Chapter 10
Banking Industry: Structure and Competition
1.Agricultural and other interests in the U.S. were quite suspicious of centralized power and thus opposed the creation of a central bank.
3.False. Although there are many more banks in the United States than in Canada, this does not mean that the American banking system is more competitive. The reason for the large number of U.S. banks is anticompetitive regulations such as restrictions on banking.
5.Because becoming a bank holding company allows a bank to: (1) circumvent branching restrictions since it can own a controlling interest in several banks even if branching is not permitted, and (2) engage in other activities related to banking that can be highly profitable.
7. Credit unions are small because they only have members who share a common employer or are associated with a particular organization.
9.IBFs encourage American and foreign banks to do more banking business in the United States, thus shifting employment from Europe to the United States.
11.The facts that banks’ importance as a source of total credit advanced has shrunk, bank profitability as measured by ROA and ROE has declined, and bank failures have been running at much higher rates starting in the 1980s.
13.True. Higher inflation helped raise interest rates which caused the disintermediation process to occur and which helped create money market mutual funds. As a result banks’ lost cost advantages on the liabilities side of their balance sheets and this has led to a less healthy banking industry. However, improved information technology would still have eroded the banks’ income advantages on the assets side of their balance sheet, so the decline in the banking industry would still have occurred.
15.Uncertain. The invention of the computer did help lower transaction costs and the costs of collecting information, both of which have made other financial institutions more competitive with banks and have allowed corporations to bypass banks and borrow directly from securities markets. Therefore, computers were an important factor in the decline of the banking system. However, another source of the decline in the banking industry was the loss of cost advantages for the banks in acquiring funds, and this loss was due to factors unrelated to the invention of the computer, such as the rise in inflation and its interaction with regulations which produced disintermediation.