Deck 11: Commercial Banks: Industry Overview

Question 1

Since 1980,the number of banks in the United States has been increasing dramatically due to deregulation of the industry.

Answer 1

False

Question 2

Negotiable certificates of deposit (CDs)do not have an active secondary market.

Answer 2

False

Question 3

The financial crisis of 2008,demonstrated that activities such as trading in financial futures and interest-rate swaps have low risk.

Answer 3

False

Question 4

A bank's balance sheet equates the value of total assets to the sum of total liabilities and equity capital.

Question 5

Which of the following could result in a negative NIM?

A)Growth in net interest income
B)Lower non interest expense
C)Decline in net interest income
D)Higher non interest income
E)Positive net interest spread

Question 6

Banks have an average total debt ratio of about 90 percent.

Question 7

Banking may be subdivided into at least three categories of banks. Match the definitions with the appropriate name.
I. A bank that specializes in retail or consumer banking in a local market
II. A bank that engages in a complete array of wholesale commercial banking activities and usually also provides retail banking services
III. A bank that is located in a financial center and relies on nondeposit or borrowed sources of funds for a significant portion of its liabilities

A)Money center bank; community bank; super-regional bank
B)Community bank; money center bank; super-regional bank
C)Super-regional bank; money center bank; community bank
D)Money center bank; super-regional bank; community bank
E)Community bank; super-regional bank; money center bank

Question 8

The majority of banks are nationally chartered and insured by the FDIC.

Question 9

Financial institutions generally do not face liquidity risk.

Question 10

Off-balance-sheet activities consist of issuing financial instruments such as various types of guarantees and engaging in derivative trading to generate additional revenue.

Question 11

In a bankruptcy situation,the Federal Reserve acts as the liquidator of the bank.

Question 12

Business loans have dropped in importance since 1987 as measured by the proportion of these loans on the bank balance sheet.

Question 13

Bank assets tend to have ________ maturities and ________ liquidity than/as bank liabilities.

A)longer; greater
B)longer; lower
C)shorter; greater
D)shorter; lower
E)equal; equal

Question 14

On average,bank liabilities tend to have shorter maturities and greater liquidity than bank assets.

Question 15

In comparison to small banks,larger banks typically have

A)more equity capital.
B)more core deposits.
C)more off-balance-sheet activities.
D)larger net interest margins.
E)All of these choices are correct.

Question 16

In terms of profitability,a well-run bank usually has an ROA of

A)0.5-3 percent.
B)3-5 percent.
C)5-10 percent.
D)10-15 percent.
E)15-20 percent.

Question 17

Small banks control about 70 percent of banking industry assets.

Question 18

Loans comprise the single largest asset category for a bank.

Question 19

International expansion for financial institutions coming from highly integrated countries maximizes the risk diversification.

Question 20

Nontransaction deposits at banks include NOW accounts and demand deposits.

Question 21

Commercial banks are the ________ financial intermediary in the United States as measured by asset size.

A)largest
B)second-largest
C)third-largest
D)fourth-largest
E)fifth-largest

Question 22

Suppose you deposit $100 in a bank,which of the following will occur?

A)The bank's assets will increase by $100.
B)The bank's liabilities will decrease by $100.
C)The bank's liabilities will increase by $200.
D)The bank's reserves will increase by $200.
E)The bank's reserves will decrease by $100.

Question 23

Most of the changes in size,structure,and composition of the banking industry in recent years are due to

A)bank failures.
B)increasing regulations.
C)new charters granted.
D)declines in the number of branch offices.
E)mergers and acquisitions.

Question 24

A contingent item that may eventually be placed on the right-hand side of the balance sheet or expensed on the income statement is a(n)

A)loan commitment.
B)off-balance-sheet liability.
C)off-balance-sheet asset.
D)net charge-off.
E)loan sold without recourse.

Question 25

About ________ of federally insured banks are nationally chartered and about ________ of federally insured banks are members of the Federal Reserve.

A)77 percent; 65 percent
B)65 percent; 77 percent
C)34 percent; 22 percent
D)19 percent; 34 percent
E)40 percent; 60 percent

Question 26

Nationally chartered banks receive chartering and merger approval from the

A)Federal Deposit Insurance Corporation.
B)Office of Comptroller of the Currency.
C)Federal Reserve System.
D)Office of Thrift Supervision.
E)All of these choices are correct.

