Chapter 10
Banking Industry: Structure and Competition

Multiple Choice
The modern commercial banking system began in America when the
Bank of United States was chartered in New York in 1801.
Bank of North America was chartered in Philadelphia in 1782.
Bank of United States was chartered in Philadelphia in 1801.
Bank of North America was chartered in New York in 1782.
Question Status: Revised
A major controversy involving the banking industry in its early years was
whether banks should both accept deposits and make loans or whether these functions should be
separated into different institutions.
whether the federal government or the states should charter banks.
what percent of deposits banks should hold as fractional reserves.
whether banks should be allowed to issue their own bank notes.
Question Status: Previous Edition
The government institution that has responsibility for the amount of money and credit supplied in the
economy as a whole is the
central bank.
commercial bank.
bank of settlement.
monetary fund.
Question Status: Previous Edition
Because of the abuses by state banks and the clear need for a central bank to help the federal government
raise funds during the War of 1812, Congress created the
Bank of United States in 1812.
Bank of North America in 1814.
Second Bank of the United States in 1816.
Second Bank of North America in 1815.
Question Status: Previous Edition
354
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
The Second Bank of the United States was denied a new charter by
President Andrew Jackson.
Vice President John Calhoun.
President Benjamin Harrison.
President John Q. Adams.
Question Status: Previous Edition
To eliminate the abuses of the state-chartered banks, the _____ created a new banking system of federally
chartered banks, supervised by the _____.
National Bank Act of 1863; Office of the Comptroller of the Currency
Federal Reserve Act of 1863; Office of the Comptroller of the Currency
National Bank Act of 1863; Office of Thrift Supervision
Federal Reserve Act of 1863; Office of Thrift Supervision
Question Status: Previous Edition
Although the National Bank Act of 1863 was designed to eliminate state-chartered banks by imposing a
prohibitive tax on banknotes, these banks have been able to stay in business by
issuing credit cards.
ignoring the regulations.
issuing deposits.
branching into other states.
Question Status: Previous Edition
The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains,
in part, the passage of
the National Bank Charter Amendments of 1918.
the Garn-St. Germain Act of 1982.
the National Bank Act of 1863.
none of the above.
Question Status: Revised
Before 1863,
banks acquired funds by issuing bank notes.
banks were chartered by state banking commissions.
federally-chartered banks had regulatory advantages not granted to state-chartered banks.
all of the above.
only (a) and (b) of the above.
Question Status: Previous Edition
Chapter 10
Banking Industry: Structure and Competition
355
Before 1863,
federally-chartered banks had regulatory advantages not granted to state-chartered banks.
the number of federally-chartered banks grew at a much faster rate than at any other time since the
end of the Civil War.
banks acquired funds by issuing bank notes.
all of the above.
Question Status: Previous Edition
Before 1863,
the Federal Reserve System regulated only federally-chartered banks.
the Comptroller of the Currency regulated both state and federally-chartered banks.
the number of federally-chartered banks grew at a much faster rate than at any other time since the
end of the Civil War.
none of the above.
Question Status: Previous Edition
The National Bank Act of 1863, and subsequent amendments to it,
created a banking system of federally-chartered banks.
established the Office of the Comptroller of the Currency.
broadened the regulatory powers of the Federal Reserve.
did all of the above.
did only (a) and (b) of the above.
Question Status: Previous Edition
The regulatory system that has evolved in the United States whereby banks are regulated at the state level,
the national level, or both, is known as a
bilateral regulatory system.
tiered regulatory system.
two-tiered regulatory system.
dual banking system.
Question Status: Previous Edition
Today the United States has a dual banking system in which banks supervised by the _____ and by the
_____ operate side by side.
federal government; municipalities
state governments; municipalities
federal government; states
municipalities; states
Question Status: Previous Edition
356
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
The U.S. banking system is considered to be a dual system because
banks offer both checking and savings accounts.
it actually includes both banks and thrift institutions.
it is regulated by both state and federal governments.
it was established before the Civil War, requiring separate regulatory bodies for the North and
South.
all of the above.
Question Status: Study Guide
The Federal Reserve Act of 1913 required that
state banks be subject to the same regulations as national banks.
national banks establish branches in the cities containing Federal Reserve banks.
national banks join the Federal Reserve System.
all of the above be done.
Question Status: Previous Edition
Which bank regulatory agency has the sole regulatory authority over bank holding companies?
The FDIC
The Comptroller of the Currency
The FHLBS
The Federal Reserve System
Question Status: Previous Edition
State banks that are not members of the Federal Reserve System are most likely to be examined by the
Federal Reserve System.
FDIC.
FHLBS.
Comptroller of the Currency.
Question Status: Previous Edition
The Federal Reserve Act required all _____ banks to become members of the Federal Reserve System,
while _____ banks could choose to become members of the system.
state; national
state; municipal
national; state
national; municipal
Question Status: Previous Edition
Chapter 10
Banking Industry: Structure and Competition
Probably the most significant factor explaining the drastic drop in the number of bank failures since the
Great Depression has been
the creation of the FDIC.
rapid economic growth since 1941.
the employment of new procedures by the Federal Reserve.
better bank management.
