Question 1

Traditionally, regulation of FIs in the U.S. has been

Accepted Answer

A)  minimal, as evidenced by the recent financial crisis. 
B)  extensive, as a result of the importance of FI to the economy. 
C)  minimal, because the free market is allowed to allocate financial resources. 
D)  extensive, because banks have monopoly power. 
E)  no different from regulation of nonfinancial firms. 
A)  minimal, as evidenced by the recent financial crisis. 
B)  extensive, as a result of the importance of FI to the economy. 
C)  minimal, because the free market is allowed to allocate financial resources. 
D)  extensive, because banks have monopoly power. 
E)  no different from regulation of nonfinancial firms.

Question 2

Nondepository financial institutions are represented by all of the following EXCEPT

Accepted Answer

A)  insurance companies. 
B)  mutual funds. 
C)  finance companies. 
D)  credit unions. 
E)  securities firms. 
A)  insurance companies. 
B)  mutual funds. 
C)  finance companies. 
D)  credit unions. 
E)  securities firms.

Question 3

The charter values of FIs will be higher if regulators

Accepted Answer

A)  increase the cost of entry by requiring more capital. 
B)  restrict the number of activities permitted by FIs, thereby increasing potential profits. 
C)  restrict the number of FIs that can operate in a given market. 
D)  increase the cost of entry by requiring more capital and restrict the number of activities permitted by FIs, thereby increasing potential profits. 
E)  increase the cost of entry by requiring more capital and restrict the number of FIs that can operate in a given market. 
A)  increase the cost of entry by requiring more capital. 
B)  restrict the number of activities permitted by FIs, thereby increasing potential profits. 
C)  restrict the number of FIs that can operate in a given market. 
D)  increase the cost of entry by requiring more capital and restrict the number of activities permitted by FIs, thereby increasing potential profits. 
E)  increase the cost of entry by requiring more capital and restrict the number of FIs that can operate in a given market.

Question 4

Because FIs remove imperfections between households and corporations, households tend to save more than they would if FIs did not exist.

Accepted Answer

A) True 
 B)False

Question 5

Compared to households, FIs often have economies of scale when purchasing or selling securities issued by businesses and governments.

Accepted Answer

A) True 
 B)False

Question 6

FIs are independent market entities that create financial assets whose value is the transformation of financial risk.

Accepted Answer

A) True 
 B)False

Question 7

Negative externalities exist in the depository sector when

Accepted Answer

A)  the fear of DI insolvency leads to bank deposit runs. 
B)  lending activity is impaired or constrained. 
C)  there are delays in disbursements from insolvent DIs. 
D)  banks that are healthy suffer when another bank nears insolvency. 
E)  All of the options. 
A)  the fear of DI insolvency leads to bank deposit runs. 
B)  lending activity is impaired or constrained. 
C)  there are delays in disbursements from insolvent DIs. 
D)  banks that are healthy suffer when another bank nears insolvency. 
E)  All of the options.

Question 8

Currently (2015) J. P. Morgan Chase is the largest bank holding company in the world and operations in 60 countries.

Accepted Answer

A) True 
 B)False

Question 9

Commercial banks and finance companies have traditionally served the needs of the residential real estate market.

Accepted Answer

A) True 
 B)False

Question 10

In its role as a delegated monitor, an FI

Accepted Answer

A)  keeps track of required interest and principal payments on loans it originates. 
B)  works with financially distressed borrowers in danger of defaulting on their loans. 
C)  holds portfolios of loans that they continue to service. 
D)  maintains contact with borrowers to ensure that loan proceeds are utilized for intended purposes. 
E)  All of the options. 
A)  keeps track of required interest and principal payments on loans it originates. 
B)  works with financially distressed borrowers in danger of defaulting on their loans. 
C)  holds portfolios of loans that they continue to service. 
D)  maintains contact with borrowers to ensure that loan proceeds are utilized for intended purposes. 
E)  All of the options.

Question 11

Which of the following repealed the 1933 Glass-Steagall barriers between commercial banking, insurance, and investment banking?

