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Money and Banking Chapter 12

1) The modern commercial banking system began in America when the
Bank of North America was chartered in Philadelphia in 1782.
2) A major controversy involving the banking industry in its early years was
whether the federal government or the states should charter banks.
3) The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the
central bank.
4) 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.
5) The Second Bank of the United States was denied a new charter by
President Andrew Jackson.
6) Currency circulated by banks that could be redeemed for gold was called
7) To eliminate the abuses of the state-chartered banks, the ________ created a new banking system of federally chartered banks, supervised by the ________.
National Bank Act of 1863; Office of the Comptroller of the Currency
8) 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.
9) Before 1863,
banks acquired funds by issuing bank notes.
10) Prior to 1863, all commercial banks in the United States
were chartered by the banking commission of the state in which they operated.
11) Although the National Bank Act of 1863 was designed to eliminate state-chartered banks by imposing a prohibitive tax on banknotes, these banks have been able to stay in business by
acquiring funds through deposits.
12) The National Bank Act of 1863, and subsequent amendments to it,
established the Office of the Comptroller of the Currency.
13) Which regulatory body charters national banks?
The Comptroller of the Currency
14) The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as a
dual banking system.
15) Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side.
federal government; states
16) The U.S. banking system is considered to be a dual system because
it is regulated by both state and federal governments.
17) The Federal Reserve Act of 1913 required that
national banks join the Federal Reserve System.
18) The Federal Reserve Act required all ________ banks to become members of the Federal Reserve System, while ________ banks could choose to become members of the system.
national; state
19) Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been
the creation of the FDIC.
20) With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System ________ to purchase FDIC insurance for their depositors, while non-member commercial banks ________ to buy deposit insurance.
were required, could choose
21) 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 non-member commercial banks could choose to buy deposit insurance.
22) The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from
engaging in underwriting and dealing of corporate securities.
23) The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the
Glass-Steagall Act.
24) Which of the following statements concerning bank regulation in the United States is true?
The Federal Reserve and the state banking authorities jointly have responsibility for the 900 state banks that are members of the Federal Reserve System.
25) Which bank regulatory agency has the sole regulatory authority over bank holding companies?
The Federal Reserve System
26) State banks that are not members of the Federal Reserve System are most likely to be examined by the
27) State banking authorities have sole jurisdiction over state banks
without FDIC insurance.
1) Financial innovations occur because of financial institutions search for
2) ________ is the process of researching and developing profitable new products and services by financial institutions.
Financial engineering
3) The most significant change in the economic environment that changed the demand for financial products in recent years has been
the dramatic increase in the volatility of interest rates.
4) In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 3.5 percent; in the 1980s it fluctuated between ________ percent and ________ percent.
5; 15
5) Uncertainty about interest-rate movements and returns is called
interest-rate risk.
6) Rising interest-rate risk
increased the demand for financial innovation.
7) Adjustable rate mortgages
benefit homeowners when interest rates are falling.
8) Adjustable rate mortgages
reduce the interest-rate risk for financial institutions.
9) The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is
a futures contract.
10) An instrument developed to help investors and institutions hedge interest-rate risk is
a financial derivative.
11) Financial instruments whose payoffs are linked to previously issued securities are called
financial derivatives.
12) Both ________ and ________ were financial innovations that occurred because of interest rate volatility.
adjustable-rate mortgages; financial derivatives
13) The most important source of the changes in supply conditions that stimulate financial innovation has been the
improvement in computer and telecommunications technology.
14) New computer technology has
reduced the cost of financial innovation.
15) Credit cards date back to
prior to the second World War.
16) A firm issuing credit cards earns income from
loans it makes to credit card holders.
17) The entry of AT&T and GM into the credit card business is an indication of
the rising profitability of credit card operations.
18) A debit card differs from a credit card in that
a credit card is a loan while for a debit card purchase, payment is made immediately.
19) Automated teller machines
cost less than human tellers, so banks may encourage their use by charging less for using ATMs.
