Chapter 18 Commercial Banking Industry: Structure and Competition 235
62. Since the late 1970s, thrift institutions’ importance as a source of funds for borrowers has shrunk
markedly, from above _________ percent of total credit advanced to below _________ percent
today.
(a) 30; 20
(b) 30; 15
(c) 40; 5
(d) 20; 10
63. Bank failures and mergers have caused the number of commercial banks in the U.S. to decline from
around _________ in the 1970s to below _________ today.
(a) 25,000; 10,000
(b) 15,000; 10,000
(c) 25,000; 20,000
(d) 15,000; 5,000
64. The traditional financial intermediation role of banking has been to make _________-term loans and
to fund them with _________-term deposits.
(a) short; long
(b) long; short
(c) short; short
(d) long; long
65. The process in which people seeking higher interest rates take their money out of financial
institutions is called
(a) capital motility.
(b) loophole mining.
(c) disintermediation.
(d) deposit jumping.
66. One factor contributing to the decline in cost advantages that banks once had is the decline in the
importance of checkable deposits from over _________ percent of banks’ source of funds to
_________ percent today.
(a) 70; 30
(b) 60; 10
(c) 50; 20
(d) 40; 15
236 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
67. The most important developments that have reduced banks’ cost advantages in the past twenty years
include
(a) the elimination of Regulation Q ceilings.
(b) the competition from money market mutual funds.
(c) the growth of securitization.
(d) all of the above.
(e) only (a) and (b) of the above.
68. The most important developments that have reduced banks’ cost advantages in the past twenty years
include
(a) the growth of the junk bond market.
(b) the competition from money market mutual funds.
(c) the growth of securitization.
(d) all of the above.
(e) only (a) and (b) of the above.
69. The most important developments that have reduced banks’ income advantages in the past twenty
years include
(a) the growth of the commercial paper market.
(b) the growth of the junk bond market.
(c) the growth of securitization.
(d) all of the above.
(e) only (a) and (b) of the above.
70. The most important developments that have reduced banks’ income advantages in the past twenty
years include
(a) the growth of the commercial paper market.
(b) the growth of the junk bond market.
(c) the elimination of Regulation Q ceilings.
(d) all of the above.
(e) only (a) and (b) of the above.
71. One factor contributing to the decline in income advantages that banks once had is the increased
competition from the commercial paper market, which has grown from _________ of commercial
and industrial bank loans to over _________ percent today.
(a) 10; 20
(b) 5; 20
(c) 10; 40
(d) 5; 40
Chapter 18 Commercial Banking Industry: Structure and Competition 237
72. Rising market interest rates in the 1960s and the 1970s, combined with regulated deposit rate
ceilings,
(a) worked in the short-run to give mortgage-issuing institutions a source of low-cost funds.
(b) led eventually to an outflow of deposits from depository institutions.
(c) led to financial innovations that worked to avoid these regulations.
(d) did all of the above.
(e) did only (a) and (c) of the above.
73. The presence of so many commercial banks in the United States is most likely the result of
(a) consumers’ strong preference for dealing with only local banks.
(b) adverse selection and moral hazard problems that give local banks a competitive advantage over
larger banks.
(c) regulations that restrict the ability of banks to open branches.
(d) all of the above.
74. The large number of banks in the United States is an indication that
(a) there is vigorous competition within the banking industry.
(b) there is a lack of competition within the banking industry.
(c) only efficient banks are operating within the United States.
(d) none of the above.
75. 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) did all of the above.
76. The legislation that effectively prohibited banks from branching across state lines and forced all
national banks to conform to the branching regulations of the state in which they reside is the
(a) McFadden Act.
(b) National Banking Act.
(c) Glass-Steagall Act.
(d) Garn-St. Germain Act.
77. Which of the following is an advantage of forming a bank holding company?
(a) It allows ownership of several banks where branching is prohibited.
(b) It allows owners to engage in activities related to banking that are prohibited to banks.
(c) Both (a) and (b).
(d) None of the above.
238 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
78. Which of the following are true statements concerning bank holding companies?
(a) Bank holding companies own almost all large banks.
(b) Bank holding companies have experienced dramatic growth in the past twenty-five years.
(c) Through a loophole in the McFadden Act, bank holding companies have successfully evaded
interstate branching restrictions.
(d) All of the above are true.
(e) Only (a) and (b) of the above are true.
79. As a result of shared electronic banking facilities,
(a) barriers to branching have become less burdensome.
(b) banking has become less competitive.
(c) both of the above have occurred.
(d) neither of the above has occurred.
80. The McFadden Act’s prohibition against interstate branching
(a) was weakened by the introduction of shared electronic banking facilities that provide banking
services nationwide.
(b) was weakened by regional compacts that allowed banks to own banks in other states in their
region.
(c) impeded banks’ ability to diversify their loans and take advantage of economies of scale.
(d) all of the above.
81. A bank with a large credit-card customer base can market other financial products to these
customers at a low cost. This is an example of
(a) economies of scale.
(b) economies of scope.
(c) becoming a superregional bank.
(d) none of the above.
82. The only country without a true national banking system in which banks have branches throughout
the nation is
(a) Canada.
(b) Japan.
(c) the United Kingdom.
(d) the United States.
83. As a result of restrictive banking regulations, the United States
(a) has too few banks when compared to other industrialized countries.
(b) has banks that are quite large relative to those in other countries.
(c) has too many banks when compared to other industrialized countries.
(d) both (a) and (b) of the above.
Chapter 18 Commercial Banking Industry: Structure and Competition 239
84. Although it has a population about half that of the United States, Japan has
(a) many more banks.
(b) about 10 percent of the number of banks.
