ECON 330 EXAM 2 CHAPTER 12 – Flashcards
102 test answers
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The Second Bank of the United States was denied a new charter by
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president andrew jackson
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Currency circulated by banks that could be redeemed for gold was called ________.
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bank notes
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To eliminate the abuses of the state-chartered banks, the ________ created a new banking system of federally chartered banks, supervised by the ________.
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National Bank Act of 1863; Office of the Comptroller of the Currency
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The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of
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the National Bank Act of 1863.
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Before 1863,
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banks acquired funds by issuing bank notes.
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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
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acquiring funds through deposits.
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The National Bank Act of 1863, and subsequent amendments to it,
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established the Office of the Comptroller of the Currency.
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Which regulatory body charters national banks?
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The Comptroller of the Currency
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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
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dual banking system.
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Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side.
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federal government, states
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The U.S. banking system is considered to be a dual system because
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it is regulated by both state and federal governments.
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The Federal Reserve Act of 1913 required that
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national banks join the Federal Reserve System.
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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.
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national, state
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Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been
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the creation of the FDIC
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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.
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were required, could choose
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With the creation of the Federal Deposit Insurance Corporation,
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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.
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The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from
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engaging in underwriting and dealing of corporate securities.
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The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the:
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the glass steagall act
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Which of the following statements concerning bank regulation in the United States are true?
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The Federal Reserve and the state banking authorities jointly have responsibility for the 900 state banks that are members of the Federal Reserve System.
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Which bank regulatory agency has the sole regulatory authority over bank holding companies?
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the federal reserve system
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State banks that are not members of the Federal Reserve System are most likely to be examined by the
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FDIC
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State banking authorities have sole jurisdiction over state banks
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without FDIC insurance
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Financial innovations occur because of financial institutions search for ________.
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profits
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________ is the process of researching and developing profitable new products and services by financial institutions.
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financial engineering
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The most significant change in the economic environment that changed the demand for financial products in recent years has been
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the dramatic increase in the volatility of interest rates.
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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.
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5, 15
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Uncertainty about interest-rate movements and returns is called ________.
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interest rate risk
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Rising interest-rate risk
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increased the demand for financial innovation.
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Adjustable rate mortgages
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benefit homeowners when interest rates are falling.
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The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is
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a futures contract
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An instrument developed to help investors and institutions hedge interest-rate risk is
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a financial derivative
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Financial instruments whose payoffs are linked to previously issued securities are called ________.
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a financial derivative
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Both ________ and ________ were financial innovations that occurred because of interest rate risk volatility.
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adjustable-rate mortgages; financial derivatives
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The most important source of the changes in supply conditions that stimulate financial innovation has been the
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improvement in computer and telecommunications technology.
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New computer technology has
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reduced the cost of financial innovation.
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Credit cards date back to
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prior to the second World War.
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A firm issuing credit cards earns income from
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loans it makes to credit card holders.
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The entry of AT&T and GM into the credit card business is an indication of
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the rising profitability of credit card operations.
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A debit card differs from a credit card in that
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a credit card is a loan while for a debit card purchase, payment is made immediately.
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Automated teller machines
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cost less than human tellers, so banks may encourage their use by charging less for using ATMs.
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The declining cost of computer technology has made ________ a reality.
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virtual banking
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Bank customers perceive Internet banks as being
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prone to many more technical problems.
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A disadvantage of virtual banks (clicks) is that
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customers worry about the security of on-line transactions.
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So-called fallen angels differ from junk bonds in that
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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.
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Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as
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junk bonds.
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In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status.
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michael milken
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One factor contributing to the rapid growth of the commercial paper market since 1970 is
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improved information technology making it easier to screen credit risks.
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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.
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the commercial paper market
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The process of transforming otherwise illiquid financial assets into marketable capital market instruments is know as
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securitization.
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________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans.
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securitization.
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The driving force behind the securitization of mortgages and automobile loans has been
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the improvement in computer technology.
