securitisation spelled the end of banks' ability to make illiquid assets marketable.

Question 60

Bills are one of the instruments banks use in asset/liability management.

Question 61

What do banks do?

Question 62

Banks always match the maturity of their assets to the maturity of their liabilities.

Question 63

What is meant by 'liquidity transformation'? Explain its significance.

Question 64

Savings and passbook accounts are part of wholesale banking.

Question 65

Only licensed banks are permitted to use the term 'bank' in their name.

Question 66

What is asset/liability management?

Question 67

The banking sector in Australia is dominated by two major banks.

Question 68

The core business of banking is best defined as running the payments system.

Question 69

The interest rate margin shows how much a bank makes out of its intermediation activities and therefore the resources it is using up in performing them.

Question 70

Explain the term 'off- balance- sheet activities'.