Exercise Questions 1
1) The Financial Services Modernization Act of 1999 allows commercial banking activities and
securities underwriting to operate simultaneously under the same ownership structure.
2) As an asset transformer, the FI issues financial claims that are more attractive to household savers
than the claims directly issued by corporations.
3) Small banks make proportionately larger amounts of real estate loans than large banks.
4) The largest category of liabilities of securities firms as of 2015 was
A) securities sold under repurchase agreements.
B) short positions in securities and commodities.
C) bank loans payable.
D) payables to non-customers.
E) payables to customers.
5) As of 2015, the Federal Reserve oversees approximately one-third of U.S. insurance company
assets.
6) Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs
of providing FI services.
7) What distinguishes financial intermediaries from industrial firms?
A) FI balance sheets are almost totally comprised of financial assets while commercial firms
hold substantial amounts of real assets.
B) FIs deal exclusively in primary securities, but industrial firms specialize in secondary
securities.
C) Industrial firms are unregulated while FIs are heavily regulated.
D) Industrial firms produce real goods or services while FIs only produce money.
E) Industrial firms are the customers of FIs, but FIs cannot be customers of industrial firms.
8) Which of the following statements is FALSE?
A) A financial intermediary specializes in the production of information.
B) A financial intermediary benefits society by providing a mechanism for payments.
C) A financial intermediary reduces its risk exposure by pooling its assets.
D) A financial intermediary acts as a lender of last resort.
E) A financial intermediary may act as a broker to bring together funds deficit and funds surplus
units.
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9) In financing their asset growth, finance companies
A) use very small amounts of long-term debt and bonds.
B) do not issue demand deposits, but can issue time deposits.
C) use less equity capital than commercial banks.
D) have relied more on bank loans over time.
E) rely heavily on short-term commercial paper.
10) Finance companies differ from banks in that they do not accept deposits.
11) Credit unions operate on a common bond principle which emphasizes the depository and lending
needs of credit union members.
12) Customer deposits are classified on a DI's balance sheet as
A) assets, because customers view deposits as assets.
B) liabilities, because the DI must meet reserve requirements on customer deposits.
C) liabilities, because DIs are required to serve depositors.
D) assets, because the DI uses deposit funds to earn profits.
E) liabilities, because the DI uses deposits as a source of funds.
13) The movement of an off-balance-sheet asset or liability to an on-balance-sheet item is dependent
on the occurrence of a contingent event.
14) By diversifying investments, an FI is able to more accurately predict the expected return on its
asset portfolio.
15) The Financial Services Modernization Act of 1999 allowed investment banks and securities firms
to offer deposit accounts to individuals.
16) Which of the following is true of secondary securities?
A) They are securities that back primary securities.
B) They include equities, bonds, and other debt claims.
C) They must be placed in a separate account on order for primary securities to be offered.
D) They are backed by the real assets of corporations issuing them.
E) They are securities issued by FIs.
17) Nondepository financial institutions are represented by all of the following EXCEPT
A) credit unions.
B) finance companies.
C) mutual funds.
D) insurance companies.
E) securities firms.
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18) Which of the following currently manages the insurance funds for both commercial banks and
savings institutions?
A) OCC.
B) State authorities.
C) FSLIC.
D) FDIC.
E) FRS.
19) The asset transformation function of FIs typically involves
A) granting loans to transform funds deficit units into funds surplus units.
B) transferring of funds from one generation to another.
C) altering the liquidity and maturity features of funds sources used to finance the FI's asset
portfolio.
D) investing short-term funds in off-balance sheet activities.
E) receipt of securities through electronic payments systems.
20) Financial institutions are subject to economies of scale in the collection of information.
21) Home equity loans have
A) seen reduced demand since the Tax Reform Act of 1986 was passed.
B) interest charges that are not tax deductible.
C) become less profitable for finance companies.
D) a higher bad debt expense than those on other finance company loans.
E) allows customers to borrow on a line of credit secured with a second mortgage on their
home.
22) Currently (2015) J.P. Morgan Chase is the largest bank holding company in the world and
operations in 60 countries.
23) The primary function of insurance companies is to
A) sell a variety of consumer investment products.
B) generate fees for the banks that sell insurance products.
C) assist in the transfer of wealth into the future.
D) provide contracts that encourage policyholders to save current income.
E) protect policyholders from adverse events.
24) Which of the following repealed the 1933 Glass-Steagall barriers between commercial banking,
insurance, and investment banking?
A) Financial Services Modernization Act (1999).
B) Garn-St. Germain Depository Institutions Act (1982).
C) Competitive Equality in Banking Act (1987).
D) Financial Institutions Reform Recovery and Enforcement Act (1989).
E) The Bank Holding Company Act (1956).
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25) Large money center banks finance most of their activities by using retail consumer deposits as the
primary source of funds.
26) In recent years, the number of commercial banks in the U.S. has been increasing.
