Mishkin 6ce TB Ch11

Economics of Money, Banking, and Financial Markets 6e (Mishkin)
Chapter 11 Banking Industry: Structure and Competition
11.1 Historical Development of the Canadian Banking System
1) The modern Canadian banking system began with ________.

A) the Chartered Bank of Upper Canada in 1821
B) the Bank of Montreal in 1817
C) the Bank of Lower Canada in 1801
D) the Bank of New Brunswick in 1820
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 11.1 Recognize the key features of the Canadian banking system and the historical
context of the implementation of these features
2) The government institution that has responsibility for the amount of money and credit
supplied in the economy as a whole is the ________.
A) central bank
B) commercial bank
C) bank of settlement
D) monetary fund
Answer: A
Diff: 1 Type: MC
Skill: Recall
3) Currency circulated by banks that could be redeemed for gold was called ________.
A) junk bonds
B) banknotes
C) gold bills
D) state money
Answer: B
Diff: 1 Type: MC
Skill: Recall
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Copyright 2017 Pearson Canada, Inc.
4) The regulatory system that permitted the organization of a bank by any group that met
certain criteria is known as a ________.
A) bilateral regulatory system
B) tiered regulatory system
C) two-tiered regulatory system
D) free banking system
Answer: D
Diff: 1 Type: MC
Skill: Recall
5) The U.S. banking system is considered to be a dual system because ________.

A) banks offer both chequing and savings accounts
B) it actually includes both banks and thrift institutions
C) it is regulated by both state and federal governments
D) it was established before the Civil War, requiring separate regulatory bodies for the North
and South
Answer: C
Diff: 2 Type: MC
Skill: Recall
6) Which bank became the government's fiscal agent in 1864?

A) The Bank of Canada
B) The Chartered Bank of Upper Canada
C) The Bank of Montreal
D) The US Treasury
Answer: C
Diff: 1 Type: MC
Skill: Recall
7) The Finance Act of 1914 required that ________.

A) local banks be subject to the same regulations as national banks
B) national banks establish branches in large cities
C) the Department of Finance to act as a lender of last resort
D) the Bank of Canada to act as a lender of last resort
Answer: C
Diff: 2 Type: MC
Skill: Recall
2
8) Explain how the dual banking system arose in the United States.
Answer: The modern US system because with all commercial banks being chartered by the
state in which they operated. However lax banking laws led to bank failures. To eliminate the
abuses that led to the failures, federally charged banks were created under the National Bank
Act of 1863. As a result today, the US has dual banking system in which banks are supervised
by either the state or the federal government.
Diff: 2 Type: ES
Skill: Recall
11.2 Financial Innovation and the Growth of the "Shadow Banking System"
1) Financial innovations occur because of financial institutions search for ________.

A) profits
B) fame
C) stability
D) recognition
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 11.2 Examine how financial innovation led to the growth of the shadow banking
system
2) ________ is the process of researching and developing profitable new products and services
by financial institutions.
A) Financial engineering
B) Financial manipulation
C) Customer manipulation
D) Customer engineering
Answer: A
Diff: 1 Type: MC
Skill: Recall
system
3) The most significant change in the economic environment that changed the demand for
financial products in recent years has been ________.
A) the aging of the baby-boomer generation
B) the dramatic increase in the volatility of interest rates
C) the dramatic increase in competition from foreign banks
D) the deregulation of financial institutions
Answer: B
Diff: 2 Type: MC
Skill: Recall
system
3
4) In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and
5.5 percent; in the 1980s it fluctuated between ________ percent and ________ percent.
A) 7; 20
B) 4; 11.5
C) 4; 18
D) 5; 10
Answer: A
Diff: 1 Type: MC
Skill: Applied
system
5) Uncertainty about interest-rate movements and returns is called ________.

A) market potential
B) interest-rate irregularities
C) interest-rate risk
D) financial creativity
Answer: C
Diff: 1 Type: MC
Skill: Recall
system
6) Rising interest-rate risk ________.