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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.
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regulated, loophole mining
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Loophole mining refers to financial innovation designed to
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get around regulations
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Prior to 2008, bank managers looked on reserve requirements
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as a tax on deposits
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Prior to 2008, the bank?s cost of holding reserves equaled
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the interest earned on loans times the amount on reserves.
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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.
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ceiling
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The process in which people take their funds out of the banking system seeking higher -yielding securities is called
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disintermediation
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Money market mutual funds
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function as interest-earning checking accounts.
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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
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they could no longer afford to redeem shares at the par value of $1.
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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
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sweep account
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Sweep accounts which were created to avoid reserve requirements became possible because of a change in ________.
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supply conditions
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Sweep accounts
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have made reserve requirements nonbonding for many banks.
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Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers
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has shrunk dramatically, from around 40 percent of total credit advanced to below 30 percent by 2005.
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Thrift institutions importance as a source of funds for borrowers
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has shrunk from over 20 percent of total credit advanced in the late 1970s to below 6 percent by 2005.
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Since 1980
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banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities.
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Financial innovation has caused
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banks to suffer a simultaneous decline of cost and income advantages.
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Disintermediation resulted from
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interest rate ceilings combine with inflation-driven increases in interest rates.
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The experience of disintermediation in the banking industry illustrates that
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markets invent alternatives to costly regulations.
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Banks responded to disintermediation by
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supporting the elimination of interest rate regulations, enabling them to better compete for funds.
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One factor contributing to the decline in cost advantages that banks once had is the
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decline in the importance of checkable deposits from over 60 percent of banks? liabilities to under 10 percent today.
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The most important developments that have reduced banks cost advantages in the past thirty years include:
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the competition from money market mutual funds.
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The most important developments that have reduced banks income advantages in the past thirty years include:
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the growth of securitization.
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Banks have attempted to maintain adequate profit levels by
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pursuing new off-balance-sheet activities.
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The decline in traditional banking internationally can be attributed to
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improved information technology
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The presence of so many commercial banks in the United States is most likely the result of
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prior regulations that restrict the ability of these financial institutions to open branches.
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The McFadden Act of 1927
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effectively prohibited banks from branching across state lines.
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The large number of banks in the United States is an indication of
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lack of competition within the banking industry.
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Which of the following is a true statement concerning bank holding companies?
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Bank holding companies have experienced dramatic growth in the past three decades.
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A financial innovation that developed as a result of banks avoidance of bank branching restrictions was ________.
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bank holding companies
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ATMs were developed because of breakthroughs in technology and as a
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means of avoiding restrictive branching regulations.
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The primary reason for the recent reduction in the number of banks is
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mergers and acquisitions.
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Bank holding companies that rival money center banks in size, but are not located in money center cities are
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superregional banks.
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The ability to use one resource to provide different products and services is
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economies of scope
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The business term for economies of scope is
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synergies
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The legislation that overturned the prohibition on interstate banking is
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the Riegle-Neal Act
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Although it has a population about half that of the United States, Japan has
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fewer than 100 commercial banks
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Experts predict that the future structure of the U.S. banking industry will have
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several thousand banks
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Bank consolidation will likely result in
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increased competition
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Critics of nationwide banking fear
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an elimination of community banks
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One of the concerns of increased bank consolidation is the reduction in community banks which could result in
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less lending to small businesses
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Nationwide banking might reduce bank failures due to
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diversification of loan portfolios across state lines.
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As the banking system in the United States evolves, it is expected that
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the number and importance of large banks will increase.
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The legislation overturning the Glass-Steagall Act is
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the Gramm-Leach-Bliley Act.
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Under the Gramm-Leach-Bliley Act states retain regulatory authority over ________.
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insurance activities
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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
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the federal reserve
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In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity.
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universal
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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.
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british style universal
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A major difference between the United States and Japanese banking systems is that
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Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot.
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