Question 1

Financial-services competition is increasingly taking the place of government rules in the hope that the public will benefit in terms of more convenient services at lower cost.

Accepted Answer

Competition in the financial services sector can drive innovation, leading to more convenient and cost-effective services for consumers, as companies strive to attract and retain customers by offering better value than their competitors. This competitive dynamic can sometimes reduce the reliance on government regulations to ensure fair prices and high-quality services.

Question 2

The money and capital markets and the financial institutions that operate within them depend heavily on public confidence.

Accepted Answer

The functioning of money and capital markets, along with the financial institutions operating within them, relies significantly on public confidence because trust in these entities ensures the smooth flow of transactions, the stability of investments, and overall market stability.

Question 3

Many members of the public regard financial institutions as less secure today than in the past, especially in the wake of failing banks, securities firms and other financial institutions in a number of countries around the world (especially in Japan, Argentina, Asia and the former Soviet Union).

Accepted Answer

The perception of decreased security in financial institutions among the public can be attributed to high-profile failures and financial crises in various countries, which have eroded trust and confidence in these institutions. Historical events, such as the Asian financial crisis, the Argentine economic crisis, and issues in the banking sectors of Japan and countries of the former Soviet Union, have contributed to this perception.

Question 4

Both government and the private sector may offer effective remedies in ensuring the continued viability of existing financial institutions and public confidence in them.

Accepted Answer

Both government interventions, such as regulatory measures and financial support, and private sector initiatives, like mergers and acquisitions or private equity injections, can play crucial roles in stabilizing financial institutions and maintaining public trust in the financial system.

Question 5

As a result of the passage of the FDIC Insurance Act of 2005 federal insurance coverage of qualified retirement accounts was increased from $100,000 to $250.000.

Accepted Answer

The Federal Deposit Insurance Reform Act of 2005 and related legislation increased the federal deposit insurance coverage on certain retirement accounts from $100,000 to $250,000.

Question 6

The public-sponsored insurance idea could be extended to include other financial instruments in which the public saves its money, such as life insurance policies or annuities.

Accepted Answer

Public-sponsored insurance programs can indeed be extended to include other financial instruments like life insurance policies or annuities, as these are mechanisms through which the public saves or invests money, and they can be structured to provide broader social benefits or protections.

Question 7

One solution mandated by the U.S. Congress for the FDIC was to tie the size of government insurance premiums charged an issued bank directly to the amount of risk taken on. Thus, the risk exposure to the insurance fund becomes the determinant of the insurance paid by private financial institutions.

Accepted Answer

This approach incentivizes banks to manage their risk exposure carefully, as higher risk would lead to higher insurance premiums, aligning the cost of insurance more closely with the level of risk a bank poses to the FDIC fund.

Question 8

The trend toward market-expanding operations has encompassed not only financial firms that have traditionally served broad markets (such as insurance companies, money-center banks and security brokerage firms) but also locally oriented financial institutions (such as credit unions and savings banks).

Accepted Answer

The trend towards market expansion in the financial sector has indeed affected a wide range of institutions, from those traditionally serving broad markets like insurance companies, money-center banks, and security brokerage firms, to more locally focused entities such as credit unions and savings banks. This reflects a broader movement towards globalization and diversification in financial services, aiming to reach wider markets and offer a more diverse range of products and services.

Question 9

The initiatives of developing larger financial institutions to deal with greater risk of failure has been most evident in the rise of interstate banking in the United States and the emergence of highly service-diversified financial holding companies. The former came partly as a result of the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, while the latter came partly as a result of the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999.

Accepted Answer

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allowed banks to operate branches across state lines, facilitating the growth of larger financial institutions. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 allowed financial institutions to offer a broader range of services, leading to the emergence of diversified financial holding companies, both aiming to manage the risks associated with financial failures more effectively.

Question 10

Mere knowledge of existing risk-management tools does not guarantee that all risk exposures will be adequately dealt with. Continuing innovation in the risk-management field is absolutely essential to the future smooth operation of the financial system and to the continuing maintenance of public confidence in that system.

Accepted Answer

While knowledge of existing risk-management tools is crucial, the financial system is dynamic and constantly evolving, which means new risks emerge over time. Continuous innovation in risk management is necessary to address these new risks and maintain confidence in the financial system.

Question 11

Fast technological advances in information technology literally make every financial-service customer into a mobile "branch office."
There will be less and less need to ever visit the brick-and-mortar office facilities of a financial institution. Fewer employees will be needed in the financial institutions sector and, eventually hundreds, if not thousands, of full-service branch offices may be closed. The financial-services business clearly is in transition from a labor-intensive industry to a capital-intensive one that relies more and more upon automation and electronic processing.

