Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Research shows that there is a significant reduction in risk achieved by investing in as few as 8 different securities.

Accepted Answer

A) True 
 B)False

Question 3

As of 2012, U.S. FIs held assets totaling over $27 trillion

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Net regulatory burden for FIs is higher because regulators may require the FI to

Accepted Answer

A) hold more capital than what would be held without regulation. 
B) produce less information than would be produced without regulation. 
C) hold more debt than what would be held without regulation. 
D) hold fewer reserves than they would without regulation. 
E) All of the above. 
A) hold more capital than what would be held without regulation. 
B) produce less information than would be produced without regulation. 
C) hold more debt than what would be held without regulation. 
D) hold fewer reserves than they would without regulation. 
E) All of the above.

Question 6

When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model, the change is likely to result in

Accepted Answer

A) increased operating costs. 
B) increased interest rate risk. 
C) increased liquidity risk. 
D) decreased monitoring costs. 
E) decreased fee income. 
A) increased operating costs. 
B) increased interest rate risk. 
C) increased liquidity risk. 
D) decreased monitoring costs. 
E) decreased fee income.

Question 7

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

Question 8

Which of the following is closely associated with credit allocation regulation?

Accepted Answer

A) Support the FI's lending to socially important sectors. 
B) Transmission of monetary policy from the Federal Reserve to the economy. 
C) Ensure the safety and soundness of the FI. 
D) Prevent discrimination in lending on the basis of age, race, sex, or income. 
E) Protect investors against abuses. 
A) Support the FI's lending to socially important sectors. 
B) Transmission of monetary policy from the Federal Reserve to the economy. 
C) Ensure the safety and soundness of the FI. 
D) Prevent discrimination in lending on the basis of age, race, sex, or income. 
E) Protect investors against abuses.

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) A financial intermediary specializes in the production of information. 
B) A financial intermediary reduces its risk exposure by pooling its assets. 
C) A financial intermediary benefits society by providing a mechanism for payments. 
D) A financial intermediary may act as a broker to bring together funds deficit and funds surplus units. 
E) A financial intermediary acts as a lender of last resort. 
A) A financial intermediary specializes in the production of information. 
B) A financial intermediary reduces its risk exposure by pooling its assets. 
C) A financial intermediary benefits society by providing a mechanism for payments. 
D) A financial intermediary may act as a broker to bring together funds deficit and funds surplus units. 
E) A financial intermediary acts as a lender of last resort.

Question 10

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 11

Which of the following refers to the term "maturity intermediation"?

Accepted Answer

A) Creation of a secondary market mature enough to withstand volatility. 
B) Overcoming constraints to buying assets imposed by large minimum denomination size. 
C) Mismatching the maturities of assets and liabilities. 
D) Reducing information costs or imperfections between households and corporations. 
E) The transfer of wealth from one generation to the next. 
A) Creation of a secondary market mature enough to withstand volatility. 
B) Overcoming constraints to buying assets imposed by large minimum denomination size. 
C) Mismatching the maturities of assets and liabilities. 
D) Reducing information costs or imperfections between households and corporations. 
E) The transfer of wealth from one generation to the next.

Question 12

Small investors in mutual funds are often able to realize larger returns than they would receive from bank deposits.

Accepted Answer

A) True 
 B)False

Question 13

The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities.

Accepted Answer

A) True 
 B)False

Question 14

The following are protective mechanisms that have been developed by regulators to promote the safety and soundness of the banking system EXCEPT

Accepted Answer

A) encouraging banks to rely more on deposits rather than debt or capital as a cushion against failure. 
B) encouraging banks to limit lending to a single customer to no more than 10% of capital. 
C) the provision of deposit insurance. 
D) the periodic monitoring of banks. 
E) encouraging banks to produce timely accounting statements and reports. 
A) encouraging banks to rely more on deposits rather than debt or capital as a cushion against failure. 
B) encouraging banks to limit lending to a single customer to no more than 10% of capital. 
C) the provision of deposit insurance. 
D) the periodic monitoring of banks. 
E) encouraging banks to produce timely accounting statements and reports.

Question 15

What is globalization?

Accepted Answer

A) The process that causes an FI to focus more intensely on their own domestic market. 
B) Acceptance of the Federal Reserve as the regulator of the world financial system. 
C) Usually refers to the initiation of GLOBEX, a new international financial communications and trading system. 
D) The evolution of markets and institutions so that geographic boundaries do not restrict financial transactions. 
E) Joint ownership of international electronic payments systems. 
A) The process that causes an FI to focus more intensely on their own domestic market. 
B) Acceptance of the Federal Reserve as the regulator of the world financial system. 
C) Usually refers to the initiation of GLOBEX, a new international financial communications and trading system. 
D) The evolution of markets and institutions so that geographic boundaries do not restrict financial transactions. 
E) Joint ownership of international electronic payments systems.

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

The liabilities of depository institutions are significant components of the money supply.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs of providing FI services.

Accepted Answer

A) True 
 B)False

Exam 1: Why Are Financial Institutions Special

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

Research shows that there is a significant reduction in risk achieved by investing in as few as 8 different securities.

As of 2012, U.S. FIs held assets totaling over $27 trillion

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

Net regulatory burden for FIs is higher because regulators may require the FI to

When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model, the change is likely to result in

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

Which of the following is closely associated with credit allocation regulation?

Which of the following statements is FALSE?

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

Which of the following refers to the term "maturity intermediation"?

Small investors in mutual funds are often able to realize larger returns than they would receive from bank deposits.

The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities.

The following are protective mechanisms that have been developed by regulators to promote the safety and soundness of the banking system EXCEPT

What is globalization?

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.

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 liabilities of depository institutions are significant components of the money supply.

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

Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs of providing FI services.

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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