Question Status: Previous Edition
Which regulatory body charters national banks?
The Federal Reserve
The FDIC
The Comptroller of the Currency
None of the above
Question Status: Previous Edition
Bank regulatory agencies include
the Comptroller of the Currency.
the Federal Reserve System.
the Federal Deposit Insurance Corporation.
all of the above.
both (a) and (b) of the above.
Question Status: Study Guide
With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve
System _____ to purchase FDIC insurance for their depositors, while non-member commercial
banks _____ to buy deposit insurance.
could choose; were required
could choose; were given the option
were required, could choose
were required; were required
Question Status: Previous Edition
357
358
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
With the creation of the Federal Deposit Insurance Corporation,
member banks of the Federal Reserve System were given the option to purchase FDIC insurance for
their depositors, while non-member commercial banks were required to buy deposit insurance.
member banks of the Federal Reserve System were required to purchase FDIC insurance for their
depositors, while non-member commercial banks could choose to buy deposit insurance.
both member and non-member banks of the Federal Reserve System were required to purchase
FDIC insurance for their depositors.
both member and non-member banks of the Federal Reserve System could choose, but were not
required, to purchase FDIC insurance for their depositors.
Question Status: Previous Edition
The Glass-Steagall Act, before its repeal in 1999,
prohibited commercial banks from issuing equity to finance bank expansion.
prohibited commercial banks from engaging in underwriting and dealing of corporate securities.
prohibited commercial banks from selling new issues of government securities.
prohibited commercial banks from purchasing any debt securities.
Question Status: Previous Edition
Before it was repealed in 1999, the Glass-Steagall Act prohibited
commercial banks from engaging in underwriting and dealing in corporate securities.
investment banks from engaging in commercial banking activities.
commercial banks from selling new issues of government securities.
all of the above.
only (a) and (b) of the above.
Question Status: Study Guide
The legislation that separated investment banking from commercial banking until its repeal in 1999 is
known as the:
National Bank Act of 1863.
Federal Reserve Act of 1913.
Glass-Steagall Act.
McFadden Act.
Question Status: Previous Edition
Chapter 10
Banking Industry: Structure and Competition
359
Which of the following statements concerning bank regulation in the United States are true?
The Office of the Comptroller of the Currency has the primary responsibility for the 4000 national
banks.
The Federal Reserve and the state banking authorities jointly have responsibility for the 1000 state
banks that are members of the Federal Reserve System.
The Fed has sole regulatory responsibility over bank holding companies.
All of the above are true.
Only (a) and (b) of the above are true.
Question Status: Previous Edition
Which of the following statements concerning bank regulation in the United States are true?
The Office of the Comptroller of the Currency has the primary responsibility for state banks that are
members of the Federal Reserve System.
The Federal Reserve and the state banking authorities jointly have responsibility for the 1000 state
banks that are members of the Federal Reserve System.
The Office of the Comptroller of the Currency has sole regulatory responsibility over bank holding
companies.
All of the above are true.
Only (a) and (b) of the above are true.
Question Status: Previous Edition
Which of the following are important factors in determining the degree and timing of financial
innovation?
Changes in technology
Changes in market conditions
Changes in regulation
All of the above
Only (a) and (b) of the above
Question Status: Previous Edition
Burdensome regulations, and rising interest rates and inflation help to explain
the rapid pace of financial innovations in banking in the 1960s and 1970s.
the low rate of bank failures in the 1980s.
both (a) and (b) of the above.
neither (a) nor (b) of the above.
Question Status: Previous Edition
360
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
Rising interest-rate risk
increased the cost of financial innovation.
increased the demand for financial innovation.
reduced the cost of financial innovation.
reduced the demand for financial innovation.
Question Status: Previous Edition
The most significant change in financial market conditions since 1970 has been the dramatic
increase in new Treasury issues.
increase in new stock offerings.
increase in the volatility of interest rate movements.
decline in the number of institutional investors, such as pension and mutual funds, relative to
individual investors.
Question Status: Previous Edition
The most significant change in the economic environment that changed the demand for financial products
since 1970 has been
the aging of the baby-boomer generation.
the dramatic increase in the volatility of interest rates.
the dramatic increase in competition from foreign banks.
the deregulation of financial institutions.
Question Status: Previous Edition
In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 3.5 percent;
in the 1980s it fluctuated between ____ percent and ____ percent.
5; 15
4; 11.5
4; 18
5; 10
Question Status: Previous Edition
In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 3.5 percent;
in the 1970s it fluctuated between ____ percent and ____ percent.
4; 14
4; 11.5
2; 14
2; 11.5
Question Status: Previous Edition
Chapter 10
Banking Industry: Structure and Competition
361
Large fluctuations in interest rates lead to
substantial capital gains and losses to owners of securities.
greater uncertainty about returns on investments.
greater interest-rate risk.
all of the above.
