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  1. All the following statements concerning commercial banks are correct, EXCEPT:
    (RM 431)  

    A. They serve only business firms, and they do not serve consumers or governments.   
    B. They can create money from excess reserves on deposits by making loans.   
    C. They are an important provider of consumer credit and state and local government loans, and offer a variety of services. 
    D. They have nearly one quarter of the total assets of all financial institutions headquartered in the U.S., and they hold the principal means of payment.   
    A. They serve only business firms, and they do not serve consumers or governments. 

    Commercial banks provide services to business firms, governments, and individual consumers.
     
    (this multiple choice question has been scrambled)
  2. Which of the following statements concerning the present structure of U.S. commercial banking is (are) correct?
    (RM 431-432)

    I            The large number of smaller banks have most of the total of financial assets of commercial banks.

    II            Most banks are chartered by state governments and have insured deposits, but only national banks must be insured by the FDIC and be members of the Federal Reserve.  

    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II 
    B. II only 

    I is incorrect because most of the assets of commercial banks as a whole are owned by a small number of very large banks.
     
    (this multiple choice question has been scrambled)
  3. All the following statements on trends among commercial banks are correct, EXCEPT:
    (RM 432-435)
     
    A. They have become more innovative and progressive and have pursued new types of business.   
    B. They have tended to consolidate into larger institutions as a result of cost pressures, efficiencies of size, and greater competition.   
    C. They have reduced the number of branches and have become more of a unit banking system.   
    D. They have been organized into more bank holding companies that also own certain nonbank businesses. 
    • C. They have reduced the number of branches and have become more of a unit banking system.  
    •  
    • The trend in commercial banking in recent years has been away from unit banking and toward an increase in the number of branch banks.
  4. Which of the following statements concerning branch banking is (are) correct?
    (RM 434)

    I            Competition from financial conglomerates and nonbank banks has decreased the pressure for branch banking.

    II            Only unit banks are permitted to have branches.  

    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II 
    D. Neither I nor II 

    I is incorrect because increased competition has led to the formation of more branch banks in order to reach customers better. II is incorrect because a unit banking system does not permit the formation of branches.
     
    (this multiple choice question has been scrambled)
  5. Which of the following statements concerning bank holding companies is correct?
    (RM 434-435)  

    A. Bank holding companies cannot hold stock in nonbank businesses.   
    B. Bank holding companies cannot offer services that commercial banks cannot offer.   
    C. Bank holding companies can be used to avoid limitations on branch banking.   
    D. Bank holding companies cannot hold the stock of more than one bank. 
    C. Bank holding companies can be used to avoid limitations on branch banking. 

    Bank holding companies became popular first as the means to avoid laws limiting branch banks. Bank holding companies can hold stock in more than one bank and in nonbank businesses. Since bank holding companies can own nonbank businesses, bank holding companies can offer services that commercial banks cannot offer.
    (this multiple choice question has been scrambled)
  6. All the following statements concerning international banking are correct, EXCEPT:
    (RM 436-437)  

    A. U.S. banks abroad may serve U.S. multinational firms but may not use Eurodollar markets as sources of funds.   
    B. Foreign banks may operate in the U.S., but they have been subject to federal regulation since 1978. 
    C. Both national and regional U.S. money center banks have expanded foreign operations.   
    D. Foreign markets often have fewer regulatory restrictions on banks than banks confront in U.S. markets.   
    A. U.S. banks abroad may serve U.S. multinational firms but may not use Eurodollar markets as sources of funds.

    One of the reasons that U.S. banks have moved into international banking has been to gain access to the Eurodollar market, an attractive source of funds when domestic sources dry up or are more expensive.
    (this multiple choice question has been scrambled)
  7. Which of the following is characteristic of the convergence trend in banking?
    (RM 437)  

    A. Investing owners’ capital in customers’ projects   
    B. Selling off businesses to focus on banking operations   
    C. Acquiring overseas banks as subsidiaries   
    D. Offering financial services in addition to banking 
    D. Offering financial services in addition to banking 

    The convergence trend is characterized by the addition of financial services such as insurance, securities underwriting, and other services. The opposite of the convergence trend is the selling off of these other businesses to focus on banking operations. Some of the large financial services organizations have taken this approach to improve profitability. Investing the owners’ capital in customers’ projects is typical of merchant banks. Acquiring overseas banks as subsidiaries is a way to penetrate foreign markets. 
     
