Deck 16: Banking in the International Economy

Question 1

The activities of a U.S. bank holding company that owns a controlling interest in a foreign financial services company are governed by

A)the Securities and Exchange Commission.
B)the Office of the Comptroller of the Currency.
C)Federal Reserve Regulation K.
D)Federal Reserve Regulation Q.

Answer 1

Federal Reserve Regulation K.

Question 2

By 2006, international bank lending in the United States, Western Europe, and Japan amounted to

A)less than $1 billion.
B)about $200 million.
C)about $10 billion.
D)several trillion dollars.

Answer 2

several trillion dollars.

Question 3

Branches of U.S. banks in which city control the most assets?

A)Tokyo
B)Hong Kong
C)Paris
D)London

Answer 3

London

Question 4

Before World War II

A)capital flows between the United States and other countries were much greater than they are today.
B)capital flows between the United States and other countries were prohibited.
C)capital flows between the United States and other countries were restricted by regulation.
D)the volume of international trade was large relative to the volume of domestic economic activity.

Question 5

Which of the following is NOT a reason that IBFs have been desirable to banks?

A)They are not subject to Federal Reserve regulation.
B)They are exempt from reserve requirements.
C)They are exempt from federal restrictions on interest payments to depositors.
D)They are often free from state and local taxation.

Question 6

What percentage of total U.S. bank assets is held by foreign banks?

A)1%
B)9%
C)15%
D)30%

Question 7

Which of the following may an Edge Act Corporation NOT do?

A)Make commercial loans to U.S. residents
B)Accept deposits from U.S. residents for use in international trade transactions
C)Deal in foreign exchange
D)Make loans to finance overseas trade

Question 8

An "offshore market" is

A)any market outside of the United States.
B)any market in a small foreign country.
C)a market that has little or no bank regulation and that taxes bank profits at low rates.
D)a foreign market that uses the U.S. dollar as its domestic currency.

Question 9

Which of the following is true of an agency office of a foreign bank?

A)It can make loans in the United States.
B)It may not transfer funds to the United States.
C)It may accept deposits from U.S. residents.
D)They are subject to the requirements for FDIC insurance.

Question 10

IBFs are

A)U.S. branches of banks headquartered outside of the United States.
B)foreign branches of U.S. banks.
C)securities tradeable on the Eurodollar market.
D)U.S. institutions that aren't allowed to conduct domestic banking business.

Question 11

Experts studying the lending patterns of Japanese and other foreign-owned banks in the United States have found that these banks

A)have been lending most of their U.S. deposits abroad.
B)have accumulated very few assets in the United States.
C)have lent most of their U.S. deposits in the United States.
D)have strong influence in some parts of the United States, but very weak influence in other parts, such as California.

Question 12

A foreign branch bank

A)may not make loans within the United States.
B)may not accept deposits from U.S. residents.
C)may not accept deposits from non-U.S. residents.
D)may accept deposits from U.S. residents and make loans to them.

Question 13

Which of the following is NOT true of the U.S. economy before World War II?

A)The U.S. economy was an open economy.
B)Capital flows between the United States and other economies were restricted by regulation.
C)The volume of international trade was small relative to the level of domestic economic activity.
D)Cross-border communication costs were relatively high.

Question 14

The principal activities of international banking are

A)engaging in currency swaps.
B)accepting deposits from savers and lending to borrowers.
C)fending off restrictive domestic regulations.
D)fending off restrictive international regulations.

Question 15

Before World War II

A)the United States was basically a closed economy.
B)the United States economy was more open than it is today.
C)New York was the leading center of international finance.
D)international banking was of great importance to U.S. banks, savers, and borrowers.

Question 16

Which of the following does NOT represent an important offshore market?

A)The Bahamas
B)The Cayman Islands
C)Puerto Rico
D)Hong Kong

Question 17

Which of the following is NOT one of the three leading financial centers in the world?

A)London
B)Amsterdam
C)Tokyo
D)New York

Question 18

An agency office of a foreign bank

A)is subject to the same branching restrictions as U.S. banks.
B)is subject to the same FDIC insurance requirements as U.S. banks.
C)may not make loans within the United States.
D)may not accept deposits from U.S. residents.

Question 19

Which of the following countries has the longest history of international banking?

A)The United States
B)Japan
C)Switzerland
D)Canada

Question 20

Edge Act Corporations are

A)legally prohibited from owning banks.
B)banks that may accept deposits, but that may not make loans.
C)special subsidiaries of U.S. banks that conduct only international banking services.
D)U.S. branches of banks headquartered outside of the United States.