Question Status: Previous Edition
Adjustable rate mortgages
protect households against higher mortgage payments when interest rates rise.
keep financial institutions’ earnings high even when interest rates are falling.
benefit homeowners when interest rates are falling.
do only (a) and (b) of the above.
none of the above.
Question Status: Previous Edition
Adjustable rate mortgages
protect households against higher mortgage payments when interest rates rise.
keep financial institutions’ earnings high even when interest rates are falling.
have many attractive attributes, explaining why so few households now seek fixed-rate mortgages.
do only (a) and (b) of the above.
none of the above.
Question Status: Previous Edition
Adjustable rate mortgages
benefit homeowners when interest rates are falling.
reduce financial institutions’ interest-rate risk.
reduce households risk of having to pay higher mortgage payments when interest rates rise.
all of the above.
do only (a) and (b) of the above.
Question Status: Revised
Adjustable rate mortgages
protect financial institutions from declining earnings when interest rates rise.
benefit households when interest rates are falling.
have many attractive attributes, explaining why so few households now seek fixed-rate mortgages.
do only (a) and (b) of the above.
do only (b) and (c) of the above.
Question Status: Previous Edition
362
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
Individuals purchasing homes for the first time might prefer financing the purchase with a fixed-rate
mortgage
if they have limited incomes that would make it difficult for them to make ends meet during periods
of rising interest rates.
if they would rather not be subject to the interest-rate risk due to rising rates.
if they believed that interest rates would be likely to rise and remain at a level higher than the
current rate.
for any of the above reasons.
for none of the above reasons.
Question Status: Revised
The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is
a put option.
a call option.
a futures contract.
a legal contract.
a mortgage-backed security.
Question Status: New
An instrument developed to help investors and institutions hedge interest-rate risk is
a put option.
a call option.
a financial derivative.
a mortgage-backed security.
a Treasury security.
Question Status: New
New computer technology has
increased the cost of financial innovation.
increased the demand for financial innovation.
reduced the cost of financial innovation.
reduced the demand for financial innovation.
Question Status: Previous Edition
Chapter 10
Banking Industry: Structure and Competition
363
The most important source of the changes in supply conditions that stimulate financial innovation has been
the
aging of the baby-boomer generation.
dramatic increase in the volatility of interest rates.
improvement in computer and telecommunications technology.
dramatic increase in competition from foreign banks.
the deregulation of financial institutions.
Question Status: Previous Edition
Credit cards date back to
prior to the second World War.
just after the second World War.
the early 1950s.
the late 1950s.
Question Status: Previous Edition
A firm issuing credit cards earns income from
loans it makes to credit card holders.
payments made to it by stores on credit card purchases.
payments made to it by manufacturers of the products sold in stores on credit card purchases.
all of the above.
only (a) and (b) of the above.
Question Status: Previous Edition
The entry of AT&T and GM into the credit card business is an indication of
government’s efforts to deregulate the provision of financial services.
the rising profitability of credit card operations.
the reduction in costs of credit card operations since 1990.
the sale of unprofitable operations by Bank of America and Citicorp.
Question Status: Previous Edition
A debit card differs from a credit card in that
a debit card is a loan while for a credit card purchase, payment is made immediately.
a debit card is a long-term loan while a credit card is a short-term loan.
a credit card is a loan while for a debit card purchase, payment is made immediately.
a credit card is a long-term loan while a debit card is a short-term loan.
debit card purchases result in an immediate deduction from a checking account, while credit card
purchases result in an immediate deduction from a savings account.
Question Status: New
364
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
The advantages of electronic banking facilities include
lower costs to the bank.
greater convenience for bank customers.
ease of obtaining foreign currency abroad.
all of the above.
both (a) and (b) of the above.
Question Status: New
Automated teller machines have the advantage that
it costs less to operate than human tellers.
they are more widely located than bank branch offices.
they operate twenty-four hours a day.
they provide easy access to foreign currency when traveling in Europe.
do all of the above.
Question Status: New
Automated teller machines
are more costly to use than human tellers, so banks discourage their use by charging more for use of
ATMs.
cost about the same to use as human tellers in banks, so banks discourage their use by charging
more for use of ATMs.
cost less than human tellers, so banks may encourage their use by charging less for using ATMs.
are more costly to use than human tellers, so banks encourage their use by charging less for use of
ATMs.
cost nothing to use, so banks provide their services free of charge.
Question Status: New
Decreasing costs of computer technology have facilitated the development of
home banking.
virtual banking.
international banking.
all of the above.
both (a) and (b) of the above.
Question Status: New
Chapter 10
Banking Industry: Structure and Competition
The declining cost of computer technology has made __________ a reality.
brick and mortar banking
international banking
virtual banking
investment banking
commercial banking
Question Status: New
Examples of financial services that became practical realities as the result of new computer technology
include
credit cards.
electronic banking facilities.
checking accounts.
all of the above.
only (a) and (b) of the above.
