Chapter 18
Commercial Banking Industry: Structure and Competition
◼ Multiple Choice Questions
1. The modern commercial banking system began in America when the
(a) Bank of the United States was chartered in New York in 1801.
(b) Bank of North America was chartered in Philadelphia in 1782.
(c) Bank of the United States was chartered in Philadelphia in 1801.
(d) Bank of North America was chartered in New York in 1782.
2. A major controversy involving the U.S. banking industry in its early years was
(a) whether banks should both accept deposits and make loans or whether these functions should be
separated into different institutions.
(b) whether the federal government or the states should charter banks.
(c) what percent of deposits banks should hold as fractional reserves.
(d) whether banks should be allowed to issue their own bank notes.
3. The government institution that has responsibility for the amount of money and credit supplied in
the economy as a whole is the
(a) central Bank.
(b) commercial Bank.
(c) bank of settlement.
(d) Treasury Department.
4. Because of the abuses by state banks and the clear need for a central bank to help the federal
government raise funds during the War of 1812, Congress created the
(a) First Bank of the United States in 1812.
(b) Bank of North America in 1814.
(c) Second Bank of the United States in 1816.
(d) Federal Reserve System in 1813.
5. The Second Bank of the United States was denied a new charter by
(a) President Andrew Jackson.
(b) Vice-President John Calhoun.
(c) President Benjamin Harrison.
(d) President John Q. Adams.
Chapter 18 Commercial Banking Industry: Structure and Competition 225
6. Before 1863,
(a) federally-chartered banks had regulatory advantages not granted to state-chartered banks.
(b) the number of federally-chartered banks grew at a much faster rate than at any other time since
the end of the Civil War.
(c) banks acquired funds by issuing banknotes.
(d) the Federal Reserve System regulated only federally-chartered banks.
(e) the Comptroller of the Currency regulated both state- and federally-chartered banks.
7. Before 1863,
(a) the Federal Reserve System regulated only federally-chartered banks.
(b) the Comptroller of the Currency regulated both state- and federally-chartered banks.
(c) the number of federally-chartered banks grew at a much faster rate than at any other time since
the end of the Civil War.
(d) none of the above.
8. Although federal banking legislation in the 1860s attempted to eliminate state-chartered banks by
imposing a prohibitive tax on banknotes, these banks have been able to stay in business by
(a) issuing credit cards.
(b) ignoring the regulations.
(c) issuing deposits.
(d) branching into other states.
9. The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital
explains, in part, the passage of
(a) the National Bank Charter Amendments of 1918.
(b) the Glass-St. Germain Act of 1982.
(c) the National Bank Act of 1863.
(d) none of the above.
10. To eliminate the abuses of the state-chartered banks, the _________ created a new banking system
of federally chartered banks, supervised by the _________
(a) National Banking Act of 1863; Office of the Comptroller of the Currency.
(b) Federal Reserve Act of 1863; Office of the Comptroller of the Currency.
(c) National Banking Act of 1863; Office of Thrift Supervision.
(d) Federal Reserve Act of 1863; Office of Thrift Supervision.
226 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
11. The National Banking Act of 1863, and subsequent amendments to it,
(a) created a banking system of federally-chartered banks.
(b) established the Office of the Comptroller of the Currency.
(c) broadened the regulatory powers of the Federal Reserve.
(d) did all of the above.
(e) did only (a) and (b) of the above.
12. The regulatory system that has evolved in the United States whereby banks are regulated at the state
level, the national level, or both, is known as a
(a) bilateral regulatory system.
(b) tiered regulatory system.
(c) two-tiered regulatory system.
(d) dual banking system.
13. Today the United States has a dual banking system in which banks supervised by the _________ and
by the _________ operate side-by-side.
(a) federal government; municipalities
(b) state governments; municipalities
(c) federal government; states
(d) municipalities; states
14. The Federal Reserve Act of 1913 required that
(a) state banks be subject to the same regulations as national banks.
(b) national banks establish branches in the cities containing Federal Reserve banks.
(c) national banks join the Federal Reserve System.
(d) all of the above be done.