Question 21

The Foreign Bank Supervision Enhancement Act of 1991

A)removed the Federal Reserve from a role in regulating foreign banks in the United States.
B)removed the Office of the Comptroller of the Currency from a role in regulating foreign banks in the United States.
C)was intended to equalize operating standards for domestic and foreign banks.
D)removed state bank regulators from a role in regulating foreign banks in the United States.

Question 22

Most of the foreign-exchange trading of banks is carried out in order to facilitate

A)imports of goods and services.
B)exports of goods and services.
C)foreign transactions by governments.
D)cross-border investment and financial transactions.

Question 23

How can a bank avoid exchange rate risk?

A)By buying financial futures
B)By buying call options
C)By buying put options
D)By matching the currency denomination of assets and liabilities

Question 24

A U.S. bank has £75 million in deposits and makes a loan of £90 million when the exchange rate is $1 = £1. 5. If the exchange rate changes to $1 = £1, then the bank's net worth will change by

A)+$5 million.
B)+$30 million.
C)-$5 million.
D)-$30 million.

Question 25

Why is credit risk in international commerce magnified?

A)Because of exchange rate fluctuations
B)Because of the volatility of global interest rates
C)Because exporters often have limited information about importers
D)Because of tariffs and quotas on international trade

Question 26

Most of the foreign-exchange trading volume of banks is with

A)governments.
B)corporations.
C)private individuals.
D)other banks.

Question 27

A U.S. subsidiary of a foreign bank

A)is subject to domestic bank regulation.
B)may not make loans within the United States.
C)may not accept deposits from U.S. residents.
D)is not subject to the same branching restrictions as U.S. banks.

Question 28

When were U.S. banks authorized to use bankers' acceptances for short-term financing of their customers' foreign and domestic trade?

A)In 1789, by the U.S. Constitution
B)In 1913, by the Federal Reserve Act
C)In 1934, by the International Exchange Act
D)In 1980, by the Deregulation of Domestic and International Exchange Act

Question 29

What is the approximate daily volume of foreign-exchange trading?

A)$1 billion
B)$10 billion
C)$1 trillion
D)$100 trillion

Question 30

Banks are subject to exchange rate risk when

A)their net worth fluctuates with increases or decreases in exchange rates.
B)they engage in currency swaps.
C)they buy foreign-exchange futures contracts.
D)they sell foreign-exchange futures contracts.

Question 31

A bankers' acceptance is

A)currency accepted for deposit in a foreign bank.
B)a loan that uses as collateral funds in a foreign bank.
C)an order to pay a specified amount of money to the holder of the acceptance on a specified date.
D)an agreement to transfer a loan from one bank to another.

Question 32

How may a U.S. bank keep its balance sheet entirely in U.S. dollars?

A)By selling financial futures
B)By buying put options
C)By buying call options
D)By using currency swaps

Question 33

A currency swap is

A)the informal name bankers give to the exchange rate.
B)an exchange of the expected future returns on debt instruments denominated in different currencies.
C)an agreement by one government to provide aid to another government in the form of a loan denominated in the recipient's currency.
D)an agreement to buy and sell a specified amount of foreign currency at a specified future date.

Question 34

As of 1997, about what percentage of Citicorp's assets are held abroad?

A)1%
B)5%
C)60%
D)90%

Question 35

In which of the following countries has the Bank of China NOT shown significant expansion?

A)The United States
B)Russia
C)Canada
D)Hong Kong

Question 36

The Riegle-Neal Act of 1994

A)subjected foreign banks in the United States to the same branching rules that applied to U.S. banks.
B)prohibited foreign bank branches from making commercial loans within the United States.
C)exempted foreign bank branches from reserve requirements.
D)subjected foreign bank branches to deposit interest rate ceilings.

Question 37

The Foreign Bank Supervision Enhancement Act of 1991 was passed as a result of

A)the savings-and-loan crisis.
B)the BCCI scandal.
C)the failure of the Bank of United States.
D)the failure of the Bank of America

Question 38

The International Banking Act of 1978

A)equalized deposit rates being paid by banks in different countries.
B)reduced the cost advantages that foreign banks had previously enjoyed in the United States.
C)brought the Eurodollar market under the control of U.S. regulators.
D)was an agreement reached under the auspices of the United Nations to allow banks to operate more freely in foreign countries.

Question 39

The Bank of Credit and Commerce International failed because of

A)volatile interest rates.
B)exchange rate fluctuations.
C)fraud.
D)overly strict regulation.

