45) Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers
A) has shrunk dramatically, from around 40 percent of total credit advanced to around 20 percent
by 2017.
B) has shrunk dramatically, from around 70 percent of total credit advanced to below 50 percent
by 2017.
C) has expanded dramatically, from around 50 percent of total credit advanced to above 70
percent by 2017.
D) has expanded dramatically, from around 30 percent of total credit advanced to above 50
percent by 2017.
46) In order to compete with changing market conditions in the 1980s, banks supported
legislation to remove interest rate ceilings and to allow banks to pay interest on checking
accounts. These actions
A) lowered transactions costs for banks.
B) raised the cost of acquiring funds for banks.
C) made banks less competitive in the financial markets.
D) raised the income banks received.
47) Since 1980
A) banks have decreased risk taking to offset the decline in profits.
B) banks have offset the decline in profits from traditional activities with increased income from
off-balance-sheet activities.
C) banks have offset the decline in profits from off-balance-sheet activities with increased
income from traditional activities.
D) bank profits have grown rapidly due to deregulation.
48) Financial innovation has caused
A) banks to suffer declines in their cost advantages in acquiring funds, although it has not caused
a decline in income advantages.
B) banks to suffer a simultaneous decline of cost and income advantages.
C) banks to suffer declines in their income advantages in acquiring funds, although it has not
caused a decline in cost advantages.
D) banks to achieve competitive advantages in both costs and income.
49) Disintermediation resulted from
A) interest rate ceilings combined with inflation-driven increases in interest rates.
B) elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits).
C) increases in federal income taxes.
D) reserve requirements.
50) The experience of disintermediation in the banking industry illustrates that
A) more regulation of financial markets may avoid such problems in the future.
B) banks are unable to remain competitive with other financial intermediaries.
C) consumers no longer desire the services that banks provide.
D) markets invent alternatives to costly regulations.
51) Banks responded to disintermediation by
A) supporting the elimination of interest rate regulations, enabling them to better compete for
funds.
B) opposing the elimination of interest rate regulations, as this would increase their cost of funds.
C) demanding that interest rate regulations be imposed on money market mutual funds.
D) supporting the elimination of interest rate regulations, as this would reduce their cost of
funds.
52) One factor contributing to the decline in cost advantages that banks once had is the
A) decline in the importance of checkable deposits from over 60 percent of banks’ liabilities to
11 percent today.
B) decline in the importance of savings deposits from over 60 percent of banks’ liabilities to
under 15 percent today.
C) decline in the importance of checkable deposits from over 40 percent of banks’ liabilities to
15 percent today.
D) decline in the importance of savings deposits from over 40 percent of banks’ liabilities to
under 20 percent today.
53) The most important developments that reduced banks cost advantages include
A) the growth of the junk bond market.
B) the competition from money market mutual funds.
C) the growth of securitization.
D) the growth in the commercial paper market.
54) The most important developments that reduced banks’ income advantages include
A) the increase in off-balance sheet activities.
B) the growth of securitization.
C) the elimination of Regulation Q ceilings.
D) the competition from money market mutual funds.
55) Banks have attempted to maintain adequate profit levels by
A) making fewer riskier loans, such as commercial real estate loans.
B) pursuing new off-balance-sheet activities.
C) increasing reserve deposits at the Fed.
D) decreasing capital accounts.
56) The decline in traditional banking internationally can be attributed to
A) increased regulation.
B) improved information technology.
C) increasing monopoly power of banks over depositors.
D) increased protection from competition.
57) Why did the interest rate volatility of the 1970s spur financial innovation?
11.3 Structure of the U.S. Commercial Banking Industry
1) The presence of so many commercial banks in the United States is most likely the result of
A) consumers’ strong desire for dealing with only local banks.
B) adverse selection and moral hazard problems that give local banks a competitive advantage
over larger banks.
C) prior regulations that restricted the ability of these financial institutions to open branches.
D) consumers’ preference for state banks.
2) The McFadden Act of 1927
A) effectively prohibited banks from branching across state lines.
B) required that banks maintain bank capital equal to at least 6 percent of their assets.
C) effectively required that banks maintain a correspondent relationship with large money center
banks.
D) separated the commercial banks and investment banks.
3) The legislation that effectively prohibited banks from branching across state lines and forced
all national banks to conform to the branching regulations in the state in which they reside is the
A) McFadden Act.
B) National Bank Act.
C) Glass-Steagall Act.
D) Garn-St.Germain Act.
4) The large number of banks in the United States is an indication of
A) vigorous competition within the banking industry.
B) lack of competition within the banking industry.
C) only efficient banks operating within the United States.
D) consumer preference for local banks.
5) Lack of competition in the United States banking industry can be attributed to
A) the fact that competition does not benefit consumers.
B) the fact that branching has eliminated competition.
C) recent legislation restricting competition.
D) nineteenth-century populist sentiment.
6) Which of the following is a TRUE statement concerning bank holding companies?