15. The Federal Reserve Act required all _________ banks to become members of the Federal Reserve
System, while _________ banks could choose to become members of the system.
(a) state; national
(b) state; municipal
(c) national; state
(d) national; municipal
16. With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal
Reserve System _________ to purchase FDIC insurance for their depositors, while non-member
commercial banks _________ to buy deposit insurance.
(a) could choose; were required
(b) could choose; were given the option
(c) were required, could choose
(d) were required; were required
Chapter 18 Commercial Banking Industry: Structure and Competition 227
17. With the creation of the Federal Deposit Insurance Corporation,
(a) member banks of the Federal Reserve System were given the option to purchase FDIC
insurance for their depositors, while non-member commercial banks were required to buy
deposit insurance.
(b) member banks of the Federal Reserve System were required to purchase FDIC insurance for
their depositors, while non-member commercial banks could choose to buy deposit insurance.
(c) both member and non-member banks of the Federal Reserve System were required to purchase
FDIC insurance for their depositors.
(d) both member and non-member banks of the Federal Reserve System could choose, but were not
required, to purchase FDIC insurance for their depositors.
18. Probably the most significant factor explaining the drastic drop in the number of bank failures since
the Great Depression has been
(a) the creation of the FDIC.
(b) rapid economic growth since 1941.
(c) the employment of new procedures by the Federal Reserve.
(d) better bank management.
19. Investment banking activities of the commercial banks were blamed for many bank failures.
This led to
(a) the passage of the National Bank Charter Amendments Act of 1918.
(b) the passage of the Garn-St. Germain Act of 1982.
(c) the passage of the National Bank Act of 1863.
(d) the passage of the Glass-Steagall Act of 1933.
(e) the establishment of the Federal Deposit Insurance Corporation in 1933.
20. The Glass-Steagall Act prohibited commercial banks from
(a) issuing equity to finance bank expansion.
(b) engaging in underwriting of and dealing in corporate securities.
(c) selling new issues of government securities.
(d) purchasing any debt securities.
21. Which bank regulatory agency has the sole regulatory authority over bank holding companies?
(a) The Federal Deposit Insurance Corporation
(b) The Comptroller of the Currency
(c) The Federal Bank Holding Company Agency
(d) The Federal Reserve System
228 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
22. State banks that are not members of the Federal Reserve System are most likely to be examined
by the
(a) Federal Reserve System.
(b) Federal Deposit Insurance Corporation.
(c) Federal Home Loan Bank System.
(d) Comptroller of the Currency.
23. Which regulatory body charters national banks?
(a) The Federal Reserve
(b) The Federal Deposit Insurance Corporation
(c) The Comptroller of the Currency
(d) None of the above
24. Which of the following statements concerning bank regulation in the United States are true?
(a) The Office of the Comptroller of the Currency has the primary responsibility for national banks.
(b) The Federal Reserve and the state banking authorities jointly have responsibility for state banks
that are members of the Federal Reserve System.
(c) The Fed has sole regulatory responsibility over bank holding companies.
(d) All of the above are true.
(e) Only (a) and (b) of the above are true.
25. Which of the following statements concerning bank regulation in the United States are true?
(a) The Office of the Comptroller of the Currency has the primary responsibility for state banks that
are members of the Federal Reserve System.
(b) The Federal Reserve and the state banking authorities jointly have responsibility for state banks
that are members of the Federal Reserve System.
(c) The Office of the Comptroller of the Currency has sole regulatory responsibility over bank
holding companies.
(d) All of the above are true.
(e) Only (a) and (b) of the above are true.
26. Which of the following are important factors in determining the degree and timing of financial
innovation?
(a) Changes in technology
(b) Changes in financial market conditions
(c) Changes in regulation
(d) All of the above
(e) Only (a) and (b) of the above
Chapter 18 Commercial Banking Industry: Structure and Competition 229
27. New computer technology has
(a) increased the cost of financial innovation.
(b) increased the demand for financial innovation.
(c) reduced the cost of financial innovation.
(d) reduced the demand for financial innovation.