Question Status: Previous Edition
Bank customers perceive Internet banks as being
more secure than physical bank branches.
a better method for the purchase of long-term savings products.
better at keeping customer information private.
prone to many more technical problems.
all of the above.
Question Status: New
A disadvantage of virtual banks (clicks) is that
their hours are more limited than physical banks.
they are less convenient than physical banks.
they are more costly to operate than physical banks.
customers worry about the security of on-line transactions.
all of the above.
Question Status: New
So-called fallen angels differ from junk bonds in that
junk bonds refer to newly issued bonds with low credit ratings.
fallen angels refer to previously issued bonds that have had their credit ratings fall below Baa.
fallen angels refer to newly issued bonds with low credit ratings.
both (a) and (b) of the above.
Question Status: Previous Edition
365
366
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
So-called fallen angels differ from junk bonds in that
junk bonds refer to previously issued bonds that have had their credit ratings fall below Baa.
fallen angels refer to newly issued bonds with low credit ratings.
junk bonds refer to newly issued bonds with low credit ratings.
both (a) and (b) of the above.
Question Status: Previous Edition
So-called fallen angels differ from junk bonds in that
junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to
previously bonds that have had their credit ratings fall below Baa.
junk bonds refer to previously bonds that have had their credit ratings fall below Baa, whereas
fallen angels refer to newly issued bonds with low credit ratings.
junk bonds have ratings below Baa, whereas fallen angels have ratings below .
fallen angels have ratings below Baa, whereas junk bonds have ratings below .
Question Status: Previous Edition
Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently
referred to as
municipal bonds.
Yankee bonds.
“fallen angels.”
junk bonds.
Question Status: Revised
In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not
yet achieved investment-grade status.
Michael Milken
Roger Milliken
Ivan Boskey
Carl Ichan
Question Status: Previous Edition
The rapid growth of the commercial paper market since 1970 is due to
the fact that commercial paper has no default risk.
improved information technology making it easier to screen credit risks.
government regulation.
FDIC insurance for commercial paper.
all of the above.
Question Status: New
Chapter 10
Banking Industry: Structure and Competition
367
The rapid growth of the commercial paper market can be attributed to
improvements in information technology.
the growth of money market mutual funds.
government insurance of commercial paper
all of the above.
both (a) and (b) of the above.
Question Status: New
The process of transforming otherwise illiquid financial assets into marketable capital market instruments
is know as
securitization.
internationalization.
arbitrage.
program trading.
none of the above.
Question Status: Previous Edition
The practice of creating marketable debt instruments that are backed by otherwise illiquid assets is known
as
standardization.
homogenization.
securitization.
adverse selection.
Question Status: Previous Edition
Creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans is
diversification.
arbitrage.
computerization.
securitization.
optioning the portfolio.
Question Status: Study Guide
The driving force behind the securitization of mortgages and automobile loans has been
the rising regulatory constraints on substitute financial instruments.
the desire of mortgage and auto lenders to exit this field of lending.
the improvement in computer technology.
the relaxation of regulatory restrictions on credit card operations.
Question Status: Previous Edition
368
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
According to Edward Kane, because the banking industry is one of the most _____ industries in America,
it is an industry in which _____ is especially likely to occur.
competitive; loophole mining
competitive; innovation
regulated; loophole mining
regulated; innovation
Question Status: Previous Edition
Loophole mining refers to
financial innovation designed to hide transactions from the IRS.
financial innovation designed to conceal transactions from the SEC.
financial innovation designed to get around regulations.
none of the above.
Question Status: Previous Edition
Bank managers look on reserve requirements
as a tax on deposits.
as a subsidy on deposits.
as a subsidy on loans.
as a tax on loans.
Question Status: Previous Edition
The cost of holding reserves to a bank equals
the interest paid on deposits times the amount of reserves.
the interest paid on deposits times the amount of deposits.
the interest earned on loans times the amount of loans.
the interest earned on loans times the amount on reserves.
the interest earned on reserves times the amount of reserves.
Question Status: New
Avoiding reserves requirements would enable banks to
increase interest income.
reduce expenses.
increase profits.
all of above.
both (a) and (c) of the above.
Question Status: New
Chapter 10
Banking Industry: Structure and Competition
369
The process in which people take their money out of financial institutions seeking higher interest rates is
called
capital mobility.
loophole mining.
disintermediation.
deposit jumping.
Question Status: Previous Edition
Money market mutual funds
function as interest-earning checking accounts.
are legally deposits.
are subject to reserve requirements.
all of the above.
both (a) and (c) of the above.
Question Status: New
In this type of arrangement, any balances above a certain amount in a corporation’s checking account at
the end of the business day are “removed” and invested in overnight securities that pay the
corporation interest. This innovation is referred to as a
sweep account.
share draft account.
removed-repo account.
stockman account.
Question Status: Previous Edition
Reserve requirements are no longer binding for many banks because of
the reduction of these requirements by the Fed.
the development of sweep accounts.
the growth of the commercial paper market.
the rapid growth of international banking.
all of the above.