     
    (this multiple choice question has been scrambled)
  8. Which of the following statements concerning bank failures in the U.S. is (are) correct?
    (RM 437-438)

    I            The annual failure rate for U.S. banking has been less than 1% for most of the industry’s history.

    II            Acceptance of greater risks because of greater competition and leniency in enforcing bank regulations have contributed to recent rises in the number of bank failures and the failure of larger banks.  

    A. Neither I nor II 
    B. Both I and II   
    C. I only   
    D. II only   
    B. Both I and II

    The annual failure rate for banks has generally been very low. However, reduced regulation and increased competition have led to sharp increases in the bank failure rate in the past decade.
    (this multiple choice question has been scrambled)
  9. Which of the following statements concerning the effects of new technology and computer applications to banking is (are) correct?           
    (RM 438-440)

    I            Fewer bank employees, but heavy investment in equipment and high fixed costs, imply a need for a large volume of transactions that will favor big banks and accelerate bank consolidation.

    II            With less need for transfers of paper checks and for direct customer contacts, the bank’s functions could be in providing equipment and records as customers conduct their own business transactions.   

    A. II only   
    B. I only   
    C. Neither I nor II
    D. Both I and II   
    D. Both I and II

    The large investment and high fixed cost of high-tech banking increase the need for a large volume of transactions. Also, technology makes it possible for customers to conduct more of their own banking transactions without a need for direct contact with bank employees.
    (this multiple choice question has been scrambled)
  10. All the following are included in primary reserves of banks, EXCEPT:
    (RM 442)  

    A. Cash   
    B. Amounts due from other banks   
    C. U.S., state, and local government debt securities   
    D. Reserves required by the Federal Reserve System 
    • C. U.S., state, and local government debt securities  
    •  
    • A bank’s primary reserves include its vault cash, reserves at the Fed, and cash due from other banks. Its holdings of government debt securities are part of a bank’s secondary reserves.
  11. Which of the following would be considered as secondary reserve elements of a commercial bank?
    (RM 442-443)  

    A. Construction financing and real estate loans 
    B. Long-term loans and corporate stock   
    C. Demand deposits and transactions deposits   
    D. Federal, state, and local government debt   
    D. Federal, state, and local government debt   

    A bank’s secondary reserves consist of holdings of securities, especially debt securities of federal and state governments and federal government agencies.
    (this multiple choice question has been scrambled)
  12. All the following statements concerning loans by commercial banks are correct, EXCEPT:
    (RM 443-444)  

    A. Equipment leasing functions as the equivalent of a loan.   
    B. Most bank credit is for commercial and industrial loans.   
    C. Banks are an important source of consumer loans.   
    D. Banks make only short-term or installment loans and cannot make long-term loans. 
    D. Banks make only short-term or installment loans and cannot make long-term loans. 

    Banks are permitted to make long-term loans, though traditionally most of their loans have been short-term. In recent years, average loan maturities of banks have risen as banks have sought to increase their rate of return on invested assets.
     
    (this multiple choice question has been scrambled)
  13. Which of the following statements concerning commercial bank deposits is correct?
    (RM 444-445)  

    A. Demand deposits carry a fixed maturity, and banks can demand that they be held to maturity.   
    B. New types of transaction accounts have increased the banks’ costs of deposits.   
    C. Time deposits can be withdrawn by writing checks.   
    D. Since 1983, Super NOW and money market deposit accounts have been subject to federal ceilings on interest rates. 
    B. New types of transaction accounts have increased the banks’ costs of deposits.

    Demand deposits may be withdrawn at any time.Checks are used to withdraw funds from checking and similar types of transaction accounts.Federal interest rate ceilings on deposits have now been phased out.
    (this multiple choice question has been scrambled)
  14. Which of the following is (are) among the nondeposit sources of funds for commercial banks?
    (RM 444-446)

    I          Purchase of federal funds from other banks
    II         Securitization of selected assets
    III         Issuance of standby credit letters
    IV       Issuance of capital notes
    V         Offering of NOW and Super NOW accounts  

    A. I, II, III, and IV only   
    B. II, III, and IV only   
    C. V only   
    D. I, II, III, IV, and V 
    E. I, III, and IV only   
    A. I, II, III, and IV only 

    V is incorrect because NOW and Super NOW accounts are deposit sources of funds.
     
    (this multiple choice question has been scrambled)
  15. Which of the following statements concerning equity capital of commercial banks is (are) correct?
    (RM 447-448)

    I             The greatest share of funds for banks to lend is from equity capital.

    II            The ratio of equity capital to bank loans has been rising for many years due to rising profit margins.  

