question

The modern commercial banking system began in America when the

answer

Bank of North America was chartered in Philadelphia in 1782.

question

A major controversy involving the banking industry in its early years was

answer

whether the federal government or the states should charter banks.

question

The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the

answer

central bank

question

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

answer

Second Bank of the United States in 1816.

question

The Second Bank of the United States was denied a new charter by

answer

president andrew jackson

question

Currency circulated by banks that could be redeemed for gold was called ________.

answer

bank notes

question

To eliminate the abuses of the state-chartered banks, the ________ created a new banking system of federally chartered banks, supervised by the ________.

answer

National Bank Act of 1863; Office of the Comptroller of the Currency

question

The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of

answer

the National Bank Act of 1863.

question

Before 1863,

answer

banks acquired funds by issuing bank notes.

question

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

answer

acquiring funds through deposits.

question

The National Bank Act of 1863, and subsequent amendments to it,

answer

established the Office of the Comptroller of the Currency.

question

Which regulatory body charters national banks?

answer

The Comptroller of the Currency

question

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

answer

dual banking system.

question

Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side.

answer

federal government, states

question

The U.S. banking system is considered to be a dual system because

answer

it is regulated by both state and federal governments.

question

The Federal Reserve Act of 1913 required that

answer

national banks join the Federal Reserve System.

question

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.

answer

national, state

question

Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been

answer

the creation of the FDIC

question

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.

answer

were required, could choose

question

With the creation of the Federal Deposit Insurance Corporation,

answer

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.

question

The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from

answer

engaging in underwriting and dealing of corporate securities.

question

The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the:

answer

the glass steagall act

question

Which of the following statements concerning bank regulation in the United States are true?

answer

The Federal Reserve and the state banking authorities jointly have responsibility for the 900 state banks that are members of the Federal Reserve System.

question

Which bank regulatory agency has the sole regulatory authority over bank holding companies?

answer

the federal reserve system

question

State banks that are not members of the Federal Reserve System are most likely to be examined by the

answer

FDIC

question

State banking authorities have sole jurisdiction over state banks

answer

without FDIC insurance

question

Financial innovations occur because of financial institutions search for ________.

answer

profits

question

________ is the process of researching and developing profitable new products and services by financial institutions.

answer

financial engineering

question

The most significant change in the economic environment that changed the demand for financial products in recent years has been

answer

the dramatic increase in the volatility of interest rates.

question

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.

answer

5, 15

question

Uncertainty about interest-rate movements and returns is called ________.

answer

interest rate risk

question

Rising interest-rate risk

answer

increased the demand for financial innovation.

question

Adjustable rate mortgages

answer

benefit homeowners when interest rates are falling.

question

The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is

answer

a futures contract

question

An instrument developed to help investors and institutions hedge interest-rate risk is

answer

a financial derivative

question

Financial instruments whose payoffs are linked to previously issued securities are called ________.

answer

a financial derivative

question

Both ________ and ________ were financial innovations that occurred because of interest rate risk volatility.

answer

adjustable-rate mortgages; financial derivatives

question

The most important source of the changes in supply conditions that stimulate financial innovation has been the

answer

improvement in computer and telecommunications technology.

question

New computer technology has

answer

reduced the cost of financial innovation.

question

Credit cards date back to

answer

prior to the second World War.

question

A firm issuing credit cards earns income from

answer

loans it makes to credit card holders.

question

The entry of AT&T and GM into the credit card business is an indication of

answer

the rising profitability of credit card operations.

question

A debit card differs from a credit card in that

answer

a credit card is a loan while for a debit card purchase, payment is made immediately.

question

Automated teller machines

answer

cost less than human tellers, so banks may encourage their use by charging less for using ATMs.

question

The declining cost of computer technology has made ________ a reality.

answer

virtual banking

question

Bank customers perceive Internet banks as being

answer

prone to many more technical problems.

question

A disadvantage of virtual banks (clicks) is that

answer

customers worry about the security of on-line transactions.

question

So-called fallen angels differ from junk bonds in that

answer

junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously bonds that have had their credit ratings fall below Baa.

question

Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as

answer

junk bonds.

question

In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status.

answer

michael milken

question

One factor contributing to the rapid growth of the commercial paper market since 1970 is

answer

improved information technology making it easier to screen credit risks.

question

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.

answer

the commercial paper market

question

The process of transforming otherwise illiquid financial assets into marketable capital market instruments is know as

answer

securitization.

question

________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans.

answer

securitization.