A) Bank holding companies own few large banks.
B) Bank holding companies have experienced dramatic growth in the past three decades.
C) The McFadden Act has prevented bank holding companies from establishing branch banks.
D) Bank holding companies can own only banks.
7) A financial innovation that developed as a result of banks avoidance of bank branching
restrictions was
A) money market mutual funds.
B) commercial paper.
C) junk bonds.
D) bank holding companies.
8) ATMs were developed because of breakthroughs in technology and as a
A) means of avoiding restrictive branching regulations.
B) means of avoiding paying interest to corporate customers.
C) way of concealing transactions from the SEC.
D) increasing the competition from foreign banks.
9) Financial innovations that grew out of the bank branching restrictions were
A) bank holding companies and automated teller machines.
B) bank holding companies and securitization.
C) automated teller machines and sweep accounts.
D) automated teller machines and bank credit cards.
10) What financial innovations helped banks to get around the bank branching restrictions of the
11.4 Bank Consolidation and Nationwide Banking
1) The primary reason for the recent reduction in the number of banks is
A) bank failures.
B) re-regulation of banking.
C) restrictions on interstate branching.
D) bank consolidation.
2) Bank holding companies that rival money center banks in size, but are not located in money
center cities are
A) superregional banks.
B) bank clearing houses.
C) international banks.
D) local banks.
3) Allowing bank branching across state lines gives banks greater ability to coordinate bank
operations. This makes it easier for them to receive the benefits of
A) the dual banking system.
B) economies of scale.
C) disintermediation.
D) interest-rate irregularities.
4) The ability to use one resource to provide different products and services is
A) economies of scale.
B) economies of scope.
C) diversification.
D) vertical integration.
5) The business term for economies of scope is
A) economies of scale.
B) diversification.
C) cooperation.
D) synergies.
6) The legislation that overturned the prohibition on interstate banking is
A) the McFadden Act.
B) the Gramm-Leach-Bliley Act.
C) the Glass-Steagall Act.
D) the Riegle-Neal Act.
7) Although it has a population about half that of the United States, Japan has
A) many more banks.
B) about 25 percent of the number of banks.
C) more than 5,000 commercial banks.
D) fewer than 100 commercial banks.
8) Experts predict that the future structure of the U.S. banking industry will have
A) an increased number of banks.
B) as few as ten banks.
C) several thousand banks.
D) a few hundred banks.
9) Bank consolidation will likely result in
A) less competition.
B) the elimination of community banks.
C) increased competition.
D) a shift in assets from larger banks to smaller banks.
10) Critics of nationwide banking fear
A) an elimination of community banks.
B) increased lending to small businesses.
C) cutthroat competition.
D) banks with economies of scale problems.
11) One of the concerns of increased bank consolidation is the reduction in community banks
which could result in
A) less lending to small businesses.
B) loss of cultural identity.
C) higher interest rates.
D) more bank regulation.
12) Nationwide banking might reduce bank failures due to
A) reduced competition.
B) reduced lending to small businesses.
C) diversification of loan portfolios across state lines.
D) elimination of community banks.
13) As the banking system in the United States evolves, it is expected that
A) the number and importance of small banks will increase.
B) the number and importance of large banks will decrease.
C) small banks will grow at the expense of large banks.
D) the number and importance of large banks will increase.
11.5 Separation of the Banking and Other Financial Service Industries
1) The legislation overturning the Glass-Steagall Act is
A) the McFadden Act.
B) the Gramm-Leach-Bliley Act.
C) the Garn-St. Germain Act.
D) the Riegle-Neal Act.
2) Under the Gramm-Leach-Bliley Act states retain regulatory authority over
A) bank holding companies.
B) securities activities.
C) insurance activities.
D) bank subsidiaries engaged in securities underwriting.
3) Under the Gramm-Leach-Bliley Act the oversight of the securities activities of bank holding
companies belongs to
A) the SEC.
B) the Comptroller of the Currency.
C) the U.S. Treasury.
D) the Federal Reserve.
4) As a result of the global financial crisis several of the large, free-standing investment banking
firms chose to become bank holding companies. This means that they will now be regulated by
A) the Federal Reserve.
B) the FDIC.
C) the state banking authorities.
D) the Treasury.
5) In a ________ banking system, commercial banks provide a full range of banking, securities,
and insurance services, all within a single legal entity.
A) universal
B) severable
C) barrier-free
D) dividerless
6) In a ________ banking system, commercial banks engage in securities underwriting, but legal
subsidiaries conduct the different activities. Also, banking and insurance are not typically
undertaken together in this system.
A) universal
B) British-style universal
C) short-fence
D) compartmentalized
7) A major difference between the United States and Japanese banking systems is that
A) American banks are allowed to hold substantial equity stakes in commercial firms, whereas
Japanese banks cannot.
B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas
American banks cannot.
C) bank holding companies are illegal in the United States.
