Chapter 13
Financial Industry Structure
Multiple-Choice Questions
1. When compared to Canada or Japan, the U.S. is unusual in that it has:
a. far fewer banks than either of those countries.
b. fewer banks than Japan but more than Canada.
c. more banks than Japan but fewer than Canada.
d. more banks than either Japan or Canada.
2. In recent years the U.S. banking structure has changed in such a way that there are now:
a. more banks.
b. fewer branches.
c. fewer banks but more branches.
d. fewer banks and fewer banks with branches.
3. The financial crisis in the United States in 2007-2009 brought about all but which of the
following changes:
a. a rise in the number of unit banks.
b. an increase in the deposit share of the top four U.S. commercial banks.
c. the placement of the two government-sponsored enterprises for housing finance into
conservatorship.
d. a run on money-market mutual funds.
4. If someone wants to start a bank today they would have to:
a. obtain a charter from the federal government.
b. simply have $5 million is startup capital, a charter is no longer needed.
c. obtain a charter either from the federal or state government.
d. obtain a state charter, the federal government stopped issuing charters in 1970.
5. Unit banks are:
a. banks with no branches.
b. more numerous in the United States than they were in previous decades.
c. no longer permitted to exist in the United States.
d. commercial banks that have combined into one unit with an investment bank.
6. A unit bank is a bank that:
a. only makes one type of loan, (i.e.; home mortgages.)
b. only offers savings accounts.
c. provides a myriad of financial services, so customers get all or most of their financial needs
taken care of at the bank.
d. has no branches.
7. Prior to the Civil War most state banks issued their own banknotes. This resulted in all of
the following problems except:
a. their values decreased as the holder moved further from the bank.
b. they were worthless if the bank failed.
c. they were not efficient as a means of payment if the holder was far from the bank.
d. they were usually redeemable in gold.
8. The dual banking system in the U.S. today refers to:
a. a bank’s ability to issue checking and saving accounts.
b. a bank’s ability to own another financial institution.
c. the ability of banks to be either federally or state chartered.
d. a deposit institution’s decision to be either a bank or a savings and loan.
9. In the U.S. today:
a. most banks are federally chartered.
b. most banks are state chartered.
c. there are approximately equal numbers of state and federally chartered banks.
d. all new banks are federally chartered.
10. Banks exert some control over who will regulate them because banks:
a. spend a lot of money contributing to political campaigns.
b. can switch their charter from state to federal and vice versa.
c. have the right to decide on which regulator will oversee their bank.
d. pay the salary of the regulator.
11. In the early years of the Great Depression, 1929-1933:
a. over one half of all U.S. banks failed.
b. two-thirds of U.S. banks failed.
c. more than a third of all U.S. banks failed.
d. a little less than one-quarter of U.S. banks failed.
12. The bank failures that occurred during the early years of the Great Depression:
a. hurt large depositors the most since it was the large money center banks that failed.
b. hurt small depositors the most since it was mainly small banks that failed.
c. hurt the government insurance funds since FDIC covered most of the losses of depositors.
d. totaled about 30% of total bank customer deposits.
13. The Federal Deposit Insurance Corporation (FDIC) was created:
a. in 1933 as a part of the Glass-Steagall Act.
b. when the Federal Reserve was created in 1914.
c. prior to the stock market crash of 1929.
d. in 1927 as a part of the McFadden Act.
14. The Glass-Steagall Act of 1933:
a. required commercial banks to sell off their investment banking operations.
b. eliminated the FDIC.
c. required federally chartered banks to meet the branching restrictions of the states.
d. required all state banks to get federal charters.
15. The U.S. has many banks because:
a. small banks are more profitable than large banks.
b. many states outlawed bank branching.
c. the Great Depression caused the failure of the large banks, leaving many small banks.
d. the Glass-Steagall Act forced the splitting up of large banks.
16. Which of the following statements most accurately describes the state of banking in the
U.S.?
a. A large number of large banks and a small number of small banks
b. A large number of large and small banks
c. A small number of large and small banks
d. A large number of small banks and a small number of large banks
17. The number of banks in the U.S. today is approximately:
a. 5,400.
b. 800.
c. 200.
d. 15,300.
