Chapter 21—Thrift Operations
1. The insuring agency for savings institutions is the
a.
Securities and Exchange Commission (SEC).
b.
Federal Deposit Insurance Corporation (FDIC).
c.
U.S. Treasury.
d.
Federal Reserve
2. The ____ savings institutions hold the most assets in aggregate.
a.
stock owned
b.
mutual
c.
closely-held
d.
privatized
3. Which of the following statements is incorrect?
a.
A mutual-to-stock conversion allows savings institutions to obtain additional capital by
issuing stock.
b.
Because of the difference in owner control, mutual savings institutions are more
susceptible to unfriendly takeovers.
c.
When a mutual savings institution is involved in an acquisition, it first converts to a
stock-owned savings institution.
d.
Consolidation and acquisitions have caused the number of mutual and stock savings
institutions to decline consistently over the years.
4. Savings institutions use most of their funds for ____. Commercial banks use most of their funds for
____.
a.
mortgages; mortgages
b.
mortgages; business loans and commercial real estate loans
c.
business loans; commercial real estate loans and mortgages
d.
commercial real estate loans and mortgages; business loans
5. Federally-chartered savings institutions are regulated by the
a.
Securities and Exchange Commission (SEC).
b.
National Credit Union Administration.
c.
Federal Reserve.
d.
U.S. Treasury.
6. Savings institutions obtain most of their funds from
a.
savings and time deposits.
b.
loans.
c.
mortgages.
d.
repurchase agreements.
7. When savings institutions are unable to attract sufficient deposits, they can
a.
borrow in the federal funds market.
b.
borrow from the Federal Reserve.
c.
borrow through a repurchase agreement.
d.
all of the above
8. The capital of savings institutions is primarily composed of retained earnings and funds obtained from
issuing stock.
a. True
b. False
9. If depositors move money from their checking account to short-term CDs, this would ____ the
rate-sensitivity of the savings institution’s liabilities to interest rate movements.
a.
increase
b.
have no effect on
c.
decrease
d.
A or C, depending on the size of the savings institution
10. ____ are the primary asset of savings institutions.
a.
Mortgages
b.
Cash balances
c.
Investment securities
d.
Business loans
11. Savings institutions that reduce their amount of ____ will best reduce their exposure to interest rate
risk.
a.
fixed-rate mortgages
b.
consumer loans
c.
commercial loans
d.
short-term securities
12. ____ do not represent an asset of credit unions.
a.
Mortgage-backed securities
b.
Home equity loans
c.
Automobile loans
d.
Stocks
13. Which of the following is not an asset of savings institutions?
a.
loans
b.
mortgages
c.
NOW accounts
d.
mortgage-backed securities
14. Most mortgages originated by savings institutions are for
a.
commercial buildings.
b.
land for commercial purposes.
c.
single-family homes or multifamily dwellings.
d.
none of the above.
15. If a savings institutions’ assets have considerably longer duration than its liabilities, it can reduce its
exposure to interest rate risk by
a.
reducing its proportion of assets in the short duration categories.
b.
increasing its proportion of liabilities in the short duration categories.
c.
increasing its proportion of liabilities in the long duration category.
d.
A and B
16. Adjustable-rate mortgages ____ of rising interest rates on a typical savings institution’s spread. They
____ of declining interest rates on the spread.
a.
reduce the adverse impact; reduce the favorable impact
b.
reduce the adverse impact; increase the favorable impact
c.
increase the adverse impact; increase the favorable impact
d.
increase the adverse impact; reduce the favorable impact
17. To measure ____ risk, some savings institutions measure the duration of their respective assets and
liabilities.
a.
credit
b.
interest rate
c.
liquidity
d.
none of the above
18. A contract that allows for the purchase of a specified debt security for a specified price at a future
point in time is known as a(n)
a.
interest rate futures contract.
b.
interest rate swap contract.
c.
interest cap contract.
d.
security swap contract.
19. When a savings institution uses interest rate swaps to hedge interest rate risk, it would likely exchange
____ outflows for ____ inflows.
a.
variable-rate; fixed-rate
b.
variable-rate; variable-rate
c.
fixed-rate; variable-rate
d.
fixed-rate; fixed-rate
20. An interest rate swap reduces the favorable impact of declining interest rates.
a. True
b. False
21. A savings institution owned by its depositors is a ____ savings institution.
a.
mutual
b.
stock
c.
credit
d.
closed-end
22. Which of the following was not a major reason for the savings institution crisis in the late 1980s?
a.
a large proportion of loan losses on real estate loans
b.
a large proportion of loan losses on loans by savings institutions to less-developed
countries
c.
fraud
d.
illiquidity
e.
increased interest expenses
23. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) prohibited
a.
savings institutions from merging.
b.
commercial banks from acquiring savings institutions.
c.
savings institutions.
d.
savings institutions from making loans to foreign governments.
24. The risk that a credit union will experience an unanticipated wave of withdrawals without an offsetting
amount of new deposits is ____ risk.
a.
credit (default)
b.
interest rate
c.
liquidity
d.
exchange rate
e.
none of the above
25. Money market deposit accounts (MMDAs) represent
a.
trust accounts managed by savings institutions.
b.
checking accounts that do not pay interest.
c.
accounts offered primarily by money market funds.
d.
deposit accounts offering limited checking and close-to-market interest rates.
26. Savings institutions ____ allowed to borrow funds in the federal funds market; savings institutions
____ allowed to borrow funds from the Federal Reserve.
a.
are; are
b.
are; are not
c.
are not; are not
d.
are not; are
27. Savings institutions commonly ____ to reduce their risk.
a.
purchase futures contracts on stock indexes
b.
purchase futures contracts on treasury bonds
c.
sell futures contracts on stock indexes
d.
sell futures contracts on treasury bonds
28. Stock-owned savings institutions ____ susceptible to unfriendly takeovers. Mutual savings institutions
____ susceptible to unfriendly takeovers.
a.
are; are not
b.
are; are
c.
are not; are
d.
are not; are not
29. Savings institutions can obtain capital by:
a.
issuing stock.
b.
repurchasing stock.
c.
borrowing from the Federal Reserve.
d.
borrowing in the federal funds market.
30. To obtain short-term funds, savings institutions commonly borrow funds in the ____ market.
a.
stock
b.
bond
c.
mortgage
d.
federal funds
e.
futures
31. ____ risk is probably the least concern for savings institutions.
a.
Liquidity
b.
Exchange rate
c.
Credit
d.
Interest rate
32. Which of the following is not an advantage of credit unions?
a.
They can offer attractive rates to their member savers and borrowers because they are
nonprofit and therefore are not taxed.
b.
Their noninterest expenses are relatively low, because their labor, office, and furniture are
often donated or provided at a very low cost through the affiliation of their members.
c.
Their large membership allows them to effectively diversify geographically.
d.
All of the above are advantages of credit unions.
33. A savings institution’s cash flows are ____ related to interest rate movements.
a.
positively related to
b.
negatively related to
c.
unrelated to
d.
none of the above
34. The primary use of credit union funds is
a.
loans to credit union members.
b.
the purchase of government securities.
c.
the purchase of agency securities.
d.
the purchase of corporate bonds.
e.
none of the above
35. ____ are non-profit organizations composed of members with a common bond.
a.
Credit unions
b.
Savings banks
c.
Savings and loan associations
d.
Commercial banks
36. Because credit unions ____ stock, they are technically owned by the ____.
a.
issue; depositors
b.
do not issue; depositors
c.
issue; stockholders
d.
do not issue; management
37. Credit unions obtain most of their funds from
a.
issuing common stock.
b.
retained earnings.
c.
share deposits by members.
d.
issuing long-term bonds.
38. Checkable accounts offered by credit unions are called
a.
NOW accounts.
b.
money market deposit accounts.
c.
share certificates.
d.
share drafts.
39. The ____ acts as a temporary lender to credit unions.
a.
World Bank
b.
Central Liquidity Facility
c.
Federal Home Loan Bank
d.
National Credit Union Administration
40. The sensitivity of cost of funds to interest rate movements has been
a.
greater for credit unions than savings institutions.
b.
greater for credit unions than commercial banks.
c.
lower for credit unions than for savings institutions or commercial banks.
d.
similar for credit unions as savings institutions and commercial banks.
41. Credit unions use the majority of their funds to
a.
purchase investment securities.
b.
provide commercial real estate loans.
c.
provide small business loans to members.
d.
provide consumer loans to members.
42. If credit union members have a particular affiliation with their employers and large layoffs occur, the
credit union’s exposure to ____ risk may increase.
a.
settlement
b.
interest rate
c.
credit
d.
none of the above
43. The maximum insurance per depositor by the National Credit Union Insurance Fund is
a.
$250,000.
b.
$50,000.
c.
$40,000.
d.
$25,000.
44. Comparing credit unions with commercial banks and savings institutions
a.
credit unions are less able to quickly generate additional deposits.
b.
savings institutions and commercial banks can borrow from the Central Liquidity Facility,
but credit unions cannot.
c.
savings institutions and commercial banks are less able to quickly generate additional
deposits.
d.
credit unions have less exposure to liquidity risk.
45. The majority of maturities on consumer loans offered by credit unions are ____ term, causing income
generated on their asset portfolio to be ____ to interest rate movements.
a.
long; insensitive
b.
short or medium; sensitive
c.
long; sensitive
d.
short or medium; insensitive
46. Because credit unions’ sources and uses of funds are generally interest rate ____, movements in
interest revenues and interest expenses of credit unions are ____.
a.
sensitive; negatively correlated
b.
insensitive; highly correlated
c.
sensitive; uncorrelated
d.
sensitive; highly correlated
e.
insensitive; uncorrelated
47. Deposits at credit unions are called
a.
NOW accounts.
b.
money market deposit accounts.
c.
shares.
d.
credit union deposit accounts.
48. Credit unions differ from savings institutions in that they use a ____ proportion of their funds for
mortgages and are ____ institutions.
a.
smaller; non-profit
b.
larger; non-profit
c.
smaller; for-profit
d.
larger; for-profit
49. Today, credit unions are regulated as to the
a.
types of services they can offer.
b.
rates they offer on deposits.
c.
maturity of residential loans they make.
d.
size of residential mortgage loans.
50. The National Credit Union Share Insurance Fund (NCUSIF) requires all
a.
federal-chartered credit unions to obtain insurance from the NCUSIF.
b.
state-chartered credit unions to obtain insurance from the NCUSIF.
c.
credit unions to pay an annual supplemental insurance premium each year.
d.
depository institutions to pay a supplemental insurance premium each year.
51. Federal credit unions are regulated and supervised by the
a.
Central Liquidity Facility.
b.
National Credit Union Administration.
c.
Securities and Exchange Commission.
d.
Corporate Credit Union Network.
e.
none of the above
52. According to your text, about ____ percent of credit unions are insured by the National Credit Union
Share Insurance Fund.
a.
20
b.
40
c.
60
d.
