Exam 1: Why Are Financial Institutions Special

Research shows that there is a significant reduction in risk achieved by investing in as few as 6 different securities.

In most countries, cash is required to be held in reserve against deposits.

Economic collapse during the 1930s, the banking system in the U.S. performed directly or indirectly all financial services. Those functions included all of the following EXCEPT

If not done by FIs, the process of monitoring the actions of borrowers would reduce the attractiveness and increase the risk of investing in corporate debt and equity by individuals.

Safety and soundness regulations include all of the following layers of protection EXCEPT

Depository institutions serve as the primary conduit through which monetary policy actions impact the economy.

One reason for the increasing proportion of total financial assets controlled by pension funds and investment companies is that these intermediaries exploit the comparative advantages of size and diversification.

The concept of enterprise risk management encourages FIs to manage all of the risks to which they are exposed as a portfolio, rather than managing each risk individually.

FIs typically provide secondary claims to household savers that have inferior liquidity than primary securities of corporations such as equity and bonds.

The proportion of financial assets controlled by depository institutions has been increasing in recent years.

The ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is the result of choosing assets that are less than perfectly positively correlated.

The Federal Reserve mandates reserve requirements for depository institutions so that the DIs may provide payment services for the U.S. economy.

Failure to monitor the actions of firms in a timely and complete fashion after purchasing securities in that firm exposes the investor to agency costs.

The goal of credit allocation is the encouragement of FIs to diversity the composition of their assets.

Verifying the minimum level of capital or equity that must be held to fund the operations of an FI is part of the goal of

An FI acting as an agent in matching savers and borrowers of funds can attain economies of scale and provide this service more efficiently than either the saver or borrower could on their own.

Services provided by depository institutions have become relatively less significant as a portion of all services provided by FIs.

As DIs made a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model over the last decade,

In an attempt to enhance the net social welfare benefits of the services provided by financial intermediaries, safety and soundness regulation requires a DI to hold a minimum level of cash reserves against deposits.

The standardization of many FI products is evidence of the inefficient institutionalization by financial markets and the mechanisms through which these products trade.