Commercial Banking Structure, Regulation, and Performance1
CHAPTER 12
Commercial Banking Structure, Regulation,
and Performance
1.When the least desirable borrowers pursue a loan most diligently, lenders are faced with a/an
a.adverse selection problem.
b.asymmetric information problem.
c.moral hazard problem.
d.None of the above.
ANSWER:a
2.When a potential borrower knows more about the risks and returns of an investment project than the bank loan officer, lenders are faced with a/an
a.adverse selection problem.
b.asymmetric information problem.
c.moral hazard problem.
d.None of the above.
ANSWER:b
3.When the borrower has an incentive to use the proceeds of a loan for a more risky venture after the loan is funded, lenders are faced with a/an
a.adverse selection problem.
b.asymmetric information problem.
c.moral hazard problem.
d.None of the above.
ANSWER:c
4.The ______best describes a situation where the least desirable individuals are the same individuals who pursue a loan most diligently.
a.Asymmetric information
b.Adverse selection
c.Moral hazard
d.All of the above
ANSWER:b
5.______best describes a situation where a potential borrower knows more about the risks and returns of an investment project than a bank loan officer.
a.Asymmetric information
b.Adverse selection
c.Moral hazard
d.All of the above
ANSWER:a
- ______best describes a situation where a borrower takes out a loan and, unbeknownst to the lender, uses the proceeds for a much more risky venture.
a.Asymmetric information
b.Adverse selection
c.Moral hazard
d.All of the above
ANSWER:c
7.Asymmetric information, adverse selection, and moral hazard all lead to an increase in a bank’s
a.default risk.
b.interest rate risk.
c.liquidity risk.
d.foreign exchange risk.
ANSWER:a
8.The was signed into law in September, 1994, and effectively allowed unimpeded nationwide branching beginning June 1, 1997 or sooner.
a.McFadden Act
b.Bank Holding Company Act (BHCA)
c.Interstate Banking and Branching Efficiency Act (IBBEA)
d.Financial Institutions Reform and Recovery Enforcement Act (FIRREA)
ANSWER:c
9.The was signed into law in 1927, outlawed interstate branching, and made national banks conform to the intrastate branching laws of the states in which they were located.
a.McFadden Act
b.Bank Holding Company Act (BHCA)
c.Interstate Banking and Branching Efficiency Act (IBBEA)
d.Financial Institutions Reform and Recovery Enforcement Act (FIRREA)
ANSWER:a
10.The phrase dual banking system refers to
a.the system whereby bank holding companies are allowed to have branches in more than one state.
b.the system whereby depository institutions are regulated by at least two federal financial regulatory agencies.
c.the system whereby banks may have either a national or a state charter.
d.None of the above.
ANSWER:c
11.For a financial intermediary, the excess of interest earned on loans over the interest paid to depositors is best described by which of the following?
a.Negative cash flow
b.Loss
c.Profit
d.Ineffectual management
ANSWER:c
12.Commercial banks must decide which of the following?
a.The interest rate commercial banks will pay to borrow and lend funds
b.The types of loans commercial banks will make
c.The type of securities commercial banks will acquire
d.All of the above
ANSWER:d
13.A banking industry with a large number of small banks competing against each other in the market would be described as competitive. This type of market structure would
a.encourage behavior beneficial to consumers.
b.be characterized by inefficiencies and fewer benefits for the public.
c.increase the likelihood of an individual bank failure because of the increased level of competition.
d.Both a and c
ANSWER:d
14.Who is the primary regulator of state-chartered, insured, non-Fed-member banks?
a.The Federal Deposit Insurance Corporation
b.The Comptroller of the Currency
c.The Fed
d.The state in which they are chartered
ANSWER:a
15.Who is the primary regulator of state-chartered, insured, Fed-member banks?
a.The Federal Deposit Insurance Corporation
b.The Comptroller of the Currency
c.The Fed
d.The states
ANSWER:c
16.Who is the primary regulator of national banks that are not bank holding companies?
a.The Federal Deposit Insurance Corporation
b.The Comptroller of the Currency
c.The Fed
d.The states
ANSWER:b
17.Who is the primary regulator of national banks that are bank holding companies?
a.The Federal Deposit Insurance Corporation
b.The Comptroller of the Currency
c.The Fed
d.The states
ANSWER:c
18.Who regulates state-chartered, non-Fed-member, non-FDIC insured banks?
a.The Federal Deposit Insurance Corporation
b.The Comptroller of the Currency
c.The Fed
d.The state in which the bank is chartered
ANSWER:d
19.Commercial banks that are members of the Fed are
a.provided discount privileges with the Fed.
b.regulated by the Fed.
c.subject to reserve requirements set by the Fed.
d.All of the above
ANSWER:d
20.Prior to the 1980s, regulation of the banking system included which of the following?
a.Restrictions on entry
b.Regulation Q interest rate ceilings
c.Restrictions on branching
d.All of the above
ANSWER:d
21.In order to open, commercial banks must be which of the following?
a.Open for online business at least
b.Chartered by the state or federal government
c.Highly profitable
d.Registered with the FDIC
ANSWER:b
22.When a bank is granted a charter by the federal government, the bank is called which of the following?
a.a state bank
b.a Federal Reserve bank
c.a national bank
d.a dually chartered financial institution
ANSWER:c
23.The federal agency assigned the task of granting charters for national banks is called the
a.Federal Deposit Insurance Corporation.
b.Office of Economic Advisors.
c.U.S. Department of the Treasury.
d.Office of the Comptroller of the Currency.
ANSWER:d
24.A dual banking system refers to which of the following?
a.Banks with sister banks out of state
b.Banks insured by the FDIC
c.Commercial banks being chartered and regulated by either the state or federal government
d.Banks working both within and outside the United States
ANSWER:c
25.Federally chartered banks must
a.belong to the Federal Reserve system.
b.hold federal deposit insurance with the FDIC.
c.remain highly profitable at all times.
d.Both a and b
ANSWER:d
26.National banks are regulated and supervised by which of the following?
a.The Fed, if the bank is also a bank holding company
b.The Comptroller of the Currency, if the bank is not a bank holding company
c.The Fed and regulators in the state in which they are chartered
d.Both a and b
ANSWER:d
27.The FDIC provides insurance for which of the following?
a.Individual deposit accounts up to $500,000
b.Individual deposit accounts up to $100,000
c.Collective deposit accounts up to $500,000
d.Collective deposit accounts up to $100,000
ANSWER:b
28.A state-chartered bank which is not a member of the Fed is regulated by which of the following?
a.The Federal Reserve System
b.The comptroller of the currency
c.Its state banking authority or by the FDIC
d.The FDIC only
ANSWER:c
29.If a state-chartered bank wishes to join the Federal Reserve System, it must do which of the following?
a.Change its charter to a national bank
b.Become part of a bank holding company
c.Subscribe to federal deposit insurance
d.All of the above
ANSWER:c
30.If a state-chartered bank wishes to subscribe to FDIC insurance, it must
a.join the Federal Reserve system.
b.be regulated by the comptroller.
c.pay an insurance premium to the FDIC.
d.All of the above
ANSWER:c
31.As of 2001, most banks have decided to
a.be regulated by the comptroller of the currency.
b.join the Fed.
c.purchase deposit insurance from the FDIC.
d.be regulated by state banking authorities.
ANSWER:c
32.Between 1929 and 1933, how many banks failed in the United States?
a.Over 20,000
b.Over 16,000
c.Over 11,000
d.Over 8,000
ANSWER:d
33.The FDIC was created in
a.1913 by the Congress at the same time the Fed was created.
b.1933 by the Congress as a result of the banking collapse in the early years of the Great Depression.
c.1933 by the president as part of reforms put in place during the Great Depression.
d.1980 by the Congress as part of the overall movement towards deregulation.
ANSWER:b
- The Glass-Steagall Act did all of the following except:
- a. allowed interest payments on checkable deposits
- b. separated commercial and investment banking
- c. created the FDIC
- d. established Regulation Q interest rate ceilings
ANSWER:a
35.In what year was deposit insurance made a full faith and credit obligation of the federal government?
a.1933
b.1935
c.1980
d.1989
ANSWER:d
36.The largest number of banks have which of the following?
a.State charters
b.Federal charters
c.Regulation by the comptroller's office
d.None of the above
ANSWER:a
37.Most state banks
a.belong to the Fed and subscribe to deposit insurance.
b.do not belong to the Fed.
c.are regulated by the Fed.
d.are regulated by the comptroller's office.