Question 27

An example of off balance sheet activity includes:

A)lending money to a depositor.
B)borrowing from another bank.
C)borrowing from the Federal Reserve.
D)purchasing a futures contract.
E)All of these choices are correct.

Question 28

A bank is earning 6 percent on its $150 million in earning assets and is paying 4.75 percent on its liabilities. The bank's interest rate spread is ________.

A)6.00 percent
B)4.75 percent
C)1.25 percent
D)10.75 percent
E)1.26 percent

Question 29

Banks differ from other types of depository institutions in that
I. banks have more diversified asset portfolios.
II. banks obtain funds from more different types of sources.
III. the average size bank is larger than other depository institutions.

A)I only
B)I and II only
C)I and III only
D)II and III only
E)I,II,and III

Question 30

A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest-bearing liabilities. However,the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points,the bank's new pretax net interest income will be ________.

A)$600,000
B)$450,000
C)$300,000
D)$250,000
E)$175,000

Question 31

The largest single category of loans on the typical bank's balance sheet in 2016 was

A)U.S. government securities.
B)commercial and industrial loans.
C)consumer loans.
D)real estate loans.
E)interbank loans.

Question 32

Equity capital at commercial banks in 2016 comprised about ________ of liabilities and equity.

A)25 percent
B)21 percent
C)55 percent
D)11 percent
E)5 percent

Question 33

An ILC is a type of

A)finance company.
B)thrift institution.
C)credit card bank.
D)nonbank bank.
E)foreign-owned loan corporation.

Question 34

Loans past due 90 days or more and loans that are not accruing interest because of problems of the borrower are called

A)loan losses.
B)net charge-offs.
C)provisional loans.
D)noncurrent loans.
E)contra loans.

Question 35

Advantages of going global for U.S. banks include all but which one of the following?

A)Diversification of earnings
B)Greater opportunities to exploit economies of scale
C)Greater sources of funds
D)Conducting business in less regulated environments
E)Low fixed costs involved in international expansion

Question 36

A contingent promise by a bank to pay a bill when it comes due if the bill's originator fails to pay is an example of a

A)swap agreement.
B)standby letters of credit.
C)forward contract.
D)loan commitment.
E)commitment to buy foreign exchange.

Question 37

Reasons behind the drop in bank profitability in the second half of this decade include
I. flattening of the yield curve.
II. increase in competitive pressures on asset pricing.
III. increases in foreclosures in the mortgage market.
IV. increases in net interest margin.

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

Question 38

The provision of banking services to other banks,such as check clearing,foreign exchange trading,and so forth,is an example of

A)correspondent banking.
B)trust services.
C)off-balance-sheet assets.
D)economies of scope.
E)credit derivatives.

Question 39

Which of the following is the primary regulator of bank holding company activities?

A)Federal Bank Holding Company Board
B)FDIC
C)Federal Reserve
D)State regulatory agency in the chartering states
E)U.S. Treasury

Question 40

State chartered banks ________ be members of the Federal Reserve System and nationally chartered banks ________ be members of the Federal Reserve System.

A)must; may
B)must; must
C)may; must
D)may; may

Question 41

Most nonfinancial firms would never hold as much of their assets in safe liquid securities as banks do. Why do banks maintain such a high percentage of investment in securities?

Question 42

Why are banks different from other depository institutions?

Question 43

What are the major sources of funds for banks? Provide a breakdown of all the major sources of funds at a bank and briefly describe the different types of deposits/nondeposit sources.

Question 44

Why are loans such a high percentage of total assets at the typical bank? What four broad classes of loans do banks engage in?

Question 45

Why did bank profitability decline beginning in late 2006 and through 2008?

Question 46

The ROA for financial institutions such as banks is typically quite low as compared to nonfinancial firms. Why? With such a low ROA,how can banks attract stockholders?

Question 47

Discuss the major differences between large banks and small banks. Which have had higher ROAs? Why?

Question 48

What are the major advantages a bank gains by expanding into international bank services? What are three disadvantages of international expansion?