Question Status: New
Sweep accounts
have made reserve requirements nonbonding for many banks.
sweep funds out of deposit accounts into long-term securities.
enable banks to avoid paying interest to corporate customers.
reduce banks’ assets.
all of the above.
Question Status: New
370
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
Since 1974, commercial banks’ importance as a source of funds for nonfinancial borrowers
has shrunk dramatically, from around 40 percent of total credit advanced to 30 percent by 1999.
has shrunk dramatically, from around 70 percent of total credit advanced to below
50 percent by 1999.
has expanded dramatically, from around 50 percent of total credit advanced to above
70 percent by 1999.
has expanded dramatically, from around 30 percent of total credit advanced to above
50 percent by 1999.
Question Status: Revised
Since 1974, commercial banks’ importance as a source of funds for nonfinancial borrowers has shrunk
dramatically, from around _____ percent of total credit advanced to about _____ percent by 1999.
60; 30
40; 30
25; 20
30; 15
Question Status: Revised
Since 1974, commercial banks’ importance as a source of funds for nonfinancial borrowers has _____
dramatically, from around _____ percent of total credit advanced to about _____ percent by 1999.
expanded; 40; 60.
expanded; 35; 55
contracted; 40; 20
contracted; 60; 40
contracted; 90; 10
Question Status: Study Guide
Thrift institutions’ importance as a source of funds for borrowers
has shrunk from around 40 percent of total credit advanced in the late 1970s to below
30 percent by 1999.
has shrunk from over 20 percent of total credit advanced in the late 1970s to below
10 percent by 1999.
has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to
above 25 percent by 1999.
has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to
above 30 percent by 1999.
Question Status: Previous Edition
Chapter 10
Banking Industry: Structure and Competition
371
Since the late 1970s, thrift institutions’ importance as a source of funds for borrowers has shrunk
markedly, from above _____ percent of total credit advanced to below _____ percent by 1999.
30; 20
30; 15
20; 20
20; 10
Question Status: Previous Edition
Since 1980
bank profitability has declined.
banks have offset the decline in profits from traditional activities with increased income from offbalance-sheet activities.
banks have offset the decline in profits from off-balance-sheet activities with increased income from
traditional activities.
bank profits have grown rapidly due to deregulation.
banks profits have declined rapidly due to increased competition.
Question Status: New
Financial innovation has caused
banks to suffer declines in their cost advantages in acquiring funds, although it has not caused a
decline in income advantages.
banks to suffer a simultaneous decline of cost and income advantages.
banks to suffer declines in their income advantages in acquiring funds, although it has not caused a
decline in cost advantages.
banks to achieve competitive advantages in both costs and income.
Question Status: Previous Edition
Disintermediation resulted from
interest rate ceilings combine with inflation-driven increases in interest rates.
elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits).
increases in federal income taxes.
reserve requirements.
all of the above.
Question Status: New
372
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
The experience of disintermediation in the banking industry illustrates that
more regulation of financial markets may avoid such problems in the future.
banks are unable to remain competitive with other financial intermediaries.
consumers no longer desire the services that banks provide.
markets invent alternatives to costly regulations.
the financial services sector should be nationalized.
Question Status: New
The process of disintermediation
reduced banks’ income advantages.
reduce banks’ cost advantages.
resulted in an increase in banking regulation.
increased banks’ profits.
had no effect on the banking industry.
Question Status: New
Banks responded to disintermediation by
supporting the elimination of interest rate regulations, enabling them to better compete for funds.
opposing the elimination of interest rate regulations, as this would increase their cost of funds.
demanding that interest rate regulations be imposed on money market mutual funds.
supporting the elimination of interest rate regulations, as this would reduce their cost of funds.
refusing to pay interest on deposits.
Question Status: New
Rising market interest rates in the 1960s and the 1970s, combined with regulated deposit rate ceilings,
worked in the short run to give mortgage-issuing institutions a source of low-cost funds.
led eventually to an outflow of deposits from depository institutions.
led to financial innovations that worked to undo deposit rate ceilings.
did all of the above.
did only (a) and (c) of the above.
Question Status: Previous Edition
One factor contributing to the decline in cost advantages that banks once had is the decline in the
importance of checkable deposits from over _____ percent of banks’ source of funds to under
_____ percent today.
60; 30
60; 15
50; 20
40; 15
Question Status: Previous Edition
Chapter 10
Banking Industry: Structure and Competition
373
One factor contributing to the decline in cost advantages that banks once had is the
decline in the importance of checkable deposits from over 60 percent of banks’ liabilities to under 15
percent today.
decline in the importance of savings deposits from over 60 percent of banks’ liabilities to under 15
percent today.
decline in the importance of checkable deposits from over 40 percent of banks’ liabilities to under 15
percent today.
decline in the importance of savings deposits from over 40 percent of banks’ liabilities to under 20
percent today.
Question Status: Previous Edition
The most important developments that have reduced banks’ cost advantages in the past thirty years
include:
the elimination of Regulation Q ceilings.
the competition from money market mutual funds.
the growth of securitization.
all of the above.
only (a) and (b) of the above.
