63) The process in which people seeking higher interest rates take their money out of financial
institutions is called ________.
A) capital mobility
B) loophole mining
C) disintermediation
D) deposit jumping
64) 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; 5
C) 50; 20
D) 40; 15
65) 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.
66) 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.
67) 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.
68) 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.
69) 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 in size to over
________ percent of commercial and industrial bank loans today.
A) 20
B) 30
C) 40
D) 50
70) 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.
71) 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.
72) 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.
73) 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.
74) 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 of the above.
D) None of the above.
75) 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.
76) 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.
77) 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) did all of the above.
78) 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.
79) 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) has both A and B of the above.
80) Which of the following is not expected to result from bank consolidation in the U.S.?
A) The disappearance of small community banks.
B) The acceleration of the decline in the number of banks.
C) Banks will be more efficient.
D) Banks will be less likely to fail.
81) 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.
82) 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.
83) 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.
84) 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) do only A and B of the above.
85) 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
86) 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
87) 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
88) 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.
89) 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
90) 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
91) 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.
92) 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.
93) 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.
94) 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
95) The main center of the Eurodollar market is ________.
A) London
B) Basel
C) Paris
D) New York
96) In 1975, financial institutions developed financial derivatives that included ________.
A) adjustable-rate mortgages
B) futures contracts
C) financial engineering
D) virtual banks
97) An electronic machine that allows customers to make deposits, get cash, transfer funds from
one account to another, and check balances is
A) an automated banking machine.
B) the virtual bank.
C) an automated teller machine.
D) a smart card.
98) A form of electronic money used on the Internet to pay for goods and services is
A) e-money.
B) e-cash.
C) a smart card.
D) a virtual bank.
99) A financial innovation that enables banks to avoid the “tax” from reserve requirements by
taking any balances above a certain amount in a corporation’s checking account at the end of the
business day and investing them in overnight securities that pay interest is called a ________.
A) money market mutual fund
B) deposit rate ceiling
C) sweep account
D) disintermediation
100) There are approximately how many commercial banks in the United States currently?
A) 5,000
B) 6,200
C) 1,000
D) 1,250
101) Regulations restricting branching have promoted the development of what two financial
innovations?
A) Bank consolidation and nationwide banking
B) Bank holding companies and automated teller machines
C) Money market mutual funds and sweep accounts
D) Reserve requirements and restrictions on interest paid on deposits
102) In September of 2008, the money market mutual fund Reserve Primary Fund had a price of
less than $1.00 for a dollar invested. How did this happen?
A) The fund invested in debt of Lehman Brothers, which was worthless when Lehman went
broke.
B) The fund invested in high-yield junk bonds, which defaulted.
C) The fund invested in Treasuries, which yielded less than 0% returns.
D) This actually didn’t happen. It cannot happen since the fund only invested in low-risk debt.
103) What is the key difference between an S&L and a mutual savings bank?
A) Mutual savings banks are jointly owned by depositors, whereas S&Ls aren’t.
B) The FDIC insures an S&L’s deposits, but not those of mutual savings banks.
C) Both A and B are correct.
D) Neither A nor B is correct.
104) Because their members share a common bond, credit unions are typically quite small; most
hold less than ________ of assets.
A) $500,000
B) $10 million
C) $100 million
D) $1 billion
19.2 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.
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 less than 10 percent
today.
16) A change in the financial environment will stimulate a search by financial institutions for
innovations that are likely to be profitable.
17) Reserve requirements that force banks to keep a certain fraction of their deposits as reserves
and restrictions on the interest rates that can be paid on deposits have been the major forces
behind financial innovation.
18) An alternative corporate structure for U.S. banks that operate overseas is the Edge Act
corporation, a special subsidiary engaged primarily in international banking.
19) Unlike commercial banks, S&Ls can only be chartered by the federal government.
19.3 Essay
1) Discuss some of the major milestones in the development of the U.S. banking system.
2) What financial innovations are best explained as attempts to avoid regulations?
3) 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?
4) 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?
5) What are Treasury strips? What roles have reinvestment risk and information technology
played in the development of this financial product?
6) What are the reasons for the decline of traditional banking?
7) Is the large number of banking firms in the United States an indication of a competitive
banking industry? Explain why or why not.
8) Are bank consolidations and nationwide banking good things? Why?
9) When and why was the Glass-Steagall Act passed? When and why was it repealed?
10) Describe Edge Act corporations, international banking facilities, and the structure of foreign
banks in the United States.
11) Explain the innovations that have been created to lower interest-rate risk.
12) Explain what happened to the large, free-standing investment banks as a result of the Global
Financial Crisis.