    A. I only   
    B. Neither I nor II 
    C. Both I and II   
    D. II only   
    B. Neither I nor II

    Equity capital has been a small and declining share of the total capital structure of most commercial banks, though recent regulatory changes may reverse this trend.
    (this multiple choice question has been scrambled)
  16. All the following statements concerning commercial banks are correct, EXCEPT:
    (RM 448-449)  

    A. Bank capital notes and debentures are subordinated, to give depositors first claims on bank assets.   
    B. The greatest expense for commercial banks is the payment of interest on deposits.   
    C. Service charges on checking accounts are the most important revenue source, while interest and returns on loans and securities are the least important.   
    D. Deposits are the banks’ most important source of funds, and loans are the banks’ most important use of funds. 
    C. Service charges on checking accounts are the most important revenue source, while interest and returns on loans and securities are the least important.

    Interest earnings on loans and securities constitute about 75% of the total operating income of commercial banks. Service charges on checking accounts represent about 3% of their operating income.
    (this multiple choice question has been scrambled)
  17. Which of the following statements concerning money creation by banks is (are) correct?
    (RM 454-455)

    I             An individual bank can create an amount of money equal to its excess reserves, but a banking system can extend credit to create money that is a multiple of the amount of an individual bank’s excess reserves.

    II            Banks are required to hold only a fraction of their deposits as legal reserves, so the rest of any reserves can be used to create money.  

    A. II only   
    B. I only   
    C. Neither I nor II 
    D. Both I and II   
    D. Both I and II   

    Both I and II correctly describe how commercial banks are able to create money.
     
    (this multiple choice question has been scrambled)
  18. All the following statements concerning bank reserves are correct, EXCEPT:
    (RM 454-455)
     
    A. Only commercial banks are required to hold legal reserves. 
    B. A bank’s required reserves equal the product of its deposits subject to reserve requirements and the legally-set, required reserve ratio.   
    C. Excess reserves of a bank equal the difference between its total holdings of legal reserves and the amount of its required reserves.   
    D. Vault cash and a bank’s deposits at the Federal Reserve are the accepted forms of legal reserves.   
    A. Only commercial banks are required to hold legal reserves. 

    Banks and other depository institutions are required by federal law to hold legal reserves, though the size of the reserve requirement differs for different types of institutions.
     
    (this multiple choice question has been scrambled)
  19. Which of the following is the amount of a bank’s excess reserves when it has $500,000 in deposits, $150,000 in legal reserves, and the Federal Reserve has set a 20% reserve requirement?
    (RM 454-455)  

    A. $50,000   
    B. $100,000   
    C. $350,000 
    D. $150,000   
    A. $50,000

    The bank’s required minimum legal reserve is 20% of $500,000, or $100,000. Since the bank has $150,000 of reserves, its excess reserves are $150,000 minus $100,000, or $50,000.
    (this multiple choice question has been scrambled)
  20. Which of the following is the amount that a bank can lend if it has no excess reserves at the outset, if $1,000 is then deposited, and if the required reserve ratio is 20%?
    (RM 454-458)  

    A. $1,000   
    B. $200   
    C. $1,200 
    D. $800   
    D. $800   

    A single bank can lend an amount equal to its excess reserves. In this case, 80% of the new $1,000 deposit, or $800, is its excess reserve.
    (this multiple choice question has been scrambled)
  21. Which of the following is the expected increase in deposits for a banking system with no leakages and with a 20% required reserve ratio when the Federal Reserve buys a $1,000 security as the credit-creation process goes through the banks of the system?
    (RM 455-456)  

    A. $800   
    B. $1,000   
    C. $4,000   
    D. $5,000 
    D. $5,000 

    The banking system as a whole can create money equal to a multiple of the initial deposit. In this case, the multiple is 5 (that is, 100% divided by 20%), so deposits can increase by a total of $5,000, including the initial $1,000. As you will see in a later assignment, however, leakages from the system and other factors reduce the actual deposit expansion to a lower multiple than this.
    (this multiple choice question has been scrambled)
  22. Which of the following statements concerning reasons for Federal Reserve control of banking and the money supply is (are) correct?
    (RM 455-456)

    I             Money created by banks is a source of credit that is important in funding investment and growth of the economy.

    II            As the banking system creates money, the resulting spending power can be an inflationary force.  