Accepted Answer

A)  Financial Institutions Reform Recovery and Enforcement Act (1989). 
B)  Financial Services Modernization Act (1999). 
C)  Competitive Equality in Banking Act (1987). 
D)  The Bank Holding Company Act (1956). 
E)  Garn-St. Germain Depository Institutions Act (1982). 
A)  Financial Institutions Reform Recovery and Enforcement Act (1989). 
B)  Financial Services Modernization Act (1999). 
C)  Competitive Equality in Banking Act (1987). 
D)  The Bank Holding Company Act (1956). 
E)  Garn-St. Germain Depository Institutions Act (1982).

Question 12

Pension and mutual funds have a lower correlation between the maturities of their assets and liabilities than do commercial banks and thrifts.

Accepted Answer

A) True 
 B)False

Question 13

Prior to the most recent financial crisis, the risks faced by FIs have traditionally been measured and managed by

Accepted Answer

A)  outside agencies such as Moody's or Standard and Poor's. 
B)  functional risk area such as liquidity risks, price risk, or credit risk. 
C)  designated regulatory agencies for the industries in which the FI operates. 
D)  using enterprise risk management techniques. 
E)  None of the options. FIs did not monitor nor manage the risks that they face. 
A)  outside agencies such as Moody's or Standard and Poor's. 
B)  functional risk area such as liquidity risks, price risk, or credit risk. 
C)  designated regulatory agencies for the industries in which the FI operates. 
D)  using enterprise risk management techniques. 
E)  None of the options. FIs did not monitor nor manage the risks that they face.

Question 14

Firms in industries that have low costs of entry tend to enjoy larger profits than firms in industries with high costs of entry.

Accepted Answer

A) True 
 B)False

Question 15

Depository financial institutions include all of the following EXCEPT

Accepted Answer

A)  commercial banks. 
B)  savings banks. 
C)  investment banks. 
D)  credit unions. 
E)  all of the options are depository institutions. 
A)  commercial banks. 
B)  savings banks. 
C)  investment banks. 
D)  credit unions. 
E)  all of the options are depository institutions.

Question 16

The passage of legislation to prevent discrimination in lending is an example of regulation to protect investors.

Accepted Answer

A) True 
 B)False

Question 17

All of the following are examples of participants in the shadow banking system EXCEPT

Accepted Answer

A)  money market mutual funds (MMMFs). 
B)  structured investment vehicles (SIVs). 
C)  credit hedge funds. 
D)  limited-purpose finance companies. 
E)  credit unions. 
A)  money market mutual funds (MMMFs). 
B)  structured investment vehicles (SIVs). 
C)  credit hedge funds. 
D)  limited-purpose finance companies. 
E)  credit unions.

Question 18

When an FI functions as a broker, they are selling a financial asset that they have created and will continue to hold on their balance sheet.

Accepted Answer

A) True 
 B)False

Question 19

The more costly it is to supervise the use of funds by a borrower, the less likely a saver will encounter agency costs.

Accepted Answer

A) True 
 B)False

Question 20

Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower.

Accepted Answer

A) True 
 B)False

Exam 1: Why Are Financial Institutions Special

Traditionally, regulation of FIs in the U.S. has been

Nondepository financial institutions are represented by all of the following EXCEPT

The charter values of FIs will be higher if regulators

Because FIs remove imperfections between households and corporations, households tend to save more than they would if FIs did not exist.

Compared to households, FIs often have economies of scale when purchasing or selling securities issued by businesses and governments.

FIs are independent market entities that create financial assets whose value is the transformation of financial risk.

Negative externalities exist in the depository sector when

Currently (2015) J. P. Morgan Chase is the largest bank holding company in the world and operations in 60 countries.

Commercial banks and finance companies have traditionally served the needs of the residential real estate market.

In its role as a delegated monitor, an FI

Which of the following repealed the 1933 Glass-Steagall barriers between commercial banking, insurance, and investment banking?

Pension and mutual funds have a lower correlation between the maturities of their assets and liabilities than do commercial banks and thrifts.

Prior to the most recent financial crisis, the risks faced by FIs have traditionally been measured and managed by

Firms in industries that have low costs of entry tend to enjoy larger profits than firms in industries with high costs of entry.

Depository financial institutions include all of the following EXCEPT

The passage of legislation to prevent discrimination in lending is an example of regulation to protect investors.

All of the following are examples of participants in the shadow banking system EXCEPT

When an FI functions as a broker, they are selling a financial asset that they have created and will continue to hold on their balance sheet.

The more costly it is to supervise the use of funds by a borrower, the less likely a saver will encounter agency costs.

Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower.

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters