Answers to End-of-Chapter Questions
1. Many bank customers value convenience in addition to the range of services and pricing. Banks that have many
branches offer greater convenience. It is easier to make deposits, withdraw funds, visit with customer service
2. Bank regulation is too complex today with overlapping responsibilities among the regulatory agencies. The situation
largely reflect the chartering system, state versus federal competition among regulators, and the existence of FDIC
insurance. Many politicians and business people want local representatives to govern banks – hence, the appeal of
3. The objectives of depository institution regulation are:
a. Ensure the safety and soundness of the financial system
4. Regulation is not intended to prevent failures. The objectives are to:
a. Ensure the safety and soundness of the financial system
5. At the same time that Congress increased the insured deposit amount to $100,000, it expanded the range of
services and lines of business that commercial banks and thri>s could offer. Many institutions grew their deposits at
unmanageable rates by simply buying funds through brokerage houses. As such, they would authorize a broker to
6. CAMELS is an acronym that indicates the categories in which banks are examined. Regulators formally assign scores
(1 to 5 where 5 is bad) to a bank’s:
C = Capital Adequacy
A = Asset Quality
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Most bank failures re)ect poor asset quality (bad loans). Bad loans may arise from poor loan underwriting,
7. In the 1930s, Congress separated commercial banking activities (such as accepting deposits and making loans) from
investment banking activities (such as underwriting securities) so that the same bank wouldn’t tie the availability of
8. Banks that have strong senior management, a well-trained staff, large amounts of capital, and good market share are
best positioned to bene$t from increased competition. They can choose the lines of business to enter and exit,
9. Gramm-Leach-Bliley (1999) effectively allowed banks to offer services in a wide range of areas and to enter new
lines of business. It similarly allowed other financial services companies to offer traditional commercial banking
products and services. The largest institutions with the greatest amounts of capital have generally been aggressive
10. Banks are losing market share due to increased competition. Many entities now make loans and accept deposits
which represent the core bank products. Many of these competitors target large firms with the largest loans and
deposits. Many banks have similarly decided not to take as much credit risk. As such, they originate loans then
11. Increased capital at a bank lowers risk. This potentially bene$ts depositors by reducing the likelihood of failure and
deposit runs. Equity owners gain because their investment is safer, and recently the stock market has a@ached a
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in whole or in part.
12. A small community bank cannot earn above-average returns on these low-margin products/services today because
of competition. It must develop other loan products or services that can be offered at profitable margins. This
might be some specialized form of lending tied to a specific type of loan or industry, it might be emphasizing
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© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.