a. underwriting and selling insurance and securities,
b. commercial banking,
c. merchant banking,
d. insurance company porEolio investment activities.
5. The Federal Reserve may not permit forming a Financial Holding Company if any of its insured
depository institution subsidiaries are:
a. not well capitalized,
b. not well managed,
c. did not receive at least a “Satisfactory” rating in its most recent CRA exam.
6. The consolidated &nancial statements of a holding company and its subsidiaries reGect aggregate
or consolidate performance. The parent typically pays very liDle in income tax because 80
percent of the dividends from subsidiaries is exempt. Taxable income from the remaining 20
percent and interest income is small relative to deductible expenses.
7. Large Banks are typically organized as C-Corporations, while smaller banks are organized as
S-Corporations. S-Corporations receive favorable tax treatment because the &rm does not pay
corporate income tax. The &rm allocates income to shareholders on a pro rata basis and each
individual pays tax at personal tax rates on the income allocated to them. Given the ability to
avoid the double taxation at the &rm and individual level, many closely held banks have chose
S-corporation status. The primary limitation to qualifying for S-corporation status is a
requirement that the bank must have no more than 100 shareholders.
8. The principal advantage of being a depository institution is access to FDIC deposit insurance.
The primary disadvantage of operating as a bank (or Bank Holding Company) is that the &rm is
subject to regulation as a bank.
9. There are major &nancial services business models: Transactions Banking and Relationship
Banking. Transactions banking involves providing transactions services such as checking
accounts, credit card loans, and mortgage loans that occur with high frequency and exhibit
standardized features. Because the products are highly standardized, they require liDle human
input to manage. Relationship banking emphasizes the total relationship between the banker
and customer. Relationship banks will often aggressively market noncredit products and services
to such customers in order to lock in the relationship.
10. Securitization is the process of converting assets into marketable securities. It enables banks to
move assets o! balance sheet and increase fee income. It increases competition for the types of
standardized products, such as mortgages and other credit-scored loans, and eventually lowers
the prices paid by consumers by increasing the supply and liquidity of these products. This
Originate-to-Distribute (OTD) approach of separating loan origination from ownership
contributed to the credit crisis of 2007 – 2009. Lenders who originated the loans knew they
would not own the loans long term, therefore, they were less concerned about the quality of the