Chapter 11
ANSWERS TO QUESTIONS
1. Why was the United States one of the last major industrialized countries to have a central
bank?
2. Why does the United States operate under a dual banking system?
Throughout most of the history of banking in the United States, there has been a fear of
3. What were the motivations for the original Glass-Steagall Act of 1933?
4. Which regulatory agency has the primary responsibility for supervising the following
categories of commercial banks?
a. National banks
b. Bank holding companies
c. Non–Federal Reserve member state banks
d. Federal Reserve member state banks
e. Federally chartered savings and loan associations
f. Federally chartered credit unions
5. How does the emergence of interest-rate risk help explain financial innovation?
6. Why did new technology make it harder to enforce limitations on bank branching?
7. “The invention of the computer is the major factor behind the decline of the banking
industry.” Is this statement true, false, or uncertain? Explain your answer.
8. “If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier
today.” Is this statement true, false, or uncertain? Explain your answer.
9. How do sweep accounts and money market mutual funds allow banks to avoid reserve
requirements?
10. If reserve requirements were eliminated in the future, as some economists advocate, what
effects would this have on the size of money market mutual funds?
11. Why is loophole mining so prevalent in the banking industry in the United States?
12. Why have banks been losing cost advantages in acquiring funds in recent years?
The rise in inflation and the resulting higher interest rates on alternatives to checkable
13. Why have banks been losing income advantages on their assets in recent years?
other financial institutions to originate loans, again taking away some of the banks’ loan
business.
14. “The commercial banking industry in Canada is less competitive than the commercial
banking industry in the United States because in Canada only a few large banks dominate
the industry, while in the United States there are around 5,700 commercial banks.” Is this
statement true, false, or uncertain? Explain your answer.
15. Why is there a higher percentage of banks with less than $25 million of assets among
commercial banks than among savings and loans and mutual savings banks?
16. Unlike commercial banks, savings and loans, and mutual savings banks, credit unions did
not have restrictions on setting up branches in other states. Why, then, are credit unions
typically smaller than the other depository institutions?
17. Why has the number of bank holding companies dramatically increased?
18. What are the advantages and disadvantages of interstate banking?
19. How did competitive forces lead to the repeal of the Glass–Steagall Act’s separation of the
banking and securities industries?
20. What has been the likely effect of the Gramm-Leach-Bliley Act on financial consolidation?
21. What factors explain the rapid growth of international banking?
22. What incentives have regulatory agencies created to encourage international banking? Why
have they done this?
23. How could the approval of international banking facilities (IBFs) by the Fed in 1981 have
reduced employment in the banking industry in Europe?
24. If the bank at which you keep your checking account is owned by foreigners, should you
worry that your deposits are less safe than if the bank were owned by Americans?
25. Why is there only one U.S. bank among the ten largest banks in the world?
ANSWERS TO DATA ANALYSIS PROBLEMS
1. Go to the St. Louis Federal Reserve FRED database, and find data on the 30-year
conventional mortgage rate (WRMORTG) and the 5/1-year adjustable-rate mortgage
(MORTGAGE5US).
a. What are the mortgage rates reported for the most recent week of data available?
For the week of Thursday, June 5, 2014, the 30-year fixed rate mortgage was 4.1%, and
b. If the principal payment for a given month were $2000, then what would be the interest
payment per month (using simple interest) for each of the mortgage types, using the most
recent week of data?
c. Over a one-year period, how much would the difference in interest payments between
the two mortgage types amount to?
2. Go to the St. Louis Federal Reserve FRED database, and find data on the level of money
market mutual fund assets (MMMFFAQ027S). Download the data into a spreadsheet.
a. When did assets start entering money market mutual funds? What was the total worth of
assets in money market mutual funds at the end of 1970?
b. For each decade period, calculate the total percentage change in assets from the
beginning of the decade to the end of the decade: 1980:Q1–1990:Q1; 1990:Q1–
c. Calculate the growth rate from the most recent quarter of data available to the same
quarter a year prior. How does this growth rate compare to the highest average yearly
growth rate for the decades from part (b)?