A) increased the cost of financial innovation
B) increased the demand for financial innovation
C) reduced the cost of financial innovation
D) reduced the demand for financial innovation
Answer: B
Diff: 2 Type: MC
Skill: Recall
system
7) Adjustable rate mortgages ________.

A) protect households against higher mortgage payments when interest rates rise
B) keep financial institutions' earnings high even when interest rates are falling
C) benefit homeowners when interest rates are falling
D) generally have higher initial interest rates than on conventional fixed-rate mortgages
Answer: C
Diff: 2 Type: MC
Skill: Recall
system
4
8) The agreement to provide a standardized commodity to a buyer on a specific date at a
specific future price is ________.
A) a put option
B) a call option
C) a futures contract
D) a mortgage-backed security
Answer: C
Diff: 1 Type: MC
Skill: Recall
system
9) An instrument developed to help investors and institutions hedge interest-rate risk is

________.
A) a bond
B) a sweep account
C) a financial derivative
D) a mortgage-backed security
Answer: C
Diff: 1 Type: MC
Skill: Recall
system
10) Financial instruments whose payoffs are linked to previously issued securities are called
________.
A) grandfathered bonds
B) financial derivatives
C) hedge securities
D) reversible bonds
Answer: B
Diff: 1 Type: MC
Skill: Recall
system
11) Both ________ and ________ were financial innovations that occurred because of interest
rate risk volatility.
A) adjustable-rate mortgages; commercial paper
B) adjustable-rate mortgages; financial derivatives
C) sweep accounts; financial derivatives
D) sweep accounts; commercial paper
Answer: B
Diff: 1 Type: MC
Skill: Recall
system
5
12) The most important source of the changes in supply conditions that stimulate financial
innovation has been the ________.
A) deregulation of financial institutions
B) dramatic increase in the volatility of interest rates
C) improvement in computer and telecommunications technology
D) dramatic increase in competition from foreign banks
Answer: C
Diff: 3 Type: MC
Skill: Recall
system
13) New computer technology has ________.

A) increased the cost of financial innovation
B) increased the demand for financial innovation
C) reduced the cost of financial innovation
D) reduced the demand for financial innovation
Answer: C
Diff: 1 Type: MC
Skill: Recall
system
14) Credit cards date back to ________.

A) prior to the second World War
B) just after the second World War
C) the early 1950s
D) the late 1950s
Answer: A
Diff: 1 Type: MC
Skill: Recall
system
15) A firm issuing credit cards earns income from ________.

A) loans it makes to credit card holders
B) subsidies from the local governments
C) payments made to it by manufacturers of the products sold in stores on credit card purchases
D) sales of the card in foreign countries
Answer: A
Diff: 2 Type: MC
Skill: Recall
system
6
16) The entry of GM and Walmart into the credit card business is an indication of ________.
A) government's efforts to deregulate the provision of financial services
B) the rising profitability of credit card operations
C) the reduction in costs of credit card operations since 1990
D) the sale of unprofitable operations by Bank of America and Citicorp
Answer: B
Diff: 1 Type: MC
Skill: Recall
system
17) A debit card differs from a credit card in that ________.

A) a debit card is a loan while for a credit card purchase, payment is made immediately
B) a debit card is a long-term loan while a credit card is a short-term loan
C) a credit card is a loan while for a debit card purchase, payment is made immediately
D) a credit card is a long-term loan while a debit card is a short-term loan
Answer: C
Diff: 1 Type: MC
Skill: Recall
system
18) Automated teller machines ________.