Question 40

A U.S. bank has £50 million in deposits and makes a loan of £100 million when the exchange rate is $1 = £1. 5. If the exchange rate changes to $1 = £2, then the bank's net worth will change by

A)+$8.33 million.
B)+$16.67 million.
C)-$8.33 million.
D)-$16.67 million.

Question 41

Which of the following statements concerning the volume of outstanding bankers' acceptances in the United States since the 1920s is accurate?

A)The volume had continually increased between the 1920s and the 1990s.
B)The volume had continually decreased between the 1920s and the 1990s.
C)The volume had risen and fallen over the decades between the 1920s and the 1990s.
D)Statistics on the volume of bankers' acceptances outstanding are not available, so movements in the volume can only be guessed at.

Question 42

The use of bankers' acceptances is most useful in reducing

A)interest rate risk.
B)credit risk.
C)exchange rate risk.
D)the gap between current exchange rates and future exchange rates.

Question 43

Which of the following was NOT an important factor in the rise of the Eurodollar market?

A)Restrictions on British banks lending pounds abroad
B)Restrictions on U.S. banks lending dollars abroad
C)Regulation Q
D)Reserve requirements on banks in the United States

Question 44

What was the international transaction currency before World War II?

A)German mark
B)French franc
C)U.S. dollar
D)British pound

Question 45

Through the early 1970s the largest borrowers on Euromarkets were

A)U.S. banks.
B)foreign banks.
C)governments and state-owned enterprises.
D)multinational corporations.

Question 46

The typical Eurodollar loan

A)matures in less than one year.
B)matures in five to ten years.
C)is for a smaller amount than the typical commercial loan made in the United States.
D)has its principal and interest guaranteed by IMF.

Question 47

Which of the following is true of bankers' acceptances?

A)There is no secondary market for them.
B)They have high default risk.
C)They are analogous to standby letters of credit in the domestic commercial paper market.
D)Their principal, but not their interest, is guaranteed by the International Monetary Fund.

Question 48

Since the late 1980s, the share of eurocurrency deposits denominated in dollars

A)has risen.
B)has held steady.
C)has fallen.
D)fell initially, but since then has risen.

Question 49

Eurocurrency deposits are

A)time deposits denominated in a currency other than that of the issuing bank.
B)deposits denominated in the new universal European currency.
C)dollars used as currency in Eastern European countries with unreliable currencies.
D)the most popular European version of traveler's checks.

Question 50

What is the primary motivation for loan syndication in the Euroloan market?

A)Reduction in information costs
B)Reduction in transactions costs
C)Risk sharing
D)Tax advantages

Question 51

A key reason the commercial paper market developed later in Europe than in the United States is that

A)well-capitalized European banks did not need to find substitutes for traditional bank lending activities.
B)participation in the commercial paper market has been required of U.S. banks since 1914.
C)in the United States there have been important tax advantages to corporations in using the commercial paper market.
D)it was impossible for the commercial paper market in Europe to develop until the Eurodollar market became sufficiently large.

Question 52

Today, the countries with large trade surpluses to deposit in Eurodollar accounts are

A)Canada and the United States.
B)France and England.
C)Germany and England.
D)Japan and South Korea.

Question 53

The Eurodollar arose from

A)the desire of U.S. companies to shield their profits from the U.S. income tax.
B)the reluctance of Eastern Bloc countries to deposit their dollar reserves in U.S. banks.
C)the scarcity of British pounds in the immediate post-World War II period.
D)the scarcity of U.S. dollars in the immediate post-World War II period.

Question 54

Eurodollars are

A)dollar deposits in the United States owned by European residents.
B)dollar deposits in the United States owned by non-U.S. residents.
C)deposits denominated in dollars in banks outside the United States.
D)dollars that may only be spent on European goods and services.

Question 55

Before World War II what was the leading global financial and commercial center?

A)London
B)New York
C)Tokyo
D)Berlin

Question 56

The LIBOR is the

A)accounting convention used in Europe to assess the market value of a loan.
B)European commission which regulates the Eurocurrency market.
C)ceiling on interest rates which may be charged on Eurodollar loans.
D)interest rate charged on Eurodollar loans made between banks.

Question 57

What is the international transaction currency?

A)During any period, the currency of choice in settling international transactions
B)Currently, a weighted combination of the dollar, pound, yen, and euro
C)The gold coins of any country
D)A special currency issued by the International Monetary Fund for use in settling international transactions

Question 58

From the mid-1970s to the late 1980s the largest source of deposits in Euromarkets was

A)OPEC countries.
B)multinational corporations.
C)European governments.
D)the U.S. government.