20) The declining cost of computer technology has made ________ a reality.
virtual banking
21) Bank customers perceive Internet banks as being
prone to many more technical problems.
22) A disadvantage of virtual banks (clicks) is that
customers worry about the security of on-line transactions.
23) 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 to previously issued bonds that have had their credit ratings fall below Baa.
24) Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as
junk bonds.
25) In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status.
Michael Milken
26) One factor contributing to the rapid growth of the commercial paper market since 1970 is
improved information technology making it easier to screen credit risks.
27) The development of money market mutual funds contributed to the growth of ________ since the money market mutual funds need to hold liquid, high-quality, short-terms assets.
the commercial paper market
28) The process of transforming otherwise illiquid financial assets into marketable capital market instruments is know as
29) ________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans.
30) The driving force behind the securitization of mortgages and automobile loans has been
the improvement in computer technology.
31) According to Edward Kane, because the banking industry is one of the most ________ industries in America, it is an industry in which ________ is especially likely to occur.
regulated; loophole mining
32) Loophole mining refers to financial innovation designed to
get around regulations.
33) Prior to 2008, bank managers looked on reserve requirements
as a tax on deposits.
34) Prior to 2008, the bank’s cost of holding reserves equaled
the interest earned on loans times the amount on reserves.
35) Prior to 1980, the Fed set an interest rate ________, a maximum limit, on the interest rate that could be paid on time deposits.
36) The process in which people take their funds out of the banking system seeking higher -yielding securities is called
37) Money market mutual funds
function as interest-earning checking accounts.
38) In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation known as “breaking the buck.” This means that
they could no longer afford to redeem shares at the par value of $1.
39) In this type of arrangement, any balances above a certain amount in a corporation’s checking account at the end of the business day are “removed” and invested in overnight securities that pay the corporation interest. This innovation is referred to as a
sweep account.
40) Sweep accounts which were created to avoid reserve requirements became possible because of a change in
41) Sweep accounts
have made reserve requirements nonbinding for many banks.
42) Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers
has shrunk dramatically, from around 40 percent of total credit advanced to around 25 percent by 2011.
43) 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 around 3 percent by 2011.
44) Since 1980
banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities.
45) Financial innovation has caused
banks to suffer a simultaneous decline of cost and income advantages.
46) Disintermediation resulted from
interest rate ceilings combined with inflation-driven increases in interest rates.
47) The experience of disintermediation in the banking industry illustrates that
markets invent alternatives to costly regulations.
48) Banks responded to disintermediation by
A) supporting the elimination of interest rate regulations, enabling them to better compete for funds.
49) One factor contributing to the decline in cost advantages that banks once had is the
A) decline in the importance of checkable deposits from over 60 percent of banks’ liabilities to 2 percent today.
50) The most important developments that have reduced banks cost advantages in the past thirty years include:
B) the competition from money market mutual funds.
51) The most important developments that have reduced banks income advantages in the past thirty years include:
B) the growth of securitization.
52) Banks have attempted to maintain adequate profit levels by
B) pursuing new off-balance-sheet activities.
53) The decline in traditional banking internationally can be attributed to
B) improved information technology.
1) The presence of so many commercial banks in the United States is most likely the result of
C) prior regulations that restricted the ability of these financial institutions to open branches.
2) The McFadden Act of 1927
A) effectively prohibited banks from branching across state lines.
3) The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the
A) McFadden Act.
4) The large number of banks in the United States is an indication of
B) lack of competition within the banking industry.
5) Lack of competition in the United States banking industry can be attributed to
D) nineteenth-century populist sentiment.
6) Which of the following is a true statement concerning bank holding companies?
B) Bank holding companies have experienced dramatic growth in the past three decades.
7) A financial innovation that developed as a result of banks avoidance of bank branching restrictions was
D) bank holding companies.
8) ATMs were developed because of breakthroughs in technology and as a
A) means of avoiding restrictive branching regulations.
9) Financial innovations that grew out of the bank branching restrictions were
A) bank holding companies and automatic teller machines.
1) The primary reason for the recent reduction in the number of banks is
D) mergers and acquisitions.
2) Bank holding companies that rival money center banks in size, but are not located in money center cities are
A) superregional banks.
3) Allowing bank branching across state lines gives banks greater ability to coordinate bank operations. This makes it easier for them to receive the benefits of
B) economies of scale.
4) The ability to use one resource to provide different products and services is
B) economies of scope.
5) The business term for economies of scope is
6) The legislation that overturned the prohibition on interstate banking is
D) the Riegle-Neal Act
7) Although it has a population about half that of the United States, Japan has
D) fewer than 100 commercial banks.
8) Experts predict that the future structure of the U.S. banking industry will have
C) several thousand banks.
9) Bank consolidation will likely result in
C) increased competition.
10) Critics of nationwide banking fear
A) an elimination of community banks.
11) One of the concerns of increased bank consolidation is the reduction in community banks which could result in
A) less lending to small businesses.
12) Nationwide banking might reduce bank failures due to
C) diversification of loan portfolios across state lines.
13) As the banking system in the United States evolves, it is expected that
D) the number and importance of large banks will increase.
1) The legislation overturning the Glass-Steagall Act is
B) the Gramm-Leach-Bliley Act.
2) Under the Gramm-Leach-Bliley Act states retain regulatory authority over
C) insurance activities.
3) Under the Gramm-Leach-Bliley Act the oversight of the securities activities of bank holding companies belongs to
A) the SEC.
4) As a result of the global financial crisis several of the large, free-standing investment banking firms chose to become bank holding companies. This means that they will now be regulated by
A) the Federal Reserve.
5) In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity.
A) universal
6) In a ________ banking system, commercial banks engage in securities underwriting, but legal subsidiaries conduct the different activities. Also, banking and insurance are not typically undertaken together in this system.
B) British-style universal
7) A major difference between the United States and Japanese banking systems is that
B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot.
1) Like the dual banking system for commercial banks, thrifts can have either ________ or ________ charters.
A) state; federal
2) The regulatory agency responsible for supervising savings and loans institutions is the
D) Office of Thrift Supervision.
3) Unlike banks, ________ have been allowed to branch statewide since 1980.
A) federally-chartered S&Ls
4) Thrift institutions include
D) mutual savings banks.
5) The FHLBS gives loans to S&Ls and thus performs a function similar to the ________ for commercial banks.
A) Federal Reserve
6) Mutual savings banks are owned by
C) depositors.
7) An essential characteristic of credit unions is that
D) they are organized for individuals with a common bond.
8) ________ are the only depository institutions that are tax-exempt.
D) Credit unions
1) The spectacular growth in international banking can be explained by
A) the rapid growth in international trade.
2) What country is given credit for the birth of the Eurodollar market?
C) The Soviet Union
3) Deposits in European banks denominated in dollars for the purpose of international transactions are known as
A) Eurodollars.
4) The main center of the Eurodollar market is
A) London.
5) Eurodollars are
A) dollar-dominated deposits held in banks outside the United States.
6) Reasons for holding Eurodollars include
B) the fact that dollars are widely used to conduct international transactions.
7) An advantage to American banks inherent in operating foreign branches is that Eurodollar deposits in offshore branches are
A) not subject to reserve requirements.
8) U.S. banks have most of their branches in
A) Latin America, the Far East, the Caribbean, and London.
9) A ________ is a subsidiary of a U.S. bank that is engaged primarily in international banking.
A) Edge Act corporation
10) ________ within the U.S. can make loans to foreigners but cannot make loans to domestic residents.
B) International Banking Facilities
11) ________ of a foreign bank operates in the U.S. but cannot accept deposits from domestic residents.
A) An agency office
12) If a foreign bank operates a subsidiary bank in the U.S., the subsidiary bank is
A) subject to the same regulations as a U.S. owned bank.
13) Foreign banks may engage in banking activities in the United States by opening all of the following except
D) a McFadden Corporation.
14) Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by foreign banks in the U.S. has been
A) reduced.

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