A) are more costly to use than human tellers, so banks discourage their use by charging more
for use of ATMs
B) cost about the same to use as human tellers in banks, so banks discourage their use by
charging more for use of ATMs
C) cost less than human tellers, so banks may encourage their use by charging less for using
ATMs
D) cost nothing to use, so banks provide their services free of charge
Answer: C
Diff: 2 Type: MC
Skill: Recall
system
19) The declining cost of computer technology has made ________ a reality.
A) brick and mortar banking
B) commercial banking
C) virtual banking
D) investment banking
Answer: C
Diff: 1 Type: MC
Skill: Recall
system
7
20) Bank customers perceive Internet banks as being ________.
A) more secure than physical bank branches
B) a better method for the purchase of long-term savings products
C) better at keeping customer information private
D) prone to many more technical problems
Answer: D
Diff: 1 Type: MC
Skill: Recall
system
21) A disadvantage of virtual banks (clicks) is that ________.

A) their hours are more limited than physical banks
B) they are more secure than physical banks
C) they are more costly to operate than physical banks
D) customers worry about the security of on-line transactions
Answer: D
Diff: 1 Type: MC
Skill: Recall
system
22) So-called fallen angels differ from junk bonds in that ________.
A) 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
B) 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
C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C
D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C
Answer: A
Diff: 2 Type: MC
Skill: Recall
system
23) Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies
are frequently referred to as ________.
A) municipal bonds
B) Yankee bonds
C) "fallen angels"
D) junk bonds
Answer: D
Diff: 1 Type: MC
Skill: Recall
system
8
24) In 1977, he pioneered the concept of selling new public issues of junk bonds for companies
that had not yet achieved investment-grade status.
A) Michael Milken
B) Roger Milliken
C) Ivan Boskey
D) Carl Ichan
Answer: A
Diff: 1 Type: MC
Skill: Recall
system
25) One factor contributing to the rapid growth of the commercial paper market since 1970 is
________.
A) the fact that commercial paper has no default risk
B) improved information technology making it easier to screen credit risks
C) government regulation
D) FDIC insurance for commercial paper
Answer: B
Diff: 1 Type: MC
Skill: Recall
system
26) The development of money market mutual funds contributed to the growth of ________
since the money market mutual funds need to hold liquid, high-quality, short-terms assets.
A) the commercial paper market
B) the municipal bond market
C) the corporate bond market
D) the junk bond market
Answer: A
Diff: 1 Type: MC
Skill: Recall
system
27) The process of transforming otherwise illiquid financial assets into marketable capital
market instruments is known as ________.
A) securitization
B) internationalization
C) arbitrage
D) program trading
Answer: A
Diff: 1 Type: MC
Skill: Recall
system
9
28) ________ is creating a marketable capital market instrument by bundling a portfolio of
mortgage or auto loans.
A) Diversification
B) Arbitrage
C) Computerization
D) Securitization
Answer: D
Diff: 1 Type: MC
Skill: Recall
system
29) The driving force behind the securitization of mortgages and automobile loans has been
________.
A) the rising regulatory constraints on substitute financial instruments
B) the desire of mortgage and auto lenders to exit this field of lending
C) the improvement in computer technology
D) the relaxation of regulatory restrictions on credit card operations
Answer: C
Diff: 2 Type: MC
Skill: Recall
system
30) 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.
A) competitive; loophole mining
B) competitive; innovation
C) regulated; loophole mining
D) regulated; innovation
Answer: C
Diff: 2 Type: MC
Skill: Recall
system
31) Loophole mining refers to financial innovation designed to ________.