18. Many states prohibited bank branching because of all of the following except:
a. they feared the concentration and monopoly power of large banks.
b. they generated significant revenue from issuing bank charters.
c. they wanted to protect the profits of banks since they generated tax revenue from these
profits.
d. the McFadden Act of 1927.
19. The actual results of the McFadden Act included:
a. increased efficiency of banking across the country.
b. a tight network of interconnected banks across the country.
c. the continued operation of small inefficient banks.
d. the elimination of banking monopolies.
20. One of the results of the limit on bank branching was:
a. increased diversification in the loan portfolio of small banks.
b. curtailment of credit availability for borrowers in small towns.
c. lower profits for banks.
d. increased efficiency in the operations of banks.
21. Bank holding companies developed:
a. to get around the limitations on bank
branchi
ng.
b. so foreign banks could open branches in the U.S.
c. to circumvent the regulation by the Office of the Comptroller of the Currency.
d. so that unit banks could combine into larger banks.
22. Over the last twenty years in the U.S., the number of banks has:
a. steadily increased.
b. stayed about the same.
c. steadily decreased.
d. more than doubled.
23. One way that a bank could offer non-bank services across more than one state was to:
a. file for a foreign bank charter.
b. be a federally chartered bank rather than a state chartered bank.
c. create a bank holding company.
d. become a central bank.
24. The Bank Holding Company Act of 1956:
a. significantly broadened the scope of what bank holding companies could do.
b. limited bank holding companies to operating only within their chartered state.
c. limited the scope of bank holding companies in terms of services offered.
d. repealed the McFadden Act of 1927.
25. As a result of technology, many small businesses today:
a. are located closer to their bank.
b. are located further from their bank.
c. have more face-to-face interactions with their banker.
d. no longer need banks.
26. One of the results of the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 was:
a. a reversal of the branching restrictions of the McFadden Act.
b. an increase in the number of banks in the U.S.
c. a decrease in the average size of banks.
d. a decrease in commercial banks but an increase in the number of savings and loans and
savings banks.
27. The sharp reduction in the number of banks that has occurred since the mid-1980s has
been due primarily to:
a. bank failures from increased competition.
b. bank mergers.
c. the closing of banks by federal regulators.
d. the revoking of state bank charters.
28. One result of the Riegle-Neal Interstate Banking and Branching Efficiency Act was that:
a. banking system efficiency decreased.
b. banks became less geographically diversified.
c. banking system efficiency increased.
d. banks became less geographically diversified and banking system efficiency decreased.
29. The Gramm-Leach–Bliley Act:
a. repealed the Riegle-Neal Interstate Banking and Branching Efficiency Act.
b. repealed the Glass-Steagall Act’s prohibition of mergers between commercial banks and
insurance or securities firms.
c. repealed the McFadden Act’s restriction on bank branching.
d. reinforced the Glass-Steagall Act’s limitation on commercial banks’ availability to merge
with insurance or securities firms by increasing the penalties for doing so.
10
30. An Edge Act Corporation is:
a. a company created so a U.S. bank can operate in more than one state.
b. a subsidiary of a bank created to provide insurance and securities services.
c. a company created by a non-bank corporation used to purchase and operate banks.
d. a subsidiary of a domestic bank that is established specifically to engage in international
banking transactions.
31. The growth of international banking has:
a. decreased the competition that domestic banks face.
b. decreased the efficiency of most banks.
c. enhanced economic growth in many countries.
d. increased the monopoly power of most banks.
32. Eurodollars are:
a. the currency of the European Economic Union.
b. euro-denominated deposits in U.S. Banks.
c. dollar-denominated deposits in banks outside the United States.
d. dollars that are specially printed for use abroad to minimize counterfeiting.
33. Often Eurodollar deposits earn higher returns than U.S. bank deposits for all of the
following reasons except:
a. Eurodollar deposits are not subject to U.S. reserve requirements.
b. the bank does not have to pay deposit insurance premiums on these deposits.
c. regulatory compliance may be more costly for a foreign bank than a U.S. bank.
d. taxes on the profits on banks outside the U.S. may be lower on banks inside the U.S.