(c) about 5 percent of the number of banks.
(d) about 1 percent of the number of banks.
85. Which of the following is not expected to result from bank consolidation in the U.S.?
(a) Disappearance of small community banks
(b) Acceleration of the decline in the number of banks
(c) Banks will be more efficient
(d) Banks will be less likely to fail
86. The legislation that separated investment banking from commercial banking was the
(a) National Bank Act.
(b) Federal Reserve Act.
(c) Glass-Steagall Act.
(d) McFadden Act.
87. The prohibition against banks underwriting corporate securities and engaging in brokerage, real
estate, and insurance activities was repealed by the
(a) Gramm-Leach-Bliley Financial Services Modernization Act.
(b) Competitive Equality in Banking Act.
(c) Depositary Institution Deregulation and Monetary Control Act.
(d) Glass-Steagall Act.
88. The Riegle-Neal Act of 1994
(a) required all banks to become universal banks.
(b) removed ceilings on bank deposit interest rates.
(c) allowed banks to underwrite insurance and securities and engage in real estate activities.
(d) overturned prohibitions on interstate banking and branching.
89. In recent years, commercial banks have been allowed to
(a) invest in real estate.
(b) enter certain insurance markets.
(c) underwrite stocks.
(d) do all of the above.
(e) only (a) and (b) of the above.
240 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
90. 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) British-style universal
(c) barrier-free
(d) seamless
91. In a _________ banking system, commercial banks engage in securities underwriting, but separate
subsidiaries conduct the different activities. Also, banking and insurance are not typically
undertaken together in this system.
(a) universal
(b) British-style universal
(c) divided
(d) compartmentalized
(e) severable
92. 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) both (a) and (c) of the above.
(e) both (b) and (c) of the above.
93. Major differences between the United States and Japanese banking systems include:
(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 Japan.
(d) both (a) and (c) of the above.
(e) both (b) and (c) of the above.
94. Which of the following is a reason for the rapid expansion of international banking?
(a) The rapid growth in international trade
(b) The growth of multinational corporations
(c) The desire of U.S. banks to expand
(d) All of the above
Chapter 18 Commercial Banking Industry: Structure and Competition 241
95. Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by
foreign banks has been
(a) reduced.
(b) mildly expanded.
(c) completely eliminated.
(d) greatly expanded.
96. A special subsidiary of a U.S. bank that is engaged in international banking is called
(a) an international banking facility.
(b) an agency office.
(c) an Edge Act corporation.
(d) a foreign bank subsidiary.
97. U.S. banks have most of their foreign 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.
98. Eurodollars are
(a) dollar-denominated 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-denominated deposits held in U.S. banks by Europeans.
99. Deposits in European banks denominated in dollars for the purpose of international transactions are
known as
(a) Eurodollars.
(b) European Currency Units.
(c) Euros.
(d) International Monetary Units.
100. The main center of the Eurodollar market is
(a) London.
(b) Basel.
(c) Paris.
(d) New York.
242 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
◼ True/False
1. Today the United States has a dual banking system in which banks supervised by the federal
government and banks supervised by the states operate side-by-side.
2. Bank holding companies are regulated by the FDIC.
3. The existence of large numbers of banks in the United States indicates the presence of vigorous
competition.
4. Even when an ATM is owned by a bank, states typically have special provisions that allow wider
establishment of ATMs than is permissible for traditional “brick and mortar” branches.
5. Bank holding companies that have begun to rival the money center banks in size but whose
headquarters are not based in one of the money center cities are called superregional banks.
6. The future structure of the U.S. banking industry is likely to be characterized by many more smaller
banks, as customers demand neighborhood banks operated by people they know personally.
7. Restrictions on commercial banks’ securities and insurance activities put American banks at
a competitive disadvantage relative to foreign banks.
8. Eurodollars are created when deposits in accounts in the United States are transferred to a bank
outside the country and are kept in the form of dollars.
9. Financial innovation has widened the cost advantages that banks have in acquiring funds, helping to
explain why bank profitability has soared in recent years.
10. Americans are the biggest users of checks in the world but nonetheless are ahead of Europeans in
the proportion of noncash payments that are made by electronic means.
11. Securitization is the process of transforming illiquid financial assets such as residential mortgages
into marketable securities.
12. Disintermediation occurs when funds are deposited into banks and lent to borrowers.
Chapter 18 Commercial Banking Industry: Structure and Competition 243
13. The principle underlying Treasury STRIPS is that an investor will earn a higher interest rate when
reinvestment risk is eliminated.
14. Economies of scope come from increasing the size of a given financial activity and economies of
scale come from combining different activities to lower their costs.
15. Checkable deposits, a traditional source of low-cost funds for banks, have declined dramatically in
importance, falling from over 60 percent of bank liabilities to 10 percent today.
244 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
◼ Essay
1. What financial innovations are best explained as attempts to avoid regulations?
2. What new forms of banking have been spawned by the advances in information technology of the
past two decades? Is it likely that traditional banks will disappear as a result of these innovations? Why?
3. What new forms of making payments have been spawned by the advances in information
technology of the past two decades? Is it likely that ours will become a cashless society anytime
soon as a result of these innovations? Why?
4. What are Treasury STRIPS? What roles have reinvestment risk and information technology played
in the development of this financial product?
5. What are the reasons for the decline of traditional banking?
6. Is the large number of banking firms in the United States an indication of a competitive banking
industry? Explain why or why not.
7. Are bank consolidation and nationwide banking good things? Why?
8. When and why was the Glass-Steagall Act passed? When and why was it repealed?
9. Describe Edge Act corporations, international banking facilities, and the structure of foreign banks
in the United States.