    A. II only   
    B. I only   
    C. Neither I nor II 
    D. Both I and II   
    D. Both I and II

    The power of banks to create money increases the amount of credit available to fund economic growth. It can be inflationary, however, if not closely controlled by the Federal Reserve System.
    (this multiple choice question has been scrambled)
  23. Which of the following statements is (are) correct when the Federal Reserve buys $1,000 in securities from a dealer?
    (RM 455-458)

    I             There is an additional $1,000 in reserves in the dealer’s bank.

    II            There is an additional $1,000 in demand deposits in the dealer’s bank.  

    A. I only   
    B. Both I and II   
    C. Neither I nor II 
    D. II only   
    B. Both I and II

    If the Fed buys securities, it adds the amount of the purchase to the selling dealer’s checking account and, therefore, to the dealer’s bank’s demand deposits and reserve position.
    (this multiple choice question has been scrambled)
  24. Which of the following is the expected contraction of deposits if $1,000 is withdrawn from a banking system with no leakages and no excess reserves and a 20% reserve ratio?
    (RM 457-458)  

    A. $1,000   
    B. $5,000 
    C. $800   
    D. $4,000   
    B. $5,000

    A withdrawal of deposits from the banking system creates the same amount of contraction of total deposits as the expansion that was described in the answer to the preceding question concerning an addition to deposits.
    (this multiple choice question has been scrambled)
  25. All the following are functions of the Federal Reserve System, EXCEPT:
    (RM 539-541)  

    A. Setting reserve requirements for deposits in all depository institutions   
    B. Supervision of all member banks chartered by states and all bank holding company activities in the U.S.   
    C. Conduct of monetary policy on availability and cost of credit in financial markets   
    D. Issuance of charters and supervision of deposit insurance of all national banks 
    D. Issuance of charters and supervision of deposit insurance of all national banks 

    Issuance of charters to national banks is done by the Comptroller of the Currency. Supervision of their deposit insurance is the responsibility of the Federal Deposit Insurance Corporation.
    (this multiple choice question has been scrambled)
  26. All the following are functions of the Comptroller of the Currency, EXCEPT:           
    (RM 541)
     
    A. Supervision of international banking by all U.S. banks   
    B. Regular examination of all national banks   
    C. Approval of national bank applications for branches, mergers, and holding companies   
    D. Issuance of charters for new national banks 
    A. Supervision of international banking by all U.S. banks

    Supervision of the international banking activities of U.S. banks is a responsibility of the Federal Reserve System, not the Comptroller of the Currency.
    (this multiple choice question has been scrambled)
  27. Which of the following statements concerning bank insurance and regulation is (are) correct?
    (RM 541-542)

    I             Because the FDIC insures deposits, it guarantees that no insured bank will fail and close because it cannot meet its obligations.

    II            State and federal banking agencies often have overlapping powers, but they consider similar issues when chartering a new bank.
     
    A. Both I and II   
    B. Neither I nor II 
    C. II only   
    D. I only   
    C. II only

    The FDIC does not guarantee that an insured bank will not fail. Rather, the FDIC insures that, subject to the $250,000 limit, depositors will not lose if an insured bank fails and is unable to meet its obligations.
    (this multiple choice question has been scrambled)
  28. How did the Gramm-Leach-Bliley Act change banking?
    (RM 544, 546-547)  

    A. It allowed holding companies to acquire banks and to open branches across state lines.   
    B. It brought foreign banks operating in the U.S. under federal regulation. 
    C. It allowed banking, insurance, and securities services under one holding company.   
    D. It eliminated unnecessary and burdensome regulations for banks.   
    C. It allowed banking, insurance, and securities services under one holding company.

    The Gramm-Leach-Bliley Act changed banking by allowing financial holding companies to bring together different businesses of banking, insurance, and securities services under one controlling company. The holding company could adopt a subsidiary structure or an affiliate structure to enable it to offer the different services of these businesses.
    (this multiple choice question has been scrambled)
  29. How did the Basel II Agreement change the Basel I Agreement?
    (RM 549-551)  

    A. Basel II focused more on the risks of smaller banks.   
    B. Basel II discontinued allowing banks to develop their own risk assessment models.  
    C. Basel II set bank capital requirements for a wider range of risks.   
    D. Basel II reversed the trend toward deregulation. 
     
    C. Basel II set bank capital requirements for a wider range of risks.   

    While Basel I was primarily directed at default risk, Basel II added in market risk and operational risk and required bank capital sufficient for all of these risk exposures. Basel II recognized that different banks had different exposures and allowed banks to develop their own risk assessment models. The focus was on larger banks in Basel II.
     
    (this multiple choice question has been scrambled)

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