question

The driving force behind the securitization of mortgages and automobile loans has been

answer

the improvement in computer technology.

question

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.

answer

regulated, loophole mining

question

Loophole mining refers to financial innovation designed to

answer

get around regulations

question

Prior to 2008, bank managers looked on reserve requirements

answer

as a tax on deposits

question

Prior to 2008, the bank?s cost of holding reserves equaled

answer

the interest earned on loans times the amount on reserves.

question

Prior to 1980, the Fed set an interest rate ________ that is a maximum limit on the interest rate that could be paid on time deposits.

answer

ceiling

question

The process in which people take their funds out of the banking system seeking higher -yielding securities is called

answer

disintermediation

question

Money market mutual funds

answer

function as interest-earning checking accounts.

question

In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as ?breaking the buck.? This means that

answer

they could no longer afford to redeem shares at the par value of $1.

question

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

answer

sweep account

question

Sweep accounts which were created to avoid reserve requirements became possible because of a change in ________.

answer

supply conditions

question

Sweep accounts

answer

have made reserve requirements nonbonding for many banks.

question

Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers

answer

has shrunk dramatically, from around 40 percent of total credit advanced to below 30 percent by 2005.

question

Thrift institutions importance as a source of funds for borrowers

answer

has shrunk from over 20 percent of total credit advanced in the late 1970s to below 6 percent by 2005.

question

Since 1980

answer

banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities.

question

Financial innovation has caused

answer

banks to suffer a simultaneous decline of cost and income advantages.

question

Disintermediation resulted from

answer

interest rate ceilings combine with inflation-driven increases in interest rates.

question

The experience of disintermediation in the banking industry illustrates that

answer

markets invent alternatives to costly regulations.

question

Banks responded to disintermediation by

answer

supporting the elimination of interest rate regulations, enabling them to better compete for funds.

question

One factor contributing to the decline in cost advantages that banks once had is the

answer

decline in the importance of checkable deposits from over 60 percent of banks? liabilities to under 10 percent today.

question

The most important developments that have reduced banks cost advantages in the past thirty years include:

answer

the competition from money market mutual funds.

question

The most important developments that have reduced banks income advantages in the past thirty years include:

answer

the growth of securitization.

question

Banks have attempted to maintain adequate profit levels by

answer

pursuing new off-balance-sheet activities.

question

The decline in traditional banking internationally can be attributed to

answer

improved information technology

question

The presence of so many commercial banks in the United States is most likely the result of

answer

prior regulations that restrict the ability of these financial institutions to open branches.

question

The McFadden Act of 1927

answer

effectively prohibited banks from branching across state lines.

question

The large number of banks in the United States is an indication of

answer

lack of competition within the banking industry.

question

Which of the following is a true statement concerning bank holding companies?

answer

Bank holding companies have experienced dramatic growth in the past three decades.

question

A financial innovation that developed as a result of banks avoidance of bank branching restrictions was ________.

answer

bank holding companies

question

ATMs were developed because of breakthroughs in technology and as a

answer

means of avoiding restrictive branching regulations.

question

The primary reason for the recent reduction in the number of banks is

answer

mergers and acquisitions.

question

Bank holding companies that rival money center banks in size, but are not located in money center cities are

answer

superregional banks.

question

The ability to use one resource to provide different products and services is

answer

economies of scope

question

The business term for economies of scope is

answer

synergies

question

The legislation that overturned the prohibition on interstate banking is

answer

the Riegle-Neal Act

question

Although it has a population about half that of the United States, Japan has

answer

fewer than 100 commercial banks

question

Experts predict that the future structure of the U.S. banking industry will have

answer

several thousand banks

question

Bank consolidation will likely result in

answer

increased competition

question

Critics of nationwide banking fear

answer

an elimination of community banks

question

One of the concerns of increased bank consolidation is the reduction in community banks which could result in

answer

less lending to small businesses

question

Nationwide banking might reduce bank failures due to

answer

diversification of loan portfolios across state lines.

question

As the banking system in the United States evolves, it is expected that

answer

the number and importance of large banks will increase.

question

The legislation overturning the Glass-Steagall Act is

answer

the Gramm-Leach-Bliley Act.

question

Under the Gramm-Leach-Bliley Act states retain regulatory authority over ________.

answer

insurance activities

question

As a result of the subprime 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

answer

the federal reserve

question

In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity.

answer

universal

question

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.

answer

british style universal

question

A major difference between the United States and Japanese banking systems is that

answer

Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot.

ECON 330 EXAM 2 CHAPTER 12 – Flashcards

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards