Chapter 12

Depository Financial Institutions

D1Factual
1. Depository institutions are the most important source of credit to A) mutual funds. B) large businesses. C) small businesses. D) state governments. Answer: C

D1Factual
2. he largest type of depository institution in the !nited "tates is A) savings#and#loans B) commercial ban$s C) credit unions D) mutual funds Answer: B

D1Interpretive
%. he assets of a ban$ are its &&&&&&&&&&&&&&&&&& of funds. A) uses B) sources C) reserves D) e'cess Answer: A

D1Factual
(. "ince 1)*+ there has been a clear increase in the proportion of the ban$ing industry assets made up of A) mortgage loans. B) state and local government securities. C) cash. D) business loans. Answer: A

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138,itter-"ilber-!dell Money, Banking, and Financial Markets . /leventh /dition

D1Factual
0. 1hat type of loan led the wave of ban$ lending in the 1)*+s and 1)2+s3 A) Consumer loan B) Commercial mortgage C) 4oans to state and local governments D) Commercial paper Answer: B

D1Factual
5. Ban$s are prohibited from holding &&&&&&&&&&&&&&&&&& in their portfolio of assets. A) commercial paper B) local government securities C) farm mortgages D) corporate stoc$ Answer: D

D1Factual
*. As a source of ban$ funds. &&&&&&&&&&&&&&&&&& has fallen by nearly two#thirds in relative importance since 1)*+. A) time deposits B) transactions deposits C) savings deposits D) e6uity Answer: B

D1Factual
2. ,egulation 7 was responsible for the drop in importance of &&&&&&&&&&&&&&&&&& as a source of ban$ funds. A) time deposits B) transactions deposits C) savings deposits D) e6uity Answer: B

D1Factual
). 8on#transactions deposits are different from transactions deposits in that A) transactions deposits have unlimited chec$ writing privileges while non#transactions deposits do not B) transactions deposits have limited chec$ writing privileges while non#transactions deposits have unlimited chec$ writing privileges C) transactions deposits have no chec$ writing privileges while non#transactions deposits do D) transactions deposits have no chec$ writing privileges while non#transactions deposits have limited chec$ writing privileges Answer: A

Chapter 12Depository 9inancial :nstitutions 139

D1Factual
1+. "ince 1)*+ there has been a huge increase in the relative importance of &&&&&&&&&&&&&&&&&& as a source of ban$ funds. A) negotiable CDs B) time deposits C) foreign deposits D) transactions deposits Answer: C

D1Factual
11. 1hich of these 6ualifies as a ;miscellaneous liability< of a ban$3 A) repurchase agreements B) negotiable CDs C) transactions deposits D) savings deposits Answer: A

D1Factual
12. 1hich of these does not 6ualify as a ;miscellaneous liability< of a ban$3 A) borrowings from the 9ederal ,eserve B) repurchase agreements C) borrowing from foreign branches D) large#si=ed negotiable CDs Answer: D

D1Factual
1%. 1ith overnight repos. &&&&&&&&&&&&&&&&&& earn interest while sacrificing virtually no li6uidity. A) corporations B) ban$s C) governments D) consumers Answer: A

D1Factual
1(. 1ith overnight repos. &&&&&&&&&&&&&&&&&& gain access to short#term funds to lend. A) corporations B) ban$s C) governments D) consumers Answer: B

140,itter-"ilber-!dell Money, Banking, and Financial Markets . /leventh /dition

D2Factual
10. he decline in the relative importance of transactions deposits as a source of ban$ funds between 1)*+ and 1))* can be attributed to A) the general increase in interest rates on other types of assets. B) movements of transactions deposits to thrifts. C) the e'tension of unlimited chec$ writing privileges to many non#transactions deposits. D) the increase in large#si=ed negotiable CDs as sources of ban$ funds. Answer: A

D1Factual
15. A pac$age of nontraded financial instruments can be transformed into a traded financial instrument through the process of A) collaterali=ation. B) repurchasing. C) securiti=ation. D) underwriting. Answer: C

D1Interpretive
1*. A ban$>s net interest income is roughly analogous to a manufacturing firm>s A) total reserves. B) gross profit. C) total cost. D) gross interest income. Answer: B

D1Interpretive
12. A ban$>s net interest income is A) the same as net operating income. B) the difference between interest on loans and interest e'pense. C) the same as net operating income before e'penses. D) the difference between total interest income and interest e'pense. Answer: D

D1Interpretive
1). A ban$ with some monopoly power may be able to &&&&&&&&&&&&&&&&&& the rate on its deposits and so &&&&&&&&&&&&&&&&&& its net interest income. A) lower. lower B) lower. raise C) raise. lower D) raise. raise Answer: B

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D1Factual
2+. A ban$>s net interest margin can be adversely affected by all of the following e'cept A) credit ris$. B) interest rate ris$. C) leverage ris$. D) stoc$ mar$et ris$. Answer: D

D2Factual
21. A ban$>s net interest margin is A) total interest income minus total interest e'pense. B) net interest income as a percent of ban$ e6uity. C) net interest income as a percent of total ban$ assets. D) net interest as a percent of total income. Answer: C