ANSWER:b
38.Reserve requirements for depository institutions are currently
a.smaller for state-chartered banks; this is the attraction to obtain a state charter.
b.larger for state-chartered banks; because state banks are typically smaller.
c.the same for both national and state-chartered banks.
d.varied depending upon location.
ANSWER:c
39.Federal Reserve members must buy stock in the Fed equal to what share of their assets?
a.10 percent
b.7 percent
c.3 percent
d.2 percent
ANSWER:c
40.Among the following time periods, the highest level of bank failures occurred during which time frame?
a.The mid and late 1960s
b.The late 1970s
c.The mid and late 1980s
d.The early 1990s
ANSWER:c
41.Approximately how many banks were there in the United States in 2001?
a.8,200
b.67,000
c.11,200
d.34,000
ANSWER:a
- Which of the following acts separated commercial and investment banking, and created the FDIC?
- a. The Glass-Steagall Act
- b. The Interstate Banking and Branching Efficiency Act (IBBEA)
- c. The McFadden Act
- d. Gramm-Leach-Bliley Act
ANSWER:a
- Which of the following acts outlawed interstate branching?
- a. The Glass-Steagall Act
- b. The Interstate Banking and Branching Efficiency Act (IBBEA)
- c. The McFadden Act
- d. Gramm-Leach-Bliley Act
ANSWER:c
44.Which of the following acts allowed banks, securities firms and insurance companies to affiliate under common ownership and to offer the public a vast array of financial services under one umbrella.
- a. The Glass-Steagall Act
- b. The Interstate Banking and Branching Efficiency Act (IBBEA)
- c. The McFadden Act
- d. Gramm-Leach-Bliley Act
ANSWER:d
- 45. Which of the following is false?
- a. The largest number of banks are state-chartered and not members of the Fed
- b. The largest number of banks are members of the Fed
- c. The vast majority of banks have FDIC insurance
- d. Banks with national charters have more assets than banks with state charters
ANSWER:b
46.A noncompetitive industry would generally be the result of a
a.large number of competing small firms.
b.large number of competing large firms.
c.small number of large firms.
d.large number of competing medium firms.
ANSWER:c
47.A competitive industry would generally be the result of which of the following?
a.A large number of competing small firms
b.A small number of competing large firms
c.A small number competing medium firms
d.All of the above could be competitive industries
ANSWER:a
48.Theoretically, competition and efficiency determine a firm's performance as measured by which of the following?
a.The quantity of goods and services they produce
b.The profitability of the firm
c.The prices they are able to charge
d.All of the above
ANSWER:d
49.Which of the following is characteristic of a banking system composed of a large number of small banks?
a.The safety and soundness of the banking system would not threatened with a few bank failures.
b.Competition would be discouraged.
c.Individual banks have a smaller risk of failure.
d.The industry would be highly non-competitive
ANSWER:a
50.Which of the following is characteristic of a banking system composed of a small number of large banks?
a.Fierce price competition
b.High efficiency (low cost) due to extensive competition
c.A low number of bank failures
d.All of the above
ANSWER:c
51.Applicants desiring a bank charter for banking must
a.be free of a criminal record.
b.demonstrate a knowledge of the business of banking.
c.have a large supply of funds to finance the bank.
d.All of the above
ANSWER:d
52.The McFadden Act was passed by Congress in what year?
a.1919
b.1927
c.1929
d.1989
ANSWER:b
53.The McFadden Act was designed to do which of the following?
a.Prohibit state-chartered banks from branching across state lines
b.Prohibit national banks from branching across state lines
c.Require state banks to abide by the branching laws of the state in which they are located
d.All of the above
ANSWER:b
54.State banks that are Fed members can operate
a.in any state where charters are available.
b.in any state that allows branching across state lines.
c.only in the state that grants them a charter.
d.only in the state where the president of the bank resides.
ANSWER:c
55.Which law effectively revoked the McFadden Act of 1927.
a.Interstate Banking and Branching Efficiency Act (IBBEA) of 1994.
b.Glass-Steagall Act of 1933.
c.the Gramm-Leach-Bliley Act (GLBA) of 1999.
d.None of the above.
ANSWER:a
56.The Interstate Banking and Branching Efficiency Act (IBBEA) was designed to
a.allow state-chartered banks to join the FDIC.
b.allow state-chartered banks to join the Fed.
c.allow unrestrained nationwide branching of banks.
d.allow intrastate branching for all national banks.