34. The interest rate at which banks lend each other Eurodollars is known as:
a. the international federal funds rate.
b. the London Interbank Offered Rate.
c. the discount rate.
d. the International Prime Rate.
35. The gap between LIBOR and the expected Federal Reserve policy interest rate provides a
key measure of which of the following:
a. the direction of movement of the Euro relative to the US dollar on the foreign exchange
market.
b. the persistence and intensity of the liquidity crisis.
c. the expected length of a coming global recession.
d. the movement of the US stock market.
36. Citigroup is an example of:
a. an Edge Act corporation.
b. a foreign bank.
c. a financial holding company.
d. a unit bank.
37. Universal banks are:
a. firms that engage in banking services across many countries.
b. firms that engage a wide array of financial and non-financial activities.
c. banks that make direct investment in non-financial firms.
d. multinational corporations that own U.S. banks.
38. Which of the following is an accurate statement about universal banks?
a. In Germany universal banks do everything under one roof, including direct investment in
the shares of nonfinancial firms.
b. In Germany the provision of insurance, banking, and securities must be done by separate
corporations.
c. As in Germany, universal banks in the United States do everything under one
roof, including direct investment in the shares of nonfinancial firms.
d. Universal banks in the United States account for the largest share of financial intermediary
assets.
39. Which of the following is not a reason to create large financial holding companies?
a. Financial holding companies offer a wide array of services under one brand
name.
b. Financial holding companies need only one CEO, one Board of Directors, and one
accounting system regardless of size.
c. Financial holding companies are well diversified so risk is reduced.
d. Financial holding companies are exempt from having to pay for FDIC insurance on
deposits.
40. Which of the following is an example of the economies of scale argument for increased
profits for large financial holding companies?
a. Financial holding companies offer a wide array of services under one name.
b. Financial holding companies need only one CEO, one Board of Directors, and one
accounting system regardless of size.
c. Financial holding companies are well diversified so risk is reduced.
d. The profitability of financial holding companies does not rely on one particular line of
business.
41. Which of the following is an example of the economies of scope argument for increased
profits for large financial holding companies?
a. Financial holding companies offer a wide array of services under one name.
b. Financial holding companies need only one CEO, one Board of Directors, and one
accounting system regardless of size.
c. Financial holding companies face declining average costs per dollar of deposits.
d. The profitability of financial holding companies relies on one particular line of
business.
42. Which of the following is an example that can help explain increased profits for large
financial holding companies?
a. Financial holding companies offer a wide array of services under many brand names.
b. Financial holding companies need only one CEO, one Board of Directors, and one
computer system regardless of size.
c. Financial holding companies are not well diversified and receive a higher return for the
higher risk.
d. Financial holding companies are exempt from having to pay for FDIC insurance.
43. Which of the following is not a nondepository institution?
a. A savings and loan
b. An insurance company
c. A mutual fund company
d. A pension fund
44. Which of the following statements best completes the following statement: “Over the
past 40 years, the percentage(s) of assets for all financial intermediaries…”?
a. controlled by banks has increased while the percentage for mutual funds has decreased.
b. controlled by banks has decreased as has the percentage for mutual funds while insurance
companies have increased their percentage.
c. controlled by insurance companies and mutual funds has decreased and the percentage
controlled by banks has increased.
d. controlled by banks has decreased while the percentage for mutual funds has increased.
45. Which of the following statements best completes the following statement: “Over the
past 40 years, the percentage(s) of assets for all financial intermediaries…”?
a. controlled by banks has decreased as has the percentage for mutual funds while insurance
companies have increased their percentage.
b. controlled by insurance companies and mutual funds has decreased and the percentage
controlled by banks has increased.
c. controlled by banks and insurance companies has decreased while the percentage
controlled by mutual funds and pensions has increased.
d. controlled by banks, insurance companies, mutual funds and pensions have all increased.
46. Modern forms of insurance can be traced back to around:
a. the early 1900s.
b. the early 1400s.
c. the mid 1800s.
d. the late 1700s.