A) hide transactions from the CRA
B) conceal transactions from the Bank of Canada
C) get around regulations
D) conceal transactions from the Department of Finance
Answer: C
Diff: 2 Type: MC
Skill: Recall
system
10
32) Prior to 2008, bank managers in the U.S. looked on reserve requirements ________.
A) as a tax on deposits
B) as a subsidy on deposits
C) as a subsidy on loans
D) as a tax on loans
Answer: A
Diff: 1 Type: MC
Skill: Recall
system
33) Prior to 2008, a U.S. bank's cost of holding reserves equaled ________.
A) the interest paid on deposits times the amount of reserves
B) the interest paid on deposits times the amount of deposits
C) the interest earned on loans times the amount of loans
D) the interest earned on loans times the amount on reserves
Answer: D
Diff: 1 Type: MC
Skill: Recall
system
34) Prior to 1980, the Fed set an interest rate ________ that is a maximum limit on the interest
rate that could be paid on time deposits.
A) floor
B) ceiling
C) wall
D) window
Answer: B
Diff: 1 Type: MC
Skill: Recall
system
35) The process in which people take their funds out of the banking system seeking higher-
yielding securities is called ________.
A) capital mobility
B) loophole mining
C) disintermediation
D) deposit jumping
Answer: C
Diff: 1 Type: MC
Skill: Recall
system
11
36) Money market mutual funds ________.
A) function as interest-earning chequing accounts
B) are legally deposits
C) are subject to reserve requirements
D) have an interest-rate ceiling
Answer: A
Diff: 1 Type: MC
Skill: Recall
system
37) In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in
the situation know as "breaking the buck." This means that ________.
A) they could no longer afford to redeem shares at the par value of $1
B) they required shareholders to contribute a dollar more in fees each month
C) shareholders were able to redeem shares for more than a $1
D) shares earned more than a dollar in interest
Answer: A
Diff: 3 Type: MC
Skill: Applied
system
38) In this type of arrangement, any balances above a certain amount in a corporation's
chequing 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 ________.
A) sweep account
B) share draft account
C) removed-repo account
D) stockman account
Answer: A
Diff: 2 Type: MC
Skill: Recall
system
39) Sweep accounts which were created to avoid reserve requirements became possible because
of a change in ________.
A) demand conditions
B) supply conditions
C) government rules
D) bank mergers
Answer: C
Diff: 1 Type: MC
Skill: Recall
system
12
40) Sweep accounts ________.
A) have made reserve requirements nonbinding for many banks
B) sweep funds out of deposit accounts into long-term securities
C) enable banks to avoid paying interest to corporate customers
D) reduce banks' assets
Answer: A
Diff: 1 Type: MC
Skill: Recall
system
41) Financial innovation has caused ________.

A) banks to suffer declines in their cost advantages in acquiring funds, although it has not
caused a decline in income advantages
B) banks to suffer a simultaneous decline of cost and income advantages
C) banks to suffer declines in their income advantages in acquiring funds, although it has not
caused a decline in cost advantages
D) banks to achieve competitive advantages in both costs and income
Answer: B
Diff: 2 Type: MC
Skill: Recall
system
42) Disintermediation resulted from ________.

A) interest rate ceilings combine with inflation-driven increases in interest rates
B) elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits)
C) increases in federal income taxes
D) reserve requirements
Answer: A
Diff: 2 Type: MC
Skill: Recall
system
43) The experience of disintermediation in the banking industry illustrates that ________.
A) more regulation of financial markets may avoid such problems in the future
B) banks are unable to remain competitive with other financial intermediaries
C) consumers no longer desire the services that banks provide
D) markets invent alternatives to costly regulations
Answer: D
Diff: 2 Type: MC
Skill: Applied
system
13
44) One factor contributing to the decline in cost advantages that banks once had is the
________.
A) decline in the importance of chequable deposits as part of a banks' source of funds
B) decline in the importance of savings deposits as part of a banks' source of funds
C) increase in the importance of chequable deposits as part of a banks' source of funds
D) increase in the importance of savings deposits as part of a banks' source of funds
Answer: A
Diff: 2 Type: MC
Skill: Recall
system
45) Banks have attempted to maintain adequate profit levels by ________.

A) making fewer riskier loans, such as commercial real estate loans
B) pursuing new off-balance-sheet activities
C) increasing reserve deposits at the Bank of Canada
D) decreasing capital accounts
Answer: B
Diff: 1 Type: MC
Skill: Recall
system
46) The decline in traditional banking internationally can be attributed to ________.

