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Chapter 19 notes

The modern commercial banking system began in America when the
Bank of North America was chartered in Philadelphia in 1782
A major controversy involving the U.S. banking industry in its early years was
whether the federal government or the states should charter banks
The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole
central bank
Because of the abuses by state banks and the clear need for a central bank to help the federal government raise funds during the War of 1812, Congress created the
Second Bank of the United States in 1816
The Second Bank of the United States was denied a new charter by
President Andrew Jackson
Before 1863,
banks acquired funds by issuing banknotes
Before 1863, none of these occurred
1) the Federal Reserve System regulated only federally chartered banks
2) the Comptroller of the Currency regulated both state and federally chartered banks
3) the number of federally chartered banks grew at a much faster rate than any other time since the end of the Civil War
Although federal banking legislation in the 1860s attempted to eliminate state chartered banks by imposing a prohibitive tax on banknotes, these banks have been able to stay in business by
issuing deposits
The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of
the National Bank Act of 1863
To eliminate the abuses of the state-chartered banks, the ______ created a new banking system of federally chartered banks, supervised by the _______
National Banking Act of 1863′ Office of the Comptroller of the Currency
The National Banking Act of 1863, and subsequent amendments to it,
created an banking system of federally chartered banks and established the Office of the Comptroller of the Currency
The regulatory system that had evolved in the U.S. whereby banks are regulated at the state level, the national level, or both, is known as
dual banking system
Today the US. has a dual banking system in which banks supervised by the ______ and by the ______ operate side by side
federal government; states
The Federal Reserve Act of 1913 required that
national banks join the Federal Reserve System
The Federal Reserve Act requires all ______ banks to become members of the Federal Reserve System, while _____ banks could choose to become members of the system
national; state
With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System ______ to purchase FDIC insurance for their depositors, while nonmember commercial banks _______ to buy deposit insurance
were required; could choose
With the creation of the Federal Deposit Insurance Corporation,
member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while nonmember commercial banks could choose to buy deposit insurance
Investment banking activities of the commercial banks were blamed for many bank failures. This led to
the passage of the Glass-Steagall Act of 1933
The Glass-Steagall Act prohibited commercial banks from
engaging in underwriting of and dealing in corporate securities
Which bank regulatory agency has the sole regulatory authority over bank holding companies?
The Federal Reserve System
State banks that are not member of the Federal Reserve System are most likely to be examined by the
Federal Deposit Insurance Corporation
Which regulatory body charters national banks?
The Comptroller of the Currency
Which of the following statements concerning bank regulation in the U.S. is true?
1)The Office of the Comptroller of the Currency has the primary responsibility for national banks
2) The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System
3) The Fed has sole regulatory responsibility over bank holding companies
Which of the following statements concerning bank regulation in the US are true?
The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System
Which of the following are important factors in determining the degree and timing of financial innovation?
changes in technology, changes in financial market conditions and changes in regulation
New computer technology has
reduced the cost of financial innovation
Rising interest-rate risk ______ the _______ financial innovation
increased; demand for
Large fluctuations in interest rates leads to
substantial capital gains ans losses to owners of securities, greater uncertainty about returns on investments, and greater interest-rate risk
In the 1950s, the interest rate on three-month Treasury bills fluctuated between 1.0% and 3.5%. In the 1980s, the three-month Treasury bill rate ranged from 5% to over 15%, From this, one could predict that in the 1980s interest-rate risk was ______ and the demand for financial innovation was ____
greater;greater
The most significant change in the economic environment that changed the demand for financial products since 1970 has been
the dramatic increase in the volatility of interest rates
Adjustable-rate mortgages DO NOT
protect households against higher mortgages payment when interest rates rise, keep financial institutions’ earnings high even when interest rates are falling, or have many attractive attributes, explaining why so few households now seek fixed rate
Adjustable-rate mortgages
benefit homeowners when interest rates are falling and reduce financial institutions’ interest-rate risk
The most important source of the changes in supply conditions that stimulate financial innovation has been
improvement in information technology
Examples of financial services that became practical realities as the result of new computer technology include
credit cards and electronic banking facilities
Credit cards date back to
prior to World War II
A firm issuing credit cards earns income from
loans it makes to credit card holders and payments made to it by stores on credit card purchases and
The entry of Sears, AT&T, and GM into the credit card business is an indication of
the rising profitability of credit card operations
A smart card is a form of
stored-valued card
Which of the following s not a financial innovation stimulated by information technology?
adjustable-rate mortgage
Which of the following is an example of a financial innovation introduced to avoid regulations?
sweep account
“Stripping” a Treasury bond
means selling each of its future payments as a separate zero-coupon bond
So-called fallen angels differ from junk bonds in that
junk bonds refer to newly issued bonds with low credit ratings
So-called fallen angels differ from junk bonds in that
junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer t previously issued bonds which have has their credit ratings fall below Baa
High-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as ______
junk bonds
In 1977, _______pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status
Michaek Milken
The practice of creating marketable debt instruments that are backed by otherwise illiquid assets is known as _____
securization
The driving force behind the securitization of mortgages and automobile loans has been
the improvement in computer technology
The bundling of mortgages into a saleable security (usually for large institutional investors) is called _____
securitization
In the usual GNMA pass-through security, the ______ has direct ownership of pro-rata share of the portfolio of mortgage loans
buyer
Bank managers look on reserve requirements as a
tax on deposits
Checking accounts that earn interest (such as NOW accounts) were not available until
1972
Burdensome regulations, along with inflation and rising interest rates, help to explain
the rapid pace of financial innovations in banking in the 1960s and 1970s
The Federal Reserve’s Regulation Q
set maximum interest rates banks could pay on deposits
When disintermediation occurs, the banking system ______ deposits and bank lending _______
loses; deacreases
Which of the following is not a reason for the disappointing revenue, growth and profits of Internet-only banks?
high cost per transaction
It now appears that the predominant delivery system for banking services in the future will be
traditional banks supplemented with online services
The growing use and proliferation of ATMs has been stimulated by
lower transaction costs, greater customer convenience, and declining cost of the ATM equipment
Since 1978, commercial banks’ importance as a source of funds for borrowers has shrunk dramatically, from around _______ percent of total credit advanced to near _____ percent by 2012
40;22
Thrift institutions’ importance as a source of funds for borrowers
has shrunk from over 20 percent of total credit advanced in the late 1970s to below 10 percent today
Since the late 1970s, thrift institutions’ importance as a source of funds for borrowers has shrunk markedly, from above _____ percent of total credit to below _____ percent today
20;10
Bank failures and mergers have caused a number of commercial banks in the US to decline from around ______ in the 1970s to below _____ today
15,000;8,000
The traditional financial inter-mediation role of banking has been to make ______-term loans and to fund them with _____-term deposits
long;short
The process in which people seek higher interest rates take their money out of financial institutions is called
disintermediation
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
60;5
The most important developments that have reduced banks’ cost advantages in the past twenty years include
the elimination of Regulation Q ceilings and the competition from money market mutual funds
The most important developments that have reduced banks’ cost advantages in the past twenty years include
the competition from money markets mutual funds
The most important developments that have reduced banks’ income advantages in the past twenty years include
the growth of the commercial paper market, the growth of the junk bond market, and the growth of securitization
The most important developments that have reduced banks’ income advantages in the past twenty years include
the growth of the commercial paper market and the growth of the junk bond market
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
30
Rising market interest rates in the 1960s and the 1970s, combined with regulated deposit rate ceilings,
worked in the short-run to give mortgage-issuing institutions a source of low-cost funds, led eventually to an outflow of deposits from depository institutions and led to financial innovations that worked to avoid these regulations
The presence of so many commercial banks in the US is most likely the result of
regulations that restrict the ability of banks to open branches
The McFadden Act of 1927
effectively prohibited banks from branching across state lines
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
McFadden Act
Which of the following is an advantage of forming a bank holding company?
it allows ownership of several banks where branching is prohibited and it allows owners to engage in activities related to banking that are prohibited to banks
Which of the following are true statements concerning bank holding companies?
banks holding companies own almost all large banks and bank holding companies have experienced dramatic growth in the past 25 years
As a result of shared electronic banking facilities,
barriers to branching have become less burdensome
The McFadden Act’s prohibition against interstate branching
was weakened by the introduction of shared electronic banking facilities that provide banking services nationwide, was weakened by regional compacts that allowed banks to own banks in other states in their region and impeded banks’ ability to diversify their loans and take advantage of economies of scale
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
economies of scope
As a result of restrictive banking regulations, the US
has too many banks when compared to other industrialized countries
Which of the following is not expected to result from bank consolidation in the U.S.?
the disappearance of small community banks
The legislation that separated investment banking from commercial banking was the
Glass-Steagall Act
The prohibition against banks underwriting corporate securities and engaging in brokerage, real estate, and insurance activities was repealed by the
Gramm-Leach-Bliley Financial Services Moderation Act
The Riegle-Neal Act of 1994
overturned prohibitions on the interstate banking and branching
In recent years, commercial banks have been allowed to
invest in real estate, enter certain insurance markets and underwrite stocks
In a _____ banking system, commercial banks provide full range of banking, securities, and insurance services, all within a single legal entity
universal
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
British-style universal
A major difference between the U.S. and Japanese banking systems is that
Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot
Major differences between the U.S. and Japanese banking systems includes:
Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas the U.S. cannot and bank holding companies are illegal in Japan
Which of the following is a reason for the rapid expansion of international banking?
the rapid growth in international trade, the growth of multinational corporations and the desire of U.S. banks to expand
Since the passage of the International Banking Act of 1978, the comparative advantage enjoyed by foreign banks has been
reduced
A special subsidiary of a U.S. bank that is engaged in international banking is called
an Edge Act corporation
U.S. banks have most of their foreign branches in
Latin America, the Far East, the Caribbean and London
Eurodollars are
dollar-denominated deposits held in banks outside the U.S.
Deposits in European banks denominated in dollars for the purpose of international transactions are known as
Eurodollars
The main center of the Eurodollar market is
London
In 1975, financial institutions developed financial derivatives that included ______
futures contracts
An electronic machine that allows customers to make deposits, get cash transfer funds from one account to another, and check balances is
an automated teller machine
A form of electronic money used on the Internet to pay for goods and services is
e-cash
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 ______
sweep account
There are approximately how many commercial banks in the U.S. currently
6,200
Regulations restricting branching have promoted the development of what two financial innovations?
bank holding companies and automated teller machines
In September of 2008, the money market mutual fund Reserve Primary Fund had a price of less that $1 for a dollar invested. How did this happen?
the fund invested in debt of Lehman Brothers, which was worthless when Lehman went broke
What is the key difference between an S&L and a mutual savings bank?
Mutual savings banks are jointly owned by depositors, whereas an S&Ls aren’t
Because their members share a common bond, credit unions are typically quiet small; most hold less than ______ of assets
$ 10 million

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