Question Status: Revised
Banks’ cost advantages have been reduced during the past thirty years due to
the elimination of Regulation Q ceilings.
the competition from money market mutual funds.
the competition from junk bonds.
all of the above.
only (a) and (b) of the above.
Question Status: Study Guide
The most important developments that have reduced banks’ cost advantages in the past
thirty years include:
the growth of the junk bond market.
the competition from money market mutual funds.
the growth of securitization.
all of the above.
only (a) and (b) of the above.
Question Status: Revised
374
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
The most important developments that have reduced banks’ income advantages in the past thirty years
include:
the competition from money market mutual funds.
the growth of the junk bond market.
the growth of securitization.
all of the above.
only (b) and (c) of the above.
Question Status: Study Guide
The most important developments that have reduced banks’ income advantages in the past thirty years
include:
the growth of the commercial paper market.
the growth of the junk bond market.
the elimination of Regulation Q ceilings.
all of the above.
only (a) and (b) of the above.
Question Status: Revised
One factor contributing to the decline in income advantages that banks once had is the increased
competition from the commercial paper market which has grown from _____ percent of commercial
and industrial bank loans to over _____ percent today.
10; 20
5; 20
10; 40
5; 40
Question Status: Previous Edition
Banks have attempted to maintain adequate profit levels by
making riskier loans, such as commercial real estate loans.
pursuit of new off-balance-sheet activities.
increasing reserve deposits at the Fed.
all of the above.
both (a) and (b) of the above.
Question Status: New
Chapter 10
Banking Industry: Structure and Competition
375
The decline in profitability of traditional banking activities resulted in
bank failures.
consolidations by merger and acquisition.
increased risk taking by banks.
banks increasing their off-balance-sheet activities.
all of the above.
Question Status: New
The decline in traditional banking internationally can be attributed to
deregulation.
improved information technology.
increasing monopoly power of banks over depositors.
all of the above.
both (a) and (b) of the above.
Question Status: New
The presence of so many commercial banks in the United States is most likely the result of
consumers’ strong desire for dealing with only local banks.
adverse selection and moral hazard problems that give local banks a competitive advantage over larger
banks.
prior regulations that restrict the ability of these financial institutions to open branches.
all of the above.
Question Status: Previous Edition
The McFadden Act of 1927
effectively prohibited banks from branching across state lines.
required that banks maintain bank capital equal to at least 6 percent of their assets.
effectively required that banks maintain a correspondent relationship with large money center
banks.
did all of the above.
Question Status: Previous Edition
The legislation that effectively prohibited banks from branching across state lines and forced all national
banks to conform to the branching regulations in the state in which they reside is the
McFadden Act.
National Bank Act.
Glass-Steagall Act.
Garn-St.Germain Act.
Question Status: Previous Edition
376
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
As a result of restrictive banking regulations, the United States
has too few banks when compared to other industrialized countries.
has banks that are quite large relative to those in other countries.
has too many banks when compared to other industrialized countries.
both (a) and (b) of the above.
Question Status: Previous Edition
The large number of banks in the United States is an indication of
vigorous competition within the banking industry.
lack of competition within the banking industry.
only efficient banks operating within the United States.
none of the above.
Question Status: Previous Edition
Lack of competition in the United States banking industry can be attributed to
the fact that competition does not benefit consumers.
the fact that branching has eliminated competition.
recent legislation restricting competition.
nineteenth-century populist sentiment.
nationalization of the banking industry.
Question Status: New
Which of the following is an advantage of forming a bank holding company?
It allows ownership of several banks where branching is prohibited.
It allows owners to engage in the provision of investment advice.
Holding companies can service loans in other states.
All of the above.
Question Status: Revised
Which of the following are true statements concerning bank holding companies?
Bank holding companies own almost all large banks.
Bank holding companies have experienced dramatic growth in the past three decades.
Over 90% of commercial bank deposits are held by banks owned by holding companies.
All of the above are true.
Only (a) and (b) of the above are true.
Question Status: Revised
Chapter 10
Banking Industry: Structure and Competition
377
The bank holding company form of organization can provide a bank with important advantages in that
it allows banks to circumvent restrictive branch banking requirements.
bank holding companies can engage in activities closely related to banking, such as credit card
services.
bank holding companies can provide data processing and leasing services.
all of the above.
only (a) and (b) of the above.
Question Status: Revised
Which of the following are true statements concerning bank holding companies?
Bank holding companies own few large banks.
Bank holding companies have experienced dramatic growth in the past three decades.
The McFadden Act has prevented bank holding companies from establishing branch banks.
All of the above are true.
Only (a) and (b) of the above are true.
Question Status: Previous Edition
Which of the following are true statements concerning bank holding companies?
Bank holding companies own almost all large banks.
Bank holding companies have experienced dramatic growth in the past three decades.
The McFadden Act has prevented bank holding companies from establishing branch banks.
All of the above are true.