47. Lloyd’s of London is perhaps most known for:
a. being the largest insurance company in the world.
b. going out of business when it insured too many odd risks.
c. offering insurance against unusual risks.
d. being the oldest insurance company in the world.
48. Lloyd’s of London has a reputation for insuring:
a. only low risk stable enterprises.
b. unique and sometimes very odd situations.
c. only physical structures to minimize the risks to their underwriters.
d. only marine-related risks.
49. Insurance companies perform all of the following functions performed by financial
intermediaries except:
a. transferring risk.
b. pooling the resources of small savers.
c. making large investments.
d. supplying liquidity.
50. Insurance companies offer two basic type of insurance; these are:
a. life insurance and property and casualty insurance.
b. life insurance and mutual funds.
c. property and casualty companies.
d. whole life and term life insurance companies.
51. Whole life insurance differs from term life in which of the following w
a
ys
?
a
. Whole life has a rising premium as the policyholder ages, but term life has a fixed
premium.
b. Term life has a savings component while whole life is pure insurance.
c. Term life is usually more expensive than whole life.
d. Whole life is a combination of term life insurance and a savings account.
52. Whole life insurance has decreased in popularity due to:
a. many whole life insurance companies becoming bankrupt.
b. cheaper savings alternatives that have developed, making whole life policies expensive
savings vehicles.
c. mergers with property and casualty companies, raising the cost of all insurance.
d. lower interest rates on alternative savings vehicles.
53. A typical automobile insurance policy is an example of:
a. liability insurance only.
b. property and casualty insurance.
c. property insurance only.
d. casualty insurance only.
54. Property and casualty insurers will hold assets of shorter maturities than life insurance
companies because:
a. shorter maturity assets usually have higher returns.
b. life insurance companies may find they need to get liquid unexpectedly.
c. property and casualty insurers can find themselves needing to get liquid unexpectedly.
d. life insurance companies generally take on more risk than property and casualty companies.
55. Insurance company assets will include:
a. stocks and bonds.
b. only bonds.
c. only stocks.
d. only U.S. Treasury securities.
56. A young father needing to provide his family with financial security would be better off
purchasing:
a. a whole life insurance policy.
b. a term life insurance policy.
c. as much life insurance as they can afford.
d. no life insurance; instead he should focus on saving.
57. Insurance companies can predict fairly accurately:
a. the percentage of policyholders who will have a claim and which policyholders will have a
claim.
b. which policyholders will suffer a loss but not the percentage of policyholders that will do so.
c. the type of losses policyholders will incur but not the percentage of policyholders that will
file claims.
d. the percentage of policyholders that will file claims but not the policyholders that will file
them.
58. In order for insurance companies to generate predictable payouts, they need to:
a. spread the risk across many policies.
b. accept policyholders from a very specific geographic area.
c. focus on insuring only specific events, for example only fire.
d. offer only life insurance.
59. Because most insurance companies insure many people, they do not have to worry about
the problem of:
a. moral hazard.
b. adverse selection.
c. spreading of risk.
d. information asymmetry.
60. A person who discovers that he/she has advanced stages of cancer and calls his/her life
insurance agent to double his/her insurance policy is an example of:
a. a moral hazard risk.
b. the risk of adverse selection.
c. the problem of information symmetry.
d. risk spreading.
61. A homeowner discovers that a large tree in his yard is diseased and may fall in a bad
windstorm and if it falls, it will likely destroy the garage. The cost to have the tree cut down
is significant but the homeowner has an insurance policy and figures that if the tree falls and
destroys the garage, the insurance company will pay, and the deductible is less than the cost
to have the tree removed. This is an example of:
a. information symmetry.
b. adverse selection.
c. moral hazard.
d. screening.
62. One way insurance companies deal with the problem of adverse selection is by:
a. charging the same price to everyone.
b. screening applicants.
c. monitoring policyholders after they have purchased insurance.
d. spreading the risk in the same geographic area.
63. In many cases, life insurance companies will require applicants to take a physical. This is
done to avoid the problem of:
a. adverse selection.
b. moral hazard.
c. free riding.
d. transaction costs.