Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 136
Chapter 11
ANSWERS TO QUESTIONS
1. Do you think that before the National Bank Act of 1863 the prevailing conditions in the
banking industry fostered or hindered trade across states in the United States?
Two important conditions hindered trade across states before 1863: there was no national
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
centralized banking power. As a result, all banks had been chartered locally by each state.
3. In light of the recent financial crisis of 2007–2009, do you think that the firewall created by
the Glass-Steagall Act of 1933 between commercial banking and the securities industry
proved to be a good thing or not?
Answers will vary. In general, one could say that the Glass Steagall Act was a good choice in
4. Which regulatory agency has the primary responsibility for supervising the following
categories of commercial banks?
a. National banks
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.
Uncertain. The invention of the computer did help lower transaction costs and the costs of
collecting information, both of which have made other financial institutions more
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.
True. Higher inflation helped raise interest rates, which caused the disintermediation process
9. How do sweep accounts and money market mutual funds allow banks to avoid reserve
requirements?
With a sweep account, any account funds left at the end of the business day are technically
transferred to another account, which is invested in overnight securities. Since they are no
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?
Money market mutual funds are not subject to reserve requirements and so they avoid the tax
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
deposits meant that banks had a big shrinkage in this low-cost way of raising funds. The
13. Why have banks been losing income advantages on their assets in recent years?
The growth of the commercial paper market and the development of the junk bond market
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.
False. Although there are many more banks in the United States than in Canada, this does not
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?
Because restrictions on branching are stricter for commercial banks than for savings and
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. Given the role of the loan originator in the securitization process of a mortgage loan
described in the text, do you think the loan originator will be worried about the ability of a
household to meet its monthly mortgage payments?
Given that the loan originator or mortgage broker is mostly worried about getting the
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?
International banking has been encouraged by giving special tax treatment and relaxed
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 two U.S. bank among the ten largest banks in the world?
Because of tighter regulation in the United States compared to the rest of the world, there are
ANSWERS TO DATA ANALYSIS PROBLEMS
1. Go to the St. Louis Federal Reserve FRED database and find data on the 30-year fixed rate
average mortgage rate (MORTGAGE30US) and the 5/1-year adjustable-rate mortgage
(MORTGAGE5US).
a. What are the mortgage rates reported for the most recent week of data available?
b. If the principal payment for a given month were $2,000, 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?
At 3.96%, the interest payment for the 30-year mortgage using simple interest would be
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–
Assets started entering money market mutual funds at the beginning of 1974 (Q1). By the
end of the decade in 1979:Q4 there were $45.2 billion in assets.
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 142
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)?
For the most recent one year period from 2016:Q1 to 2017:Q1, money market mutual