Only (a) and (b) of the above are true.
Question Status: Previous Edition
As a result of shared electronic banking facilities,
barriers to branching have become less burdensome.
banking has become less competitive.
both of the above have occurred.
neither of the above has occurred.
Question Status: Previous Edition
Which of the following are true statements concerning shared electronic banking facilities?
Most courts and states have held that electronic bank facilities are technically subject to branching
restrictions.
If an electronic facility is paid for on a transaction fee basis, it is not considered a branch bank, and
is therefore not subject to branching regulations.
McFadden Act restrictions do not apply to electronic facilities owned outright by banks.
All of the above are true.
Only (a) and (b) of the above are true.
Question Status: Previous Edition
378
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
The dismal performance of the banking industry in the 1980s and early 1990s has led to a large number of
bank failures and mergers that have reduced the number of commercial banks from around _____ in
the 1970s to about _____ today.
25,000; 11,500
15,000; 8,500
20,000; 12,500
15,000; 5,500
Question Status: Previous Edition
The primary reason for the recent reduction in the number of banks is
bank failures.
re-regulation of banking.
restrictions on interstate branching.
mergers and acquisitions.
all of the above.
Question Status: New
Bank holding companies that rival money center banks in size, but are not located in money center cities
are
nonbank banks.
bank clearing houses.
international banks.
local banks.
superregional banks.
Question Status: New
The ability to use one resource to provide different products and services is
economies of scale.
economies of scope.
diversification.
divestiture.
vertical integration.
Question Status: New
The business term for economies of scope is
economies of scale.
diversification.
consolidation.
synergies.
cooperation.
Question Status: New
Chapter 10
Banking Industry: Structure and Competition
The recent legislation that overturned the prohibition on interstate banking is
the McFadden Act.
the Douglas Amendment.
the Glass-Steagall Act
the Riegle-Neal Act
the Gramm-Leach-Bliley Act.
Question Status: New
The only country without a true national banking system in which banks have branches throughout the
nation is
Canada.
France.
Italy.
the United States.
Question Status: Previous Edition
Although it has a population about half that of the United States, Japan has
many more banks.
only 10 percent of the number of banks.
only 5 percent of the number of banks.
only 1 percent of the number of banks.
Question Status: Previous Edition
Experts predict that the future structure of the U.S. banking industry
will have an increased number of banks.
will have approximately the same number of banks as currently exist.
will have several thousand banks.
will have a few hundred banks.
will have as few as ten banks.
Question Status: New
Bank consolidation will likely result in
less competition.
the elimination of community banks.
increased competition.
both (a) and (b) of the above.
both (b) and (c) of the above.
Question Status: New
379
380
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
Critics of nationwide banking fear
an elimination or community banks.
reduced lending to small businesses.
cutthroat competition.
all of the above.
both (a) and (b) of the above.
Question Status: New
Benefits of nationwide banking will likely include
increased competition.
increased diversification of banks’ loan portfolios.
reduced bank failures.
all of the above.
both (b) and (c) of the above.
Question Status: New
Nationwide banking will likely reduce bank failures due to
reduced competition.
reduced lending to small businesses.
diversification of loan portfolios across state lines.
regulatory forbearance.
elimination of community banks.
Question Status: New
Banking consolidation in the United States is resulting in
an increased number of small banks.
an increase in bank size.
a reduction in bank size.
elimination of small banks.
no change in the number of large and small banks.
Question Status: New
As the banking system in the United States evolves, it is expected that
the number and importance of small banks will increase.
the number and importance of large banks will decrease.
small banks will grow at the expense of large banks.
the number and importance of large banks will increase.
there will be no change in the relative size or importance of large and small banks.
Question Status: New
Chapter 10
Banking Industry: Structure and Competition
381
The legislation overturning the Glass-Steagall Act is
the McFadden Act.
the Douglas Amendment.
the Garn-St. Germain Act
the Riegle-Neal Act.
the Gramm-Leach-Bliley Act.
Question Status: Revised
Recently, commercial banks have been allowed to
invest in real estate.
enter certain insurance markets.
underwrite stocks.
do all of the above.
only (a) and (b) of the above.
Question Status: Previous Edition
In a _____ banking system, commercial banks provide a full range of banking, securities, and insurance
services, all within a single legal entity.
universal
British-style universal
barrier-free
dividerless
severable
Question Status: Previous Edition
In a _____ banking system, commercial banks engage in securities underwriting, but legal subsidiaries
conduct the different activities. Also, banking and insurance are not typically undertaken together in
this system.
universal
British-style universal
short-fence
compartmentalized
dual
Question Status: Revised
382
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
Under Section 65 of the Japanese Securities Act, commercial banks in Japan are increasingly being
allowed to engage in securities activities and are thus becoming more like
universal banks that exist in Germany and the Netherlands.
British-style universal banking system, which exists in the U.K., Canada, and Australia.
both (a) and (b) of the above.
neither (a) nor (b) of the above.
