Deck 25: Exploring the Complexities of Financial Services and Regulation

Question 1

Government-provided insurance can lead to a moral hazard problem in which agents (such as managers of an insured financial firm) take advantage of a guarantee underwritten by principals (in this case, the nation's taxpayers).

Answer 1

True

Question 2

One of the most recent and important changes sweeping through the financial system is financial innovation-the development of new financial services and instruments.

Answer 2

True

Question 3

One of the causes of the ongoing rush to innovate and develop new financial services and techniques is the rise of intense competition among financial-service providers.

Answer 3

True

Question 4

Many of the financial institutions are engaged in mergers and acquisitions aimed at creating financial giants out of numerous smaller financial-service providers-giant service companies that can more effectively compete with each other and win greater shares of the financial-service marketplace.

Question 5

Prior to the 2007-2009 credit crisis, financial-services competition was increasingly taking the place of government rules in the hope that the public will benefit in terms of more convenient services at lower cost.

Question 6

More financial institutions are establishing interstate operations and expanding their marketing programs to cover whole regions and, in many instances, the whole globe (usually referred to as globalization).

Question 7

The results of globalization are falling geographic barriers to international competition and strong pressure to consolidate smaller financial-service institutions into larger ones.

Question 8

The life-cycle hypothesis suggests that, as individuals grow older, they reduce their expectations of life-time income, mainly because their expected time in the labor force is decreasing.

Question 9

The broader and faster dissemination of information today is contributing to the internationalization of markets, which spurs competition and heightens the need for international cooperation among financial institutions and among government agencies that regulate them.

Question 10

Increasing globalization of the financial and economic system will not be without its cost.

Question 11

Due to the increasing globalization of the financial and economic system, economic conditions within any one nation have become increasingly sensitive to foreign developments and harder for domestic policymakers to control or influence.

Question 12

Confirmation of securities trades (clearing) and getting proper payment and timely delivery of securities bought and sold (settlement) will be more challenging in a globalized financial system.

Question 13

Public confidence is of high priority to financial institutions.

Question 14

The financial system works to channel scarce loanable funds (credit) to their most productive uses only if individuals and businesses are willing to save and trust those savings to financial institutions and only if other businesses and individuals are willing to rely on the financial system to provide credit to support their consumption and investment.

Question 15

When any financial institution develops serious problems that reach public notice, the public's confidence in other financial institutions may be damaged as well.

Question 16

Many members of the public regard financial institutions as less secure today than in the past, especially in the wake of great credit crisis of 2007-2009.

Question 17

Financial-service customers today appear to be more sensitive to the risk of losing their funds and are, therefore, less loyal in dealing with any one financial institution.

Question 18

Financial-service reliability has become as important as price to many customers today.

Question 19

Loss of public confidence not only produces adverse consequences for individual institutions but also damages the efficiency of financial market processes.

Question 20

Only the government can offer effective remedies in ensuring the continued viability of existing financial institutions and the public's confidence in them.

Question 21

Governments have taken major steps over the years to ensure the safety of banks and other financial institutions in order to protect the public's funds.

Question 22

During the 1930s, with thousands of banks failing, the U.S. Congress created the Federal Deposit Insurance Corporation (FDIC) to provide insurance coverage for small deposits.

Question 23

Recently, the upper limit on account balances receiving FDIC insurance increased $100,000 to $350.000.

Question 24

In 1974, U.S. Congress created the Pension Benefit Guaranty Corporation (PBGC) to insure retirement plans promised to the employees of some private businesses.

Question 25

Public-sponsored insurance of financial assets carry no adverse side-effects.

Question 26

One problem with government insurance that must be faced is how to avoid distorting risk-taking decisions by the managers of privately owned financial institutions.

Question 27

Federal deposit insurance, for example, has protected small depositors but led many banks and thrifts in prior decades to take on greater risk because, for most of the FDIC's history, insurance premiums were the same for all depository institutions, resulting in riskier depository institutions being subsidized by safer institutions.

Question 28

A way to potentially mitigate the moral hazard problem caused by deposit insurance is to charge member fees that adjust to the level of risk that the institution undertakes.

Question 29

To avoid the moral hazard problem, our preferred risk index ought to tell us that if one financial firm is twice as risky as another, the former will pay FDIC insurance premiums that are twice as high as what the latter will have to pay.

Question 30

The 12 leading industrialized nations adopted the Basle Agreement on Bank Capital Standards in July 1988 and pledged bank supervisory authorities in each nation to achieve a minimum overall bank capital-to-risk-adjusted-assets ratio of at least 8 percent.

Question 31

A unique feature of the Basle Agreement is that risk weights were applied to each category of assets a bank holds so that riskier banks were forced to hold additional capital in order to protect their depositors.

Question 32

While mergers among many different types of financial institutions allow the institution to offer a wide variety of products and services, diversifying themselves against market risk, such mergers can also lead to firms that may be judged to pose "systemic risk" across the entire financial market.

Question 33

The following financial firms were judged too big to fail and were bailed out by the U.S. government: Bank of America, American International Group, and Citigroup, as well as Lehman brothers.

Question 34

Securitization techniques, if used inappropriately, can actually increase risk for lenders and investors.

Question 35

Managers of successful financial institutions today must be intimately familiar with risk-management tools such as: duration analysis, interest rate swaps, currency swaps, financial futures and option contracts.

Question 36

Mere knowledge of existing risk-management tools does not guarantee that all risk exposures will be adequately dealt with.

Question 37

Capital market investors can only approximately price the securities of financial institutions that do not fully disclose their financial condition and prospects.

