Economics of Money, Banking, and Financial Markets, 11e (Mishkin)
Chapter 11 Banking Industry: Structure and Competition
11.1 Historical Development of the Banking System
1) The modern commercial banking system began in America when the
A) Bank of United States was chartered in New York in 1801.
B) Bank of North America was chartered in Philadelphia in 1782.
C) Bank of 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 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) monetary fund.
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) Bank of United States in 1812.
B) Bank of North America in 1814.
C) Second Bank of the United States in 1816.
D) Second Bank of North America in 1815.
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.
6) Currency circulated by banks that could be redeemed for gold was called
A) junk bonds.
B) banknotes.
C) gold bills.
D) state money.
7) To eliminate the abuses of the state-chartered banks, the ________ created a new banking
system of federally chartered banks, supervised by the ________.
A) National Bank 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 Bank Act of 1863; Office of Thrift Supervision
D) Federal Reserve Act of 1863; Office of Thrift Supervision
8) 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 Garn-St. Germain Act of 1982.
C) the National Bank Act of 1863.
D) Federal Reserve Act of 1913.
9) 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) banks were required to maintain 100% of their deposits as reserves.
10) Prior to 1863, all commercial banks in the United States
A) were chartered by the U.S. Treasury Department.
B) were chartered by the banking commission of the state in which they operated.
C) were regulated by the Federal Reserve.
D) were regulated by the central bank.
11) Although the National Bank Act of 1863 was designed to eliminate state-chartered banks by
imposing a prohibitive tax on banknotes, state banks were able to stay in business by
A) issuing credit cards.
B) ignoring the regulations.
C) acquiring funds through deposits.
D) branching into other states.
12) The National Bank Act of 1863, and subsequent amendments to it
A) created a banking system of state-chartered banks.
B) established the Office of the Comptroller of the Currency.
C) broadened the regulatory powers of the Federal Reserve.
D) created insurance on deposit accounts.
13) Which regulatory body charters national banks?
A) the Federal Reserve
B) the FDIC
C) the Comptroller of the Currency
D) the U.S. Treasury
14) 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.
15) 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
16) The U.S. banking system is considered to be a dual system because
A) banks offer both checking and savings accounts.
B) it actually includes both banks and thrift institutions.
C) it is regulated by both state and federal governments.
D) it was established before the Civil War, requiring separate regulatory bodies for the North and
South.
17) 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) state banks could not join the Federal Reserve System.
18) The Federal Reserve Act of 1913 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
19) 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.
20) 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
21) 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.
22) The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from
A) issuing equity to finance bank expansion.
B) engaging in underwriting and dealing of corporate securities.
C) selling new issues of government securities.
D) purchasing any debt securities.
23) The legislation that separated investment banking from commercial banking until its repeal
in 1999 is known as the
A) National Bank Act of 1863.
B) Federal Reserve Act of 1913.
C) Glass-Steagall Act.
D) McFadden Act.
24) Which of the following statements concerning bank regulation in the United States is 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 the 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) The state banking authorities have sole regulatory responsibility for all state banks.
25) Which bank regulatory agency has the sole regulatory authority over bank holding
companies?
A) the FDIC
B) the Comptroller of the Currency
C) the FHLBS
D) the Federal Reserve System
26) State banks that are not members of the Federal Reserve System are most likely to be
examined by the
A) Federal Reserve System.
B) FDIC.
C) FHLBS.
D) Comptroller of the Currency.
27) State banking authorities have sole jurisdiction over state banks
A) without FDIC insurance.
B) that are not members of the Federal Reserve System.
C) operating as bank holding companies.
D) chartered in the 21st century.
11.2 Financial Innovation and the Growth of the “Shadow Banking System”
1) Financial innovations occur because of financial institutions search for
A) profits.
B) fame.
C) stability.
D) recognition.
2) ________ is the process of researching and developing profitable new products and services
by financial institutions.
A) Financial engineering
B) Financial manipulation
C) Customer manipulation
D) Customer engineering
3) The most significant change in the economic environment that changed the demand for
financial products in recent years 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.
4) In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and
3.5 percent; in the 1980s it fluctuated between ________ percent and ________ percent.
A) 5; 15
B) 4; 11.5
C) 4; 18
D) 5; 10
5) Uncertainty about interest-rate movements and returns is called
A) market potential.
B) interest-rate irregularities.
C) interest-rate risk.
D) financial creativity.
6) Rising interest-rate risk
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.
7) 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) benefit homeowners when interest rates are falling.
D) generally have higher initial interest rates than on conventional fixed-rate mortgages.
8) Adjustable rate mortgages
A) reduce the interest-rate risk for financial institutions.
B) benefit homeowners when interest rates rise.
C) generally have higher initial interest rates than conventional fixed-rate mortgages.
D) allow borrowers to avoid paying interest on portions of their mortgage loans.
9) The agreement to provide a standardized commodity to a buyer on a specific date at a specific
future price is
A) a put option.
B) a call option.
C) a futures contract.
D) a mortgage-backed security.
10) An instrument developed to help investors and institutions hedge interest-rate risk is
A) a debit card.
B) a credit card.
C) a financial derivative.
D) a junk bond.
11) Financial instruments whose payoffs are linked to previously issued securities are called
A) grandfathered bonds.
B) financial derivatives.
C) hedge securities.
D) reversible bonds.
12) Both ________ and ________ were financial innovations that occurred because of interest
rate volatility.
A) adjustable-rate mortgages; commercial paper
B) adjustable-rate mortgages; financial derivatives
C) sweep accounts; financial derivatives
D) sweep accounts; commercial paper
13) The most important source of the changes in supply conditions that stimulate financial
innovation has been the
A) deregulation of financial institutions.