Accepted Answer

The rapid advancements in information technology have indeed transformed the way financial services are delivered, making it possible for customers to conduct transactions and access services remotely, thus reducing the necessity for physical branch visits. This shift towards digital platforms is leading to a decrease in the need for traditional brick-and-mortar branches and personnel, as more services are automated and handled electronically.

Question 12

Personal communication between financial institutions and their customers will always be important in the delivery of some financial services, especially to older customers and smaller businesses. However, the cost of these traditional communications methods is rising, so their economic advantage over electronic methods continues to decline.

Accepted Answer

Personal communication remains crucial for certain customer segments like older customers and smaller businesses due to their specific needs and preferences. However, as the cost of traditional communication methods increases, electronic methods become more economically advantageous due to their lower costs and scalability.

Question 13

Most of the remaining vestiges of the traditional distinctions between one type of financial-service institution and another will be swept away in the years ahead-a process we have called homogenization.

Accepted Answer

The financial services industry has been experiencing a trend towards homogenization, where traditional distinctions between different types of institutions (such as banks, insurance companies, and investment firms) are becoming less pronounced. This is due to regulatory changes, technological advancements, and shifts in consumer behavior, leading to a more integrated and uniform sector.

Question 14

There will be a need for new institutions to facilitate the continuing trend toward securitization of many of the credit-related assets held by lending institutions and other corporations.

Accepted Answer

The trend toward securitization of credit-related assets requires new institutions or mechanisms to effectively manage, distribute, and regulate these securities, ensuring market efficiency, transparency, and risk management.

Question 15

The mega-mergers involving multi-billion-dollar-size institutions within the U.S. financial system are generally of two types: consolidations, which bring together financial firms serving the same industry; and convergences, where firms from two or more different financial industries combine their operations.

Accepted Answer

Consolidations involve the merging of firms within the same financial sector, aiming to enhance market share and efficiency, while convergences represent mergers between firms from different sectors of the financial industry, such as banking and insurance, to provide a broader range of services.

Question 16

The dual concern-letting markets and competition do their essential work to benefit customers, while preserving safety and soundness to protect the most vulnerable customers-has led to the development of several different regulatory approaches, any one of which may come to dominate the future of the financial-services business.

Accepted Answer

The dual concern of allowing markets and competition to function for customer benefit while ensuring safety and soundness to protect vulnerable customers has indeed led to the development of various regulatory approaches in the financial-services sector. These approaches aim to balance market freedom with necessary oversight to prevent systemic risks and protect consumers.

Question 17

The recent Financial Services Modernization (Gramm-Leach-Bliley) Act, passed in the U.S. in November 1999, now allows banks, thrifts, insurance companies and securities firms to enter each other's backyard through a centuries-old financial structure, the holding company. 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. A model of this kind is called the "Financial Holding Company Model."

Accepted Answer

The Financial Services Modernization Act, also known as the Gramm-Leach-Bliley Act, passed in 1999, indeed allows financial institutions such as banks, insurance companies, and securities firms to merge and offer each other's services through the formation of financial holding companies. This structure permits these institutions to operate under one umbrella organization, thereby enabling a more integrated offering of financial services.

Question 18

In the financial holding company model, each firm has its own capital and management and its own net earnings or earnings losses, which are independent of the earnings or losses of other affiliated companies belonging to the same holding company.

Accepted Answer

In the financial holding company model, each firm operates independently with its own capital, management, and financial outcomes, allowing for the diversification of risks and benefits across the holding company's portfolio.

Question 19

One model entitled the "Single Regulator"
approach calls upon one regulatory agency to oversee an entire financial-services company with all of its component parts.

Accepted Answer

The "Single Regulator" approach indeed refers to a regulatory model where a single agency is responsible for overseeing all aspects of a financial-services company, including its various components, to ensure compliance with laws and regulations. This model contrasts with a system where multiple regulators oversee different parts of a financial institution based on their specific functions or activities.

Question 20

The challenge of the "Single Regulator"
approach is that such a regulator has to know many different financial businesses well in order to do a good job of supervising the safety of complex financial institutions.

Accepted Answer

A single regulator overseeing a diverse range of financial institutions must possess a broad and deep understanding of various financial businesses and their complexities to effectively supervise and ensure their safety. This is challenging due to the varied nature of financial services and products.

Quiz 4: The Future of the Financial System and the Money and Capital Markets