Question 38

In 1991, the U.S. Congress passed the FDIC Improvement Act, requiring regular full-scope, on-site examination of each U.S.-insured depository institution.

Question 39

The Internet offers banks and other financial-service firms a low-cost channel through which to advertise their services and offer service packages.

Question 40

As faster and lighter computer chips are developed, pocket-sized PCs, iPods, and smart phones increasingly will be able to merge information storage, information retrieval, telecommunications and computing power into one lightweight, portable information-gathering resource, eventually available to almost everyone at low cost.

Question 41

Pocket and hand-held computing devices such as iPods and smart phones will allow both managers of financial-service firms and their customers to instantly record transactions, notes and memos; to fax documents; and to send and retrieve financial data.

Question 42

The fast pace of technological advancement is typically outpaced by individuals desire to adopt new technology.

Question 43

Personal communication between financial institutions and their customers will likely to continue to be important in the delivery of some financial services, especially to older customers and smaller businesses.

Question 44

Globalization refers to the process by which financial services offered by different financial institutions begin to converge around the globe.

Question 45

Financial service firms will face a customer increasingly sensitized to differing terms of sale and more ready to transfer his or her business to the cheapest source for the quantity and quality of service desired.

Question 46

Because cost control and productivity will be key factors for the future success of financial-service firms, financial institutions with extensive service delivery systems (including electronic delivery channels) already in place will have a competitive advantage.

Question 47

The cost and productivity advantages of the financial institutions with extensive service delivery systems already in place are likely to lead to still more mergers and consolidations.

Question 48

Government regulation is likely to increase especially when it comes to securitized assets like mortgage backed securities and derivatives trading.

Question 49

The success of mortgage-backed securities over the past three decades demonstrate that a financial institution can more easily take some of the loans it has made and use them as collateral for borrowing money through the sale of securities.

Question 50

Today, there are loan-backed securities collateralized by such diverse assets as commercial and residential mortgage loans, mobile home loans, credit-card receivables, auto and boat loans, home equity loans and computer equipment leases.

Question 51

Consolidation is when firms from two or more different financial industries combine their operations.

Question 52

Convergence is when firms from the same industry merge to form a larger institution.

Question 53

In the holding company, different affiliated firms offer different groups of services but all are owned by one controlling company at the top of the organization.

Question 54

The "Subsidiary Model" permitted under the new Gramm-Leach-Bliley Act allows one financial service provider (e.g., a bank) to sell other services through its own subsidiary firms.

Question 55

In the financial holding company model, the earnings or losses of other affiliated companies do not affect the overall company.

Question 56

With the subsidiary approach, the earnings or losses of each subsidiary company also affect the parent firm.

Question 57

The "Single Regulator" approach calls upon one regulatory agency to oversee an entire financial-services company.

Question 58

Allowing privately owned firms to decide for themselves what services to provide and in what quantity is known as privatization.

Question 59

A recent demographic trend is a decrease in the average age of couples having their first child.

Question 60

According to the textbook, the provision of relevant information is vital to the performance of the financial market, but too much information may be detrimental.

Question 61

Regulated institutions typically posses a comparative advantage over non-regulated institutions because the public trusts them more.

Question 62

An imprudently implemented risk-management tool can actually lead to greater risk for both borrowers and lenders.

Question 63

During the 1990s interstate banking became permissible in the United States under federal and state laws.

Question 64

In 1999, the U.S. Congress lifted restrictions in place since the 1930s and allowed banks and financial-service holding companies the power to combine menus of banking, insurance, securities underwriting services and real estate brokerage services under the same financial-service organization.

Question 65

A potential benefit of increased consolidation and conversion is that it provides companies the resources needed to attract customers who value a personal touch in their financial services.

Question 66

Greater disclosure of information works to facilitate the "discipline of the market" and allows the industry to more effectively serve as its own regulator.

Question 67

The process of increasing financial disclosure in the market is referred to as "harmonization."

Question 68

Under the terms of the Gramm-Leach-Bliley (Financial Services Modernization) Act, customers were granted the authority to stop a financial institution from sharing their private information with nonaffiliated firms if those customers did so in writing.

Question 69

The Gramm-Leach-Bliley (Financial Services Modernization) Act permitted companies that are part of the same overall financial-service organization to share private customer information with each other unless they voluntarily agreed not to do so.

Question 70

The debate over protecting the privacy of financial-service consumers is likely to persist far into the foreseeable future due to the increased use of technology in the financial market.

Question 71

The notion of a "level playing field" refers to the need for increased information flows to customers so that they can make an informed financial decision.

Question 72

As long as some financial firms are taxed and regulated differently from other financial firms, the so-called "level playing field" issue will never go away.

Question 73

One of the most important ways the private market is dealing with greater risk of failure today is by encouraging the development of larger financial institutions that diversify geographically and by product line.

Question 74

Securitization opens up additional funding sources for financial institutions, adding liquidity and diversification and practically removing individual asset risk.

Question 75

The 1999 Gramm-Leach-Bliley Act specified that consumers of financial services had to "opt out" in writing if they didn't want financial-services companies sharing their "nonpublic" (private) information with others.

Question 76

The Federal Reserve has set limits upon how much in total a payments-system participant can owe to everyone else who belongs to the same clearing system.

Question 77

Governments will likely continue deregulating the financial industry, especially the areas concerned with derivatives trading.

Question 78

Increased disclosure requirements likely to be imposed on financial institutions will enable both investors and customers of financial institutions to make more intelligent decisions and the most economical use of available resources.

Question 79

The Internet in conjunction with computers will allow the transfer of information in microseconds.

Question 80

Smart cards are growing much faster in the U.S. then they are in Europe.