90
53. In general, savings institutions are larger than commercial banks.
a. True
b. False
54. Today, savings institutions are not permitted to invest in junk bonds.
a. True
b. False
55. Because savings institutions commonly use long-term liabilities to finance short-term assets, they
depend on additional deposits to accommodate withdrawal requests.
a. True
b. False
56. Savings institutions commonly measure the gap between their rate-sensitive assets and rate-sensitive
liabilities in order to determine their exposure to credit risk.
a. True
b. False
57. Savings institutions do not really know the actual maturity of the mortgages they hold and cannot
perfectly match the interest rate sensitivity of their assets and liabilities.
a. True
b. False
58. In general, when interest rates fall, a savings institution’s cost of obtaining funds declines more than
the decline in the interest earned on its loans and investments.
a. True
b. False
59. High economic growth results in more risk for a savings institution, since its consumer loans,
mortgage loans, and investments in debt securities are more likely to default.
a. True
b. False
60. Because credit unions do not issue stock, they are technically sole proprietorships.
a. True
b. False
61. Because credit unions are for-profit organizations, their income is taxable.
a. True
b. False
62. Credit unions obtain most of their funds by borrowing from the U.S. government.
a. True
b. False
63. Credit unions use the majority of their funds to invest in the stock market.
a. True
b. False
64. The National Credit Union Administration (NCUA) is responsible for regulating savings institutions.
a. True
b. False
65. Credit unions are unregulated as to the types of services they offer.
a. True
b. False
66. All federally chartered credit unions are required to obtain insurance from the National Credit Union
Share Insurance Fund (NCUSIF).
a. True
b. False
67. The primary source of funds for credit unions is
a.
share certificates.
b.
share deposits.
c.
share drafts.
d.
borrowed funds from the Central Liquidity Facility (CLF).
e.
none of the above
68. Which of the following is not an objective of a credit union?
a.
to satisfy credit union members
b.
to act as an intermediary for members by repackaging deposits
c.
to provide loans to members who are in need of funds
d.
all of the above are objectives of credit unions.
69. ____ are not a main source of funds for savings institutions.
a.
Deposits
b.
Borrowed funds
c.
Capital
d.
Mortgages
70. Which of the following is not a deposit source of funds for savings institutions?
a.
passbook savings
b.
retail CDs
c.
money market deposit accounts
d.
negotiable order of withdrawal (NOW) accounts
e.
All of the above are deposit sources of funds for savings institutions.
71. ____ is not a main use of funds for savings institutions.
a.
Capital
b.
Mortgages
c.
Consumer and commercial loans
d.
Mortgage-backed securities
72. Savings institutions were adversely affected by the credit crisis because of their exposure to ____.
a.
deposits
b.
mortgages
c.
commercial loans
d.
loans from the Federal Reserve
73. To manage interest rate risk, a savings institution could use
a.
fixed-rate mortgages.
b.
currency options.
c.
interest rate futures contracts.
d.
letters of credit.
74. Under the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), all federally chartered
savings institutions are to be regulated by the Federal Reserve, so these savings institutions no longer
have an incentive to go regulator shopping.
a. True
b. False
75. During the credit crisis of 2008–2009, some credit unions suffered losses on second mortgages and
home-equity loans that they had provided, and some credit unions experienced losses on
mortgage-backed securities in which they had invested.
a. True
b. False
76. During the credit crisis of 2008–2009:
a.
the Resolution Trust Corporation was formed to deal with insolvent savings institutions.
b.
several large savings institutions failed, including Countrywide Financial and Washington
Mutual.
c.
savings institutions were insulated because their regulator subsidized any of them that
experienced large loan defaults.
d.
the main problem for savings institutions was exposure to interest rate risk.
77. During the credit crisis of 2008–2009, savings institutions experienced all of the following except:
a.
high default rates on loans to finance leveraged buyouts.
b.
a decline in the level of mortgage originations.
c.
high default rates on subprime mortgages.
d.
losses on investments in mortgage-backed securities.
78. The Financial Reform Act of 2010 did all of the following except:
a.
strengthened the standards required to obtain a mortgage.
b.
required more disclosures by financial institutions regarding the quality of the underlying
assets when they sell mortgage-backed securities.
c.
required savings institutions to sell off any holdings of junk bonds and prohibited them
from investing in junk bonds in the future.
d.
established the Consumer Financial Protection Bureau.