28. Rising interest-rate risk _________ the _________ financial innovation.
(a) increased; cost of
(b) increased; demand for
(c) reduced; cost of
(d) reduced; demand for
29. Large fluctuations in interest rates lead to
(a) substantial capital gains and losses to owners of securities.
(b) greater uncertainty about returns on investments.
(c) greater interest-rate risk.
(d) all of the above.
30. In the 1950s the interest rate on three-month Treasury bills fluctuated between 1.0% and 3.5%. In
the 1980s, the three-month Treasury bill rate ranged from 5% to over 15%. From this one could
predict that in the 1980s interest-rate risk was _________ and the demand for financial innovation
was _________.
(a) greater; lower
(b) greater; greater
(c) lower; lower
(d) lower; greater
31. The most significant change in the economic environment that changed the demand for financial
products since 1970 has been
(a) the aging of the baby-boomer generation.
(b) the dramatic increase in the volatility of interest rates.
(c) the dramatic increase in competition from foreign banks.
(d) the deregulation of financial institutions.
32. Adjustable-rate mortgages
(a) protect households against higher mortgage payments when interest rates rise.
(b) keep financial institutions’ earnings high even when interest rates are falling.
(c) have many attractive attributes, explaining why so few households now seek fixed-rate
mortgages.
(d) do only (a) and (b) of the above.
(e) none of the above.
230 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
33. Adjustable-rate mortgages
(a) benefit homeowners when interest rates are falling.
(b) reduce financial institutions’ interest-rate risk.
(c) reduce households’ risk of having to pay higher mortgage payments when interest rates rise.
(d) do only (a) and (b) of the above.
34. The most important source of the changes in supply conditions that stimulate financial innovation
has been the
(a) aging of the baby-boomer generation.
(b) dramatic increase in the volatility of interest rates.
(c) improvement in information technology.
(d) dramatic increase in competition from foreign banks.
(e) deregulation of financial institutions.
35. Examples of financial services that became practical realities as the result of new computer
technology include
(a) credit cards.
(b) electronic banking facilities.
(c) checking accounts.
(d) all of the above.
(e) only (a) and (b) of the above.
36. Credit cards date back to
(a) prior to World War II.
(b) just after World War II.
(c) the early 1950s.
(d) the late 1950s.
37. A firm issuing credit cards earns income from
(a) loans it makes to credit card holders.
(b) payments made to it by stores on credit card purchases.
(c) payments made to it by manufacturers of the products sold in stores on credit card purchases.
(d) all of the above.
(e) only (a) and (b) of the above.
38. The entry of Sears, AT&T and GM into the credit card business is an indication of
(a) government’s efforts to deregulate the provision of financial services.
(b) the rising profitability of credit card operations.
(c) the reduction in costs of credit card operations since 1990.
(d) the sale of unprofitable operations by Bank of America and Citicorp.
Chapter 18 Commercial Banking Industry: Structure and Competition 231
39. A smart-card is a form of
(a) stored-value card.
(b) credit card.
(c) debit card.
(d) e-cash card.
40. Which of the following is not a financial innovation stimulated by information technology?
(a) Credit card
(b) Debit card
(c) Adjustable-rate mortgage
(d) Electronic banking
41. Which of the following is an example of a financial innovation introduced to avoid regulations?
(a) Securitization
(b) Junk bond
(c) Debit card
(d) Sweep account
42. “Stripping” a Treasury bond
(a) means selling each of its future payments as a separate zero-coupon bond.
(b) decreases the total present discounted value of future payments.
(c) both (a) and (b).
(d) none of the above.
43. So-called fallen angels differ from junk bonds in that
(a) junk bonds refer to previously issued bonds which have had their credit ratings fall below Baa.
(b) fallen angels refer to newly issued bonds with low credit ratings.
(c) junk bonds refer to newly issued bonds with low credit ratings.
(d) both (a) and (b) of the above.
44. So-called fallen angels differ from junk bonds in that
(a) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to
previously issued bonds which have had their credit ratings fall below Baa.
(b) junk bonds refer to previously issued bonds which have had their credit ratings fall below Baa,
whereas fallen angels refer to newly issued bonds with low credit ratings.