Question Status: Previous Edition
A major difference between the United States and Japanese banking systems is that
American banks are allowed to hold substantial equity stakes in commercial firms, whereas
Japanese banks cannot.
Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas
American banks cannot.
bank holding companies are illegal in the United States.
only (a) and (c) of the above.
only (b) and (c) of the above.
Question Status: Previous Edition
Major differences between the United States and Japanese banking systems include:
American banks are allowed to hold substantial equity stakes in commercial firms, whereas
Japanese banks cannot.
Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas
American banks cannot.
bank holding companies are illegal in Japan.
only (a) and (c) of the above.
only (b) and (c) of the above.
Question Status: Previous Edition
The regulatory agency responsible for supervising savings and loans institutions is the
FSLIC.
Fed.
Comptroller of the Currency.
Federal Home Loan Bank System.
Question Status: Previous Edition
Chapter 10
Banking Industry: Structure and Competition
Agencies regulating savings and loans include
the Office of Thrift Supervision.
the Federal Deposit Insurance Corporation.
the Federal Home Loan Bank System.
all of the above.
only (b) and (c) of the above.
Question Status: Study Guide
Unlike banks, _____ have been allowed to branch statewide since 1980.
federally-chartered S&Ls
state-chartered S&Ls
financially troubled S&Ls
technically insolvent S&Ls
Question Status: Revised
Thrift institutions include
commercial banks.
brokerage firms
insurance companies.
mutual savings banks.
all of the above.
Question Status: New
An essential characteristic of credit unions is that
they are typically large.
branching across state lines is prohibited.
their lending is primarily for mortgage loans.
they are organized for individuals with a common bond.
all of the above are true.
Question Status: New
The rapid growth in international banking is due to
rapid growth in world trade.
the decline in world trade since 1960.
the creation of the World Trade Organization.
the 1988 Basel agreement.
none of the above.
Question Status: Study Guide
383
384
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
The spectacular growth in international banking can be explained by
the rapid growth in international trade.
the desire for U.S. banks to expand.
the desire for U.S. banks to escape burdensome domestic regulations.
all of the above.
only (a) and (b) of the above.
Question Status: Previous Edition
Which of the following is not a reason for the rapid expansion of international banking?
The rapid growth in international trade
The desire for U.S. banks to expand
The growth of multinational corporations
None of the above
Question Status: Previous Edition
Which of the following is a reason for the rapid expansion of international banking?
The rapid growth in international trade
The growth of multinational corporations
The desire of U.S. banks to expand
Each of the above
Question Status: Previous Edition
What country is given credit for the birth of the Eurodollar market?
The United States
England
The Soviet Union
Japan
Question Status: Previous Edition
Deposits in European banks denominated in dollars for the purpose of international transactions are
known as
Eurodollars.
European Currency Units.
European Monetary Units.
International Monetary Units.
Question Status: Previous Edition
Chapter 10
Banking Industry: Structure and Competition
The main center of the Eurodollar market is
London.
Basel.
Paris.
New York.
Question Status: Previous Edition
Eurodollars are
dollar-dominated deposits held in banks outside the United States.
deposits held by U.S. banks in Europe.
deposits held by U.S. banks in foreign countries.
dollar-dominated deposits held in U.S. banks by Europeans.
Question Status: Previous Edition
Reasons for holding Eurodollars include
the fact that Eurodollar deposits are insured by the FDIC.
the fact that dollars are widely used to conduct international transactions.
the fact that minimum transaction sizes are very low, making Eurodollars an attractive savings
instrument for consumers.
the fact that Eurodollar deposits are heavily regulated.
all of the above reasons.
Question Status: New
An advantage to American banks from operating foreign branches is that
Eurodollar deposits in offshore branches are not subject to reserve requirements.
Eurodollar deposits in offshore branches are insured by the FDIC.
Eurodollar deposits in offshore branches are subject to extensive regulatory supervision.
Eurodollar deposits in offshore branches are all demand deposits that pay no interest.
there is no advantage to opening offshore branches that offer Eurodollar accounts.
Question Status: New
U.S. banks have most of their branches in
Latin America, the Far East, the Caribbean, and London.
Latin America, the Middle East, the Caribbean, and London.
Mexico, the Middle East, the Caribbean, and London.
South America, the Middle East, the Caribbean, and Canada.
Question Status: Previous Edition
385
386
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
International banking facilities (IBFs) that operate in the United States
accept time deposits from foreigners but are not subject to either reserve requirements on any
restrictions on interest payments.
make loans to foreigners but not to domestic residents.
have grown rapidly with the encouragement of American governments.
all of the above.
only (a) and (b) of the above.
Question Status: Study Guide
Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by foreign
banks has been
reduced.
mildly expanded.
completely eliminated.
greatly expanded.
Question Status: Previous Edition

Essay Questions
What important changes in banking have occurred as the result of low cost information technology?
Discuss four examples of these changes.
Discuss two regulations that reduced bank profitability and the innovations that developed due to these
regulations.
Explain why the profitability of traditional banking has declined and how banks have responded.