D1Interpretive
22. A ban$ that improves its service may be able to &&&&&&&&&&&&&&&&&& the rate on its loans and so &&&&&&&&&&&&&&&&&& its net interest income. A) lower. lower B) lower. raise C) raise. lower D) raise. raise Answer: D

D2Interpretive
2%. 9or "?4s in the early 1)2+s the &&&&&&&&&&&&&&&&&& cost of short#term deposits turned their net interest margin &&&&&&&&&&&&&&&&&&. A) increasing. positive B) increasing. negative C) decreasing. positive D) decreasing. negative Answer: B

D2Factual
2(. 9or ban$s. net interest income is becoming a &&&&&&&&&&&&&&&&&& proportion of their total operating income as the ban$s are &&&&&&&&&&&&&&&&&& nontraditional sources of revenue. A) rising. shifting into B) rising. pulling out of C) falling. shifting into D) falling. pulling out of Answer: A

142,itter-"ilber-!dell Money, Banking, and Financial Markets . /leventh /dition

D2Interpretive
20. Because ban$ing is very &&&&&&&&&&&&&&&&&&#intensive. a ban$ generally becomes successful if it can &&&&&&&&&&&&&&&&&& the ratio of salary and wages to total assets. A) capital. raise B) capital. lower C) labor. raise D) labor. lower Answer: D

D2Factual
25. :f a security held by a ban$ falls in mar$et value. that loss A) must be recorded by the ban$. no matter what. B) will be recorded by the ban$ only if the security is of the type they hold to maturity. C) will be recorded by the ban$ only if the security is of the type they often sell before maturity. D) will be recorded by the ban$ only if it sells the security. Answer: C

D2Factual
2*. :n the late1))+s the ,@A for ban$s in the !.". stood at about &&&&&&&&&&&&&&&&&& percent. A) one B) five C) eight D) twenty Answer: A

D1Factual
22. he ratio of e6uity to total assets is a measure of a ban$As &&&&&&&&&&&&&&&&&& ris$. A) credit B) leverage C) interest rate D) li6uidity Answer: B

D2Interpretive
2). A ban$ can lower its leverage ris$ by A) issuing more stoc$. B) buying more securities and ma$ing fewer loans. C) more closely matching the average maturity of its assets and liabilities. D) ta$ing in fewer deposits and relying more in miscellaneous liabilities to raise funds. Answer: C

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D2Factual
%+. he leverage ratio for the !.". ban$ing system in the late1))+s was about &&&&&&&&&&&&&&&&&& percent. A) two B) five C) eight D) eighteen Answer: C

D1Factual
%1. he ratio of non#performing loans to total loans is a measure of a ban$As &&&&&&&&&&&&&&&&&& ris$. A) credit B) leverage C) interest rate D) li6uidity Answer: A

D1Factual
%2. A forward loo$ing measure of a ban$>s credit ris$ is A) the ratio of loan charge#offs as a percent of total loans. B) the ratio of non#performing loans to total loans. C) ratio of non#performing loans to total assets. D) the ratio of e6uity to total loans. Answer: B

D1Factual
%%. he one#year re#pricing BAC is a measure of &&&&&&&&&&&&&&&&&& ris$. A) credit B) leverage C) interest rate D) li6uidity Answer: C

D1Factual
%(. he BAC ratio is a measure of &&&&&&&&&&&&&&&&&& ris$. A) credit B) leverage C) interest rate D) li6uidity Answer: C

144,itter-"ilber-!dell Money, Banking, and Financial Markets . /leventh /dition

D2Factual
%0. he difference between a ban$>s assets that will be re#priced in less than one year and the ban$>s liabilities that will be re#priced in less than one year e'pressed as a percent of total assets is A) a measure of li6uidity ris$. B) called the BAC ratio. C) earnings at ris$ ratio. D) a measure of credit ris$. Answer: B

D1Interpretive
%5. A 20#year floating rate mortgage has its rate adDusted twice a year. his gives it a re#pricing maturity of A) si' months. B) twenty#four years and si' months. C) twenty#five years. D) fifty years. Answer: A

D1Factual
%*. he ratio of cash and securities to total assets is a traditional measure of &&&&&&&&&&&&&&&&&& ris$. A) credit B) leverage C) interest rate D) li6uidity Answer: D

D1Interpretive
%2. Ban$s can lower their li6uidity ris$ by having more &&&&&&&&&&&&&&&&&& on their balance sheet. A) government securities B) transactions deposits C) loans D) savings deposits Answer: A

D2Factual
%). Because ban$s are act as dealers in financial instruments such as bonds. foreign currency and derivatives. they are e'posed to A) credit ris$. B) li6uidity ris$. C) trading ris$. D) interest ris$. Answer: C

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D2Factual
(+. Because transactions deposits can be withdrawn at any time. ban$s are e'posed to A) credit ris$. B) li6uidity ris$. C) trading ris$. D) interest ris$. Answer: B