(c) junk bonds have ratings below Baa, whereas fallen angels have ratings below C.
(d) fallen angels have ratings below Baa, whereas junk bonds have ratings below C.
232 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
45. High-yield bonds rated below investment grade by the bond-rating agencies are frequently
referred to as
(a) municipal bonds.
(b) Yankee bonds.
(c) “fallen angels.”
(d) junk bonds.
46. In 1977, _________ pioneered the concept of selling new public issues of junk bonds for companies
that had not yet achieved investment-grade status.
(a) Michael Milken
(b) Roger Milliken
(c) Ivan Boskey
(d) Carl Ichan
47. The practice of creating marketable debt instruments that are backed by otherwise illiquid assets is
known as
(a) standardization.
(b) homogenization.
(c) securitization.
(d) adverse selection.
48. The driving force behind the securitization of mortgages and automobile loans has been
(a) the rising regulatory constraints on substitute financial instruments.
(b) the desire of mortgage and auto lenders to exit this field of lending.
(c) the improvement in computer technology.
(d) the relaxation of regulatory restrictions on credit card operations.
49. The bundling of GNMA-guaranteed mortgages into a saleable security (usually for large
institutional investors) is called
(a) disintermediation.
(b) quasi-intermediation.
(c) futures bundling.
(d) hedge optioning.
(e) securitization.
50. Of all residential mortgages, approximately _________ are now securitized.
(a) one-fourth
(b) two-fifths
(c) one-half
(d) two-thirds
(e) three-fourths
Chapter 18 Commercial Banking Industry: Structure and Competition 233
51. In the usual GNMA pass-through security, the _________ has direct ownership of a pro-rata share
of the portfolio of mortgage loans.
(a) seller
(b) buyer
(c) financial institution issuing the mortgage loan
(d) financial institution securitizing the mortgage loan
52. Bank managers look on reserve requirements as a
(a) tax on deposits.
(b) subsidy on deposits.
(c) subsidy on loans.
(d) tax on loans.
53. Checking accounts that earn interest (such as NOW accounts) were not available until
(a) 1962.
(b) 1972.
(c) 1982.
(d) 1992.
54. Burdensome regulations, along with inflation and rising interest rates, help to explain
(a) the rapid pace of financial innovations in banking in the 1960s and 1970s.
(b) the low rate of bank failures in the 1980s.
(c) both (a) and (b) of the above.
(d) neither (a) nor (b) of the above.
55. The Federal Reserve’s Regulation Q
(a) set maximum interest rates banks could pay on deposits.
(b) set minimum interest rates banks could pay on deposits.
(c) set maximum interest rates banks could charge on loans.
(d) discouraged disintermediation.
56. When disintermediation occurs the banking system _________ deposits and bank lending
_________.
(a) gains; increases
(b) gains; decreases
(c) loses; increases
(d) loses; decreases
234 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
57. Which of the following is not a reason for the disappointing revenue growth and profits
of Internet-only banks?
(a) high cost per transaction
(b) security concerns
(c) customer preferences
(d) technical problems
58. It now appears that the predominant delivery system for banking services in the future will be
(a) Internet-only banks.
(b) traditional banks.
(c) traditional banks supplemented with on-line services.
(d) none of the above.
59. The growing use and proliferation of ATMs has been stimulated by
(a) lower transaction costs.
(b) greater customer convenience.
(c) declining cost of the ATM equipment.
(d) all of the above.
60. Since 1974, commercial banks’ importance as a source of funds for borrowers has shrunk
dramatically, from around _________ percent of total credit advanced to near _________ percent by
2004.
(a) 60; 30
(b) 35; 25
(c) 25; 20
(d) 30; 15
61. Thrift institutions’ importance as a source of funds for borrowers
(a) has shrunk from around 40 percent of total credit advanced in the late 1970s to below 30 percent
today.
(b) has shrunk from over 20 percent of total credit advanced in the late 1970s to below 10 percent
today.
(c) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to
above 25 percent today.
(d) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to
above 30 percent today.