ANSWER:c
57.Previously, entry and branching restrictions in the banking industry have
a.increased competition.
b.decreased competition, although the intent of the restrictions had been to increase competition.
c.increased profits and promoted efficiency.
d.Both a and c
ANSWER:b
58.Which of the following is not a reason why the Interstate Banking and Branching Efficiency (IBBEA) was enacted into law?
a.Banking restrictions such as limiting the entrance of large banks into smaller local markets were actually limiting competition.
b.More and more small banks were being bought out by aggressive corporate takeovers.
c.Banks had found loopholes that allowed them to engage in interstate branching.
d.Congress and the president were following the lead of the states; the states were forming regional banking pacts that allowed some interstate banking.
ANSWER:b
59.A bank holding company is a corporation that owns which of the following?
a.One or two nonfinancial firms and one bank
b.Several banks
c.Interstate banks
d.Several firms that have activities closely related to banking and at least one bank
ANSWER:d
60.A multi bank holding company
a.owns more than one bank.
b.owns one bank and several foreign bank offices.
c.owns several firms not related to banking and one bank.
d.None of the above
ANSWER:a
- 61. Which of the following is false?
a.a.Merchant banking is the making of direct equity investments (purchasing stock) in start-up or growing nonfinancial businesses.
b.b.A financial holding company can own a bank, a securities firm, and an insurance company.
c.c.Financial holding companies can engage in a much broader array of financial and nonfinancial services than bank holding companies.
d.d.There are more financial holding companies than bank holding companies.
ANSWER:d
62.The erosion and breakdown of barriers to interstate branching and various activities in the financial services industry has resulted in which of the following?
a.Increased competition in the financial services industry
b.The ineffectiveness of many financial regulations
c.Disagreement among regulatory authorities
d.All of the above
ANSWER:d
63.In the past several years, changes in banking laws have resulted in which of the following?
a.A significant increase in the number of banks
b.A significant decrease in the number of banks
c.No change in the number of banks
d.A significant decrease in the number of mergers
ANSWER:b
64.Since shortly after the first OPEC oil crisis, international borrowing and lending has
a.decreased significantly.
b.decreased slightly.
c.increased significantly.
d.increased slightly.
ANSWER:c
65.Asymmetrical information refers to which of the following?
a.Potential borrowers having more knowledge about the risks and returns of an investment project than the lender
b.Potential borrowers lying on their credit application
c.Potential borrowers using falsified identification
d.None of the above
ANSWER:a
66.An adverse selection problem
a.increases the risk of default.
b.decreases the risk of default.
c.invites the borrower to engage in a riskier venture.
d.can be resolved by the lender gaining more information about what the loan will be used for.
ANSWER:a
67.A moral hazard problem occurs when
a.the borrower uses falsified identification.
b.the borrower engages in a riskier venture than what the borrowed funds were intended for.
c.there is an increase in default.
d.there is a decrease in default.
ANSWER:b
68.The most important task of a bank's asset-liability committee is to
a.determine variable interest rates.
b.determine a bank's basic borrowing and lending strategy.
c.propose new possible assets.
d.determine the necessary cash-flow for high profit margins.
ANSWER:b
69.Which of the following would be considered nonbanks?
a.Insurance companies
b.Nonfinancial companies
c.Life insurance companies
d.All of the above
ANSWER:d
70.The problem of using borrowed funds for a more risky purpose than what they were originally intended for is called which of the following?
a.Asymmetrical information
b.Adverse selection
c.Default risk
d.Moral hazard
ANSWER:d
71.One problem with variable-rate loans is that they increase
a.default risk.
b.interest rate risk.
c.liquidity risk.
d.foreign exchange risk.
ANSWER:a
- 72. In recent decades, commercial banks as a whole have
- a. received a declining share of total intermediation in the economy.
- b. received an increasing share of total intermediation in the economy.
- c. maintained their share of intermediation in the economy.
- d. increased their share relative to nonbanks but not relative to other nonfinancial firms.
ANSWER:a
- 73. Which banks have the largest assets?
- a. national banks
- b. state chartered banks
- c. state chartered banks that are members of the Fed
- d. national banks that are not members of the Fed but that do have deposit insurance
ANSWER:a