D1Factual
(1. he Ec9adden Act was passed to prevent A) ban$s from competing on the basis of deposit rates. B) foreign ban$s from operating in the !nited "tates. C) large nationwide ban$s from forming. D) ban$s from holding corporate stoc$ as an asset. Answer: C

D1Factual
(2. A maDor loophole was punched through the Ec9adden Act as ban$s A) formed ban$ holding companies. B) developed negotiable certificates of deposit. C) began paying interest on chec$able deposits. D) converted themselves into savings#and#loans. Answer: A

D1Factual
(%. F,eciprocity pactsF started springing up in the A) 1)2+s. B) 1)0+s. C) 1)5+s. D) 1)2+s. Answer: D

D1Interpretive
((. he ,iegel#8eal Act of 1))( made reciprocity pacts A) legal. B) illegal. C) irrelevant. D) temporary. Answer: C

D1Factual
(0. 9rom 1)2+ to the mid 1))+s the number of independent ban$ing organi=ations in the !nited "tates. A) rose about 1+G. B) stayed roughly constant. C) fell about 1+G. D) fell about %0G. Answer: D

146,itter-"ilber-!dell Money, Banking, and Financial Markets . /leventh /dition

D1Factual
(5. /conomies of scope e'ist when a business becomes more efficient by A) offering fewer services. B) offering more services. C) becoming larger. D) becoming smaller. Answer: C

D1Factual
(*. Conventional wisdom holds that there are &&&&&&&&&&&&&&&&&& in ban$ing. A) economies of scope but not scale B) economies of scale but not scope C) economies of both scope and scale D) neither scope nor scale economies Answer: C

D1Factual
(2. /mpirical evidence suggests that there are economics of &&&&&&&&&&&&&&&&&& in ban$ing for all ban$ si=es. A) scale and scope B) scale but not scope C) scope but not scale D) neither scale nor scope Answer: D

D1Factual
(). he Blass#"teagall Act prevented commercial ban$s from A) opening branches in other states unless the ban$ is part of a ban$ holding company. B) getting into investment ban$ing. C) selling shares in themselves in the open mar$et. D) issuing commercial paper. Answer: B

D1Factual
0+. A few !.". commercial ban$s are allowed to have ;section 2+ affiliates< that can A) underwrite corporate debt and e6uity. B) operate in foreign mar$ets. C) branch nationwide regardless of state laws. D) own maDority shares in other ban$s. Answer: A

D1Factual
01. A stand#by letter of credit issued by a ban$ is &&&&&&&&&&&&&&&&&& of that ban$. A) an asset B) a liability C) technically both an asset and a liability D) neither an asset nor a liability Answer: D

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D1Factual
02. "ince 1)5+ !.". ban$s have &&&&&&&&&&&&&&&&&& the proportion of their total lending which is done overseas. A) reduced to near =ero B) scaled bac$ C) held nearly constant D) increased Answer: D

D1Factual
0%. :n a typical year. about &&&&&&&&&&&&&&&&&& of ban$ business loans in the !.". are made by foreign#owned ban$s through their branches here. A) ten percent B) twenty percent C) one#third D) one#half Answer: C

D2Interpretive
0(. :n 1)5( a certain foreign ban$ opened a branch in the !nited "tates. hat branch A) has always been allowed to underwrite securities. B) has never been allowed to underwrite securities. C) gained the right to underwrite securities by the :nternational Ban$ing Act of 1)*2. D) lost the right to underwrite securities by the :nternational Ban$ing Act of 1)*2. Answer: A

D1Factual
00. he Bahamas and Cayman :slands are $nown for their warm. sandy beaches and their A) /dge Act corporations. B) shell ban$s. C) section 2+ affiliates. D) high ta'ation. Answer: B

D1Factual
05. "uppose that "amsung. a "outh Horean corporation. issues bonds denominated in dollars. are A) called foreign e'change bonds. B) called /urobonds. C) called shell bonds. D) imaginary. since it is against international law to do this. Answer: B hese

148,itter-"ilber-!dell Money, Banking, and Financial Markets . /leventh /dition

D1Factual
0*. /urobonds are bonds that are A) sold outside the borrowing corporation>s home country. B) sold in /urope. C) money mar$et instruments. D) almost always underwritten by a single ban$. Answer: A

D1Factual
02. :B9s are designed to compete with A) /urobonds. B) off#balance#sheet activities. C) shell branches. D) letters of credit. Answer: C

D1Factual
0). 1hich of the following is not a thrift3 A) A savings#and#loan. B) A commercial ban$. C) A credit union. D) A mutual savings ban$. Answer: B

D2Factual
5+. 1hich type of thrift institution was relatively unaffected by the traumas of deregulation in the 1)2+s3 A) Credit unions B) "avings#and#loans C) Eutual savings ban$s D) :B9s Answer: A

D2Interpretive
51. Credit unions made it through the 1)2+s in relatively good shape because A) most of their depositors were individuals. B) most of their depositors were businesses. C) they held many mortgages among their assets. D) they held no mortgages among their assets. Answer: D