Deck 17: The Evolution of Banks and Markets and the Role of Financial Innovation

Question 1

The benefits of relationship banking are:

A)intertemporal smoothing of contract terms to encourage borrower investments
B)contractual flexibility
C)Opportunities for borrowers to better understand the business of banking.
D)Opportunities for banks to improve their image in the community.
E)none of the above
F)a and d

Answer 1

F

Question 2

Financial innovation is_____________________________________________.

Answer 2

The creation of new financial claims, institutions, markets, business practices, or processes for distributing financial products and services.

Question 3

The benefits of financial innovation are that...

Answer 3

they improve the allocation of capital via better risk sharing, diversification, and lower transaction costs, and also mitigate agency problems and information asymmetries.

Question 4

Financial innovation is often intended to:

A)resolve agency problems.
B)mitigate information-asymmetry problems.
C)inflate the profits of investment banks.
D)satisfy investors who like new financial instruments.
E)a and b

Question 5

There may be too much financial development if it:

A)leads to the financial sector becoming politically powerful.
B)causes investment banks to become too big.
C)excessively diverts talent and resources away from other productive sectors.
D)none of the above
E)a and b

Question 6

Regulatory arbitrage refers to _________________________.

Question 7

A more competitive banking environment:

A)Destroys relationship banking
B)Elevates the importance of relationship banking.
C)Causes relationship banking to adapt and change its nature.
D)Makes banks push for more protection of relationship banking
E)b and c

Question 8

The dark sides of financial innovation are that they might __________________.

Question 9

CRA stands for:

A)Community Revival Agency
B)Cash Register Advances
C)Credit Rating Agency
D)none of the above

Question 10

The relationship between financial development and economic growth is that:

A)Financial development is a consequence of economic growth, but nothing more.
B)Economic growth is a consequence of financial development, but the causality probably runs both ways.
C)If there is any correlation between financial development and economic growth, it is largely spurious
D)None of the above

Question 11

Securitization...

A)connects banks and markets.
B)should be banned because it causes fragility.
C)is an innovation designed to create profits for investment banks.
D)none of the above
E)b and c

Question 12

CRAs exist because...

A)they are protected as an oligopoly by regulation.
B)they are diversified information producers who take advantage of economies of scale in information production.
C)banks do not know how to assign credit ratings to debt instruments.
D)none of the above
E)a and b