D) Japanese banks are usually organized as bank holding companies.
11.6 Thrift Industry: Regulation and Structure
1) Like the dual banking system for commercial banks, thrifts can have either ________ or
________ charters.
A) state; federal
B) state; local
C) local; federal
D) municipal; federal
2) The Federal Reserve makes discount loans to banks, and similarly, the FHLBS makes loans to
savings and loan institutions. The Fed loans are expected to be repaid ________ while the
FHLBS loans are ________.
A) quickly; for longer periods of time
B) when the bank becomes solvent; to be repaid quickly
C) quickly; to be repaid when the S&L becomes solvent
D) when the market rebounds; of short duration
3) Thrift institutions include
A) commercial banks.
B) brokerage firms.
C) insurance companies.
D) mutual savings banks.
4) The FHLBS gives loans to S&Ls and thus performs a function similar to the ________ for
commercial banks.
A) Federal Reserve
B) U.S. Treasury
C) Office of the Comptroller of the Currency
D) U.S. Mint
5) Mutual savings banks are owned by
A) shareholders.
B) partners.
C) depositors.
D) foreign investors.
6) Mutual savings banks are primarily regulated by
A) the states in which they are located.
B) the Federal Reserve.
C) the FDIC.
D) the National Credit Union Administration.
7) An essential characteristic of credit unions is that
A) they are typically large.
B) branching across state lines is prohibited.
C) their lending is primarily for mortgage loans.
D) they are organized for individuals with a common bond.
8) ________ are the only depository institutions that are tax-exempt.
A) Commercial banks
B) Savings and loans
C) Mutual savings banks
D) Credit unions
11.7 International Banking
1) The spectacular growth in international banking can be explained by
A) the rapid growth in international trade.
B) the 1988 Basel Agreement.
C) the collapse of the Bretton Woods system.
D) the creation of the World Trade Organization.
2) What country is given credit for the birth of the Eurodollar market?
A) the United States
B) England
C) the Soviet Union
D) Japan
3) Deposits in European banks denominated in dollars for the purpose of international
transactions are known as
A) Eurodollars.
B) European Currency Units.
C) European Monetary Units.
D) International Monetary Units.
4) The main center of the Eurodollar market is
A) London.
B) Basel.
C) Paris.
D) New York.
5) Eurodollars are
A) dollar-dominated deposits held in banks outside the United States.
B) deposits held by U.S. banks in Europe.
C) deposits held by U.S. banks in foreign countries.
D) dollar-dominated deposits held in U.S. banks by Europeans.
6) Reasons for holding Eurodollars include
A) the fact that Eurodollar deposits are insured by the FDIC.
B) the fact that dollars are widely used to conduct international transactions.
C) the fact that minimum transaction sizes are very low, making Eurodollars an attractive
savings instrument for consumers.
D) the fact that Eurodollar deposits are heavily regulated.
7) An advantage to American banks from operating foreign branches is that Eurodollar deposits
in offshore branches are
A) not subject to reserve requirements.
B) insured by the FDIC.
C) subject to extensive regulatory supervision.
D) all demand deposits that pay no interest.
8) U.S. banks have most of their branches in
A) Latin America, the Far East, the Caribbean, and London.
B) Latin America, the Middle East, the Caribbean, and London.
C) Mexico, the Middle East, the Caribbean, and London.
D) South America, the Middle East, the Caribbean, and Canada.
9) A(n) ________ is a subsidiary of a U.S. bank that is engaged primarily in international
banking.
A) Edge Act corporation
B) Eurodollar agency
C) universal bank
D) McFadden corporation
10) ________ within the U.S. can make loans to foreigners but cannot make loans to domestic
residents.
A) Edge Act corporations
B) International Banking Facilities
C) Universal banks
D) Euro banks
11) ________ of a foreign bank operates in the U.S. but cannot accept deposits from domestic
residents.
A) An agency office
B) A universal corporation
C) A McFadden corporation
D) A Basel branch
12) If a foreign bank operates a subsidiary bank in the U.S., the subsidiary bank is
A) subject to the same regulations as a U.S. owned bank.
B) only subject to the regulations of the country in which the foreign bank is chartered.
C) restricted to making loans to only foreign citizens in the U.S.
D) restricted to accepting deposits from foreign citizens living in the U.S.
13) Foreign banks may engage in banking activities in the United States by opening all of the
following EXCEPT
A) an agency office of the foreign bank.
B) a subsidiary U.S. bank.
C) a branch of the foreign bank.
D) a McFadden Corporation.
14) Since the passage of the International Banking Act of 1978, the competitive advantage
enjoyed by foreign banks in the U.S. has been
A) reduced.
B) mildly expanded.
C) completely eliminated.
D) greatly expanded.
15) In 2017, ________ of the ten largest banks in the world were not U.S. banks.
A) nine
B) two
C) five
D) seven
16) Discuss three ways in which U.S. banks can become involved in international banking.