Question 59

Booking sites are

A)international banking facilities that have been authorized to provide Eurodollar banking in the United States.
B)offices in London where foreign exchange trading takes place.
C)offices in Hong Kong and Singapore where unregulated trading in Eurodollars takes place.
D)located within European central banks and provide European governments with access to the Eurodollar market.

Question 60

What is the dominant currency in the Euromarkets?

A)Japanese yen
B)U.S. dollar
C)British pound
D)Canadian dollar

Question 61

International coordination of minimum capital requirements for commercial banks began in

A)1914.
B)1944.
C)1961.
D)1987.

Question 62

Central banks have met to discuss their roles as lender of last resort several times at the

A)United Nations.
B)Bank for International Settlements.
C)League of Nations.
D)Bank of England

Question 63

What is a Euroloan? What are its typical characteristics? Why is it very likely to be syndicated?

Question 64

The growth of Islamic banking in recent years has occurred for all of the following reasons EXCEPT

A)adopting the approach to banking and payment of interest found in Europe and the U.S.
B)record oil prices contributing to record budget surpluses in some Gulf states.
C)increased desire among many muslims to follow the Koran's teachings regarding interest.
D)changes in political sentiment.

Question 65

In the Islamic religion, it is forbidden to

A)earn a profit.
B)make loans.
C)charge interest that is too high.
D)pay or earn interest.

Question 66

Currently, U.S. banks pay deposit insurance premiums on

A)domestic deposits.
B)Eurodollar deposits.
C)domestic and Eurodollar deposits.
D)all deposits.

Question 67

Which countries are the most important centers of international banking? Why is international banking concentrated in these countries?

Question 68

In which of the following countries was a deposit insurance fund first established?

A)The United States
B)France
C)Japan
D)The United Kingdom

Question 69

Eurobonds

A)account for only a small fraction of new issues in the international bond market.
B)may not be legally sold in the United States.
C)have traditionally been issued in London.
D)are redeemable in gold.

Question 70

The effect of evolving financial market regulation has been to

A)make financial institutions in various countries significantly different.
B)make financial institutions in various countries more similar.
C)increase interest rate differentials across countries.
D)make international capital flows more difficult.

Question 71

A key difficulty that banks encounter in lending to foreign governments is that

A)governments insist on paying below-market interest rates.
B)governments raise most of their money in financial markets and are rarely interested in taking out bank loans.
C)governments prefer to borrow from domestic banks.
D)the credit risk involved is higher than with private lending.

Question 72

The most likely direction of bank regulation internationally will be to

A)regulate by function rather than by institution.
B)regulate interest rates rather than to regulate permissible investments.
C)regulate permissible investments rather than to regulate interest rates.
D)eliminate all banking regulation.

Question 73

The bulk of financing by Islamic banks involves

A)payment of interest.
B)repayment of only the amount of the loan.
C)loans repaid out of the firm's profits.
D)the issuance of bonds.

Question 74

A problem facing Islamic banking is

A)the limited amount of funds available in Gulf States.
B)the lack of standardization as to how to interpret the Koran's teaching about money.
C)little interest among most Muslims to mix religion with finances.
D)the desire to earn higher returns in western banks.

Question 75

Discussion of the possibility of setting up an international lender of last resort began following the

A)collapse of Communism.
B)stock market crash of 1987.
C)developing nations' debt crisis of the early 1980s.
D)oil price increases of the 1970s.

Question 76

From 1970 until the early 1980s the creditworthiness of many developing nations was improving because

A)the collapse of Communism allowed these countries to spend less on defense.
B)of falling commodity prices.
C)of high real interest rates.
D)of rising commodity prices and low real interest rates.

Question 77

Why did the volume of newly syndicated loans in Euromarkets decline during the 1970s and 1980s?

A)International regulation of these markets increased.
B)There were significant defaults on loans to less developed countries.
C)Interest rate volatility increased.
D)Inflation increased.

Question 78

Which of the following is likely to be true as the international coordination of bank regulation continues?

A)Branches of foreign banks probably will continue to be treated differently than domestic banks by the lender of last resort.
B)Cross-border transactions of domestic banks will be addressed by the foreign lender of last resort.
C)Deposit insurance will follow host country rules for branches and subsidiaries.
D)Regulation will become an even more serious impediment to international capital flows.

Question 79

Why was international banking unimportant for U.S. banks, savers, and borrowers before World War II? Is it likely that its importance may ever recede to a low level again?

Question 80

Recent research has found that deposit insurance

A)reduces the likelihood of financial crises.
B)increases the likelihood of financial crises.
C)is unrelated to the likelihood of financial crises.
D)reduces the confidence of depositors.