B) dramatic increase in the volatility of interest rates.
C) improvement in information technology.
D) dramatic increase in competition from foreign banks.
14) 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.
15) Credit cards date back to
A) prior to the second World War.
B) just after the second World War.
C) the early 1950s.
D) the late 1950s.
16) A firm issuing credit cards earns income from
A) loans it makes to credit card holders.
B) subsidies from the local governments.
C) payments made to it by manufacturers of the products sold in stores on credit card purchases.
D) sales of the card in foreign countries.
17) The entry of 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.
18) A debit card differs from a credit card in that
A) a debit card is a loan while for a credit card purchase, payment is made immediately.
B) a debit card is a long-term loan while a credit card is a short-term loan.
C) a credit card is a loan while for a debit card purchase, payment is made immediately.
D) a credit card is a long-term loan while a debit card is a short-term loan.
19) Automated teller machines
A) are more costly to use than human tellers, so banks discourage their use by charging more for
use of ATMs.
B) cost about the same to use as human tellers in banks, so banks discourage their use by
charging more for use of ATMs.
C) cost less than human tellers, so banks may encourage their use by charging less for using
ATMs.
D) cost nothing to use, so banks provide their services free of charge.
20) The declining cost of computer technology has made ________ a reality.
A) brick and mortar banking
B) commercial banking
C) virtual banking
D) investment banking
21) Bank customers perceive Internet-only banks as being
A) more secure than physical bank branches.
B) a better method for the purchase of long-term savings products.
C) better at keeping customer information private.
D) prone to many more technical problems.
22) A disadvantage of virtual banks (clicks) is that
A) their hours are more limited than physical banks.
B) they are less convenient than physical banks.
C) they are more costly to operate than physical banks.
D) customers worry about the security of on-line transactions.
23) 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 that have had their credit ratings fall below Baa.
B) junk bonds refer to previously issued bonds that 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.
24) Newly-issued 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.
25) In 1977, he 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 Boesky
D) Carl Icahn
26) One factor contributing to the rapid growth of the commercial paper market since 1970 is
A) the fact that commercial paper has no default risk.
B) improved information technology making it easier to screen credit risks.
C) government regulation.
D) FDIC insurance for commercial paper.
27) The development of money market mutual funds contributed to the growth of ________
since the money market mutual funds need to hold liquid, high-quality, short-terms assets.
A) the commercial paper market
B) the municipal bond market
C) the corporate bond market
D) the junk bond market
28) The process of transforming otherwise illiquid financial assets into marketable capital market
instruments is known as
A) securitization.
B) internationalization.
C) arbitrage.
D) program trading.
29) ________ is creating a marketable capital market instrument by bundling a portfolio of
mortgage or auto loans.
A) Diversification
B) Arbitrage
C) Computerization
D) Securitization
30) 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 information technology.
D) the relaxation of regulatory restrictions on credit card operations.
31) Securitization is a process of asset transformation that involves a number of different
financial institutions working together. These financial institutions are known collectively as the
A) transformers.
B) amalgamation.
C) movers and shakers.
D) shadow banking system.
32) Which of the following is NOT part of the shadow banking system?
A) the transformer
B) the servicer
C) the bundler
D) the distributor
33) Because of securitization, a new class of residential mortgages offered to borrowers with
less-than-stellar credit records developed. These mortgages are known as
A) risk-enhanced mortgages.
B) subprime mortgages.
C) bundled mortgages.
D) adjustable-rate mortgages.
34) According to Edward Kane, because the banking industry is one of the most ________
industries in America, it is an industry in which ________ is especially likely to occur.
A) competitive; loophole mining
B) competitive; innovation
C) regulated; loophole mining
D) regulated; innovation
35) Loophole mining refers to financial innovation designed to
A) hide transactions from the IRS.
B) conceal transactions from the SEC.
C) get around regulations.
D) conceal transactions from the Treasury Department.
36) Prior to 2008, bank managers looked on reserve requirements
A) as a tax on deposits.
B) as a subsidy on deposits.
C) as a subsidy on loans.
D) as a tax on loans.
37) Prior to 2008, the bank’s cost of holding reserves equaled
A) the interest paid on deposits times the amount of reserves.
B) the interest paid on deposits times the amount of deposits.
C) the interest earned on loans times the amount of loans.
D) the interest earned on loans times the amount on reserves.
38) Prior to 1980, the Fed set an interest rate ________, a maximum limit, on the interest rate
that could be paid on time deposits.
A) floor
B) ceiling
C) wall
D) window
39) The process in which people seeking higher yielding securities take their funds out of the
banking system thus restricting the amount of funds banks can lend is called
A) capital mobility.
B) loophole mining.
C) disintermediation.
D) deposit jumping.
40) Money market mutual funds
A) function as interest-earning checking accounts.
B) are legally deposits.
C) are subject to reserve requirements.
D) have an interest-rate ceiling.
41) In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in
the situation know as “breaking the buck.” This means that
A) they could no longer afford to redeem shares at the par value of $1.
B) they required shareholders to contribute a dollar more in fees each month.
C) shareholders were able to redeem shares for more than a $1.
D) shares earned more than a dollar in interest.
42) In this type of arrangement, any balances above a certain amount in a corporation’s checking
account at the end of the business day are “removed” and invested in overnight securities that
pay the corporation interest. This innovation is referred to as a
A) sweep account.
B) share draft account.
C) removed-repo account.
D) stockman account.