27) Small investors in mutual funds are often able to realize larger returns than they would receive
from bank deposits.
28) The largest asset class on U.S. commercial banks' combined balance sheet as of June 30, 2015 was
A) investment securities.
B) cash.
C) deposits.
D) real estate loans.
E) commercial and industrial loans.
29) Depository financial institutions include all of the following EXCEPT
A) credit unions.
B) savings banks.
C) commercial banks.
D) investment banks.
E) all of the options are depository institutions.
30) Adverse selection is a situation where customers who most need insurance are more likely to apply
for insurance.
31) Most of the change in the number of commercial banks since 1990 has been due to bank failures.
32) A significant advantage for credit unions in competing with commercial banks is the tax-exempt
status that has been granted to credit unions.
33) The short-term mutual fund sector includes
A) tax-exempt municipal bond funds.
B) hybrid funds.
C) money market mutual funds.
D) bond funds.
E) equity funds.
34) An FI acting as an agent in matching savers and borrowers of funds can attain economies of scale
and provide this service more efficiently than either the saver or borrower could on their own.
35) The use of off-balance-sheet activities allows banks to practice regulatory tax-avoidance.
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36) Credit default swaps are a product offered by insurance companies.
37) Investment banks specialize in the origination, underwriting, and distribution of new securities
issued by corporations or governments.
38) National-chartered commercial banks are most likely to be regulated by
A) the FDIC and the Federal Reserve System.
B) the FDIC, the Federal Reserve System, and the Comptroller of the Currency.
C) the Federal Reserve System only.
D) the Federal Reserve System and the Comptroller of the Currency.
E) the FDIC only.
39) As DIs made a shift from an "originate-to-hold" banking model to an "originate-to-distribute"
model over the last decade,
A) the Federal Reserve decreased the number of services that banks could provide.
B) it became easier to measure the riskiness of individual loans.
C) it became more difficult for households to obtain credit.
D) there was a dramatic increase in systematic risk of the financial system.
E) banks became more financially stable.
40) Holdings of U.S. Treasury securities are classified on a DI's balance sheet as
A) assets, because the market for U.S. Treasury securities is the most liquid in the world.
B) liabilities, because the DI must pay cash in order to acquire the securities.
C) liabilities, because the Treasury securities must be pledged as collateral against discount
window borrowing.
D) assets, because securities holdings represent a use of funds for investment.
E) assets, because U.S. Treasury securities are default risk-free.
41) FIs perform their intermediary function in two ways
A) they serve as asset transformers by purchasing primary securities and issuing secondary
securities.
B) they specialize as brokers between savers and users and they serve as asset transformers by
purchasing primary securities and issuing secondary securities.
C) they specialize as brokers between savers and users.
D) they serve as asset transformers by purchasing secondary securities and issuing primary
securities.
E) they specialize as brokers between savers and users and they serve as asset transformers by
purchasing secondary securities and issuing primary securities.
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42) Which of the following refers to the term "maturity intermediation"?
A) Reducing information costs or imperfections between households and corporations.
B) The transfer of wealth from one generation to the next.
C) Overcoming constraints to buying assets imposed by large minimum denomination size.
D) Creation of a secondary market mature enough to withstand volatility.
E) Mismatching the maturities of assets and liabilities.
43) Since 1990, commercial banks decreased the proportion of business loans and increased the
proportion of mortgages in their portfolios.
44) A finance company that lends money to high risk customers is known as a subprime lender.
45) Financial institutions act as intermediaries between suppliers and users of money.
46) Mutual funds are financial intermediaries that invest in diversified portfolios of assets.
47) By converting to a bank holding company, an investment bank gains access to Federal Reserve
lending facilities.
48) State-chartered commercial banks may be regulated by
A) the FDIC, the Federal Reserve System, the Comptroller of the Currency, and state banking
commissions.
B) the FDIC and the Federal Reserve System.
C) the FDIC, the Federal Reserve System, and the Comptroller of the Currency.
D) the Federal Reserve System only.
E) the FDIC only.
49) The securitization of mortgages involves the pooling of mortgage loans for sale in the financial
markets.
50) All commercial banks must be members of the Federal Reserve System.
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Answer Key
Testname: EQ1
1) TRUE
2) TRUE
3) TRUE
4) A
5) TRUE
6) TRUE
7) A
8) D
9) E
10) TRUE
11) TRUE
12) E
13) TRUE
14) TRUE
15) TRUE
16) A
17) A
18) D
19) C
20) TRUE
21) E
22) FALSE
23) E
24) A
25) FALSE
26) FALSE
27) TRUE
28) D
29) D
30) TRUE
31) FALSE
32) TRUE
33) C
34) TRUE
35) TRUE
36) TRUE
37) TRUE
38) B
39) D
40) D
41) B
42) E
43) TRUE
44) TRUE
45) TRUE
46) TRUE
47) TRUE
48) A
49) TRUE
50) FALSE
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