A) increased regulation
B) improved information technology
C) increasing monopoly power of banks over depositors
D) increased protection from competition
Answer: B
Diff: 1 Type: MC
Skill: Applied
system
47) Why did the interest rate volatility of the 1970s spur financial innovation?
Answer: Banks were very vulnerable to interest-rate risk in the mortgage loans. To protect
themselves, banks began to issue adjustable-rate mortgages whose interest rate will increase
along with market interest rates. Additionally financial derivatives were developed to help
hedge against interest-rate risk.
Diff: 2 Type: ES
Skill: Recall
system
14
48) What are the adjustable-rate mortgages?
Answer: Adjustable-rate mortgages are mortgage loans on which the interest rate changes
when a market interest rate (usually the treasury bill rate) changes.
Diff: 2 Type: ES
Skill: Recall
system
49) What important changes in banking have occurred as the result of low cost information
technology? Discuss four examples of these changes.
Answer: Information technology lowers the cost of procession financial transactions making it
profitable to create new financial services, and it makes it easier for firms to issue new
securities.
Examples include credit and debit cards, electronic banking, junk bonds, growth of the
commercial paper market, and securitization.
Diff: 2 Type: ES
Skill: Recall
system
50) Explain why the profitability of traditional banking has declined and how banks have
responded.
Answer: Banks have lost cost advantages because of disintermediation that resulted in
innovations such as money market funds which competed for deposits, and reduced banks'
deposit base. Banks responded with interest-paying chequing deposits that increased bank
costs.
The development markets for junk bond, commercial paper, and securitized assets eroded
banks' income advantages.
Banks have responded by making riskier loans (commercial mortgages and funding for
takeovers and buyouts) and have moved into more off-balance-sheet activities.
Diff: 3 Type: ES
Skill: Recall
system
15
51) What bonds are commonly called "junk bonds"? Why innovations in computer technology
helped the "junk bonds" market?
Answer: Junk bonds are the bonds whose credit rating is below BBB. Before the advent of
computers and advanced telecommunications, it was difficult to acquire information about the
financial situation of firms that might want to sell securities. Because of the difficulty in
screening out bad from good credit risks, the only firms that were able to sell bonds were very
well-established corporations that had high credit ratings. Before the 1980s, then, only
corporations that could issue bonds with ratings of BBB or above could raise funds by selling
newly issued bonds. With the improvement in information technology in the 1970s, it became
easier for investors to acquire financial information making it easier to screen out bad from
good risks.
Diff: 2 Type: ES
Skill: Recall
system
52) How banks suffered a decline in income advantages on uses of funds (assets) due to
financial innovation?
Answer:
a. The commercial paper market: information technology improvements have made it easier for
corporations to issues securities directly to the public. Business customers find it now cheaper
to go to the commercial paper market instead of going to banks to finance short-term credit
needs. Thus, before 1970 nonfinancial commercial paper equalled 5 percent of commercial
bank loans, whereas the figure has risen to 20 percent today.
b. The rise of the junk bond market has also eaten into banks' loan business. Improvements in
information technology have made it easier for corporations to sell their bonds directly to the
public, thereby bypassing banks.
c. Improvement s to computer technology have also led to securitization. Computers enable
other financial institutions to originate loans because they can now accurately evaluate credit
risk with statistical methods, while computers have lowered transaction costs, making it
possible to bundle these loans and sell them as securities. When default risk can easily be
evaluated with computers, banks no longer have an advantage in making loans.
Diff: 3 Type: ES
Skill: Recall
system
16
11.3 Structure of the Canadian Commercial Banking Industry
1) The six largest chartered banks in Canada together hold ________ of the assets in the
industry.
A) over 90 percent
B) nearly 75 percent
C) just over 50 percent
D) 25 percent
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 11.3 Identify the key structural changes in the chartered banking industry
2) Which of the following are true statements?

A) Schedule I banks have more powers than Schedule II banks.
B) Widely held foreign banks can own 50 percent of a Canadian bank subsidiary.
C) A Schedule II bank may have a significant shareholder (more than 10 percent) for up to 10
years after chartering.
D) A Schedule III bank is a foreign bank is not allowed to branch directly into Canada.
Answer: C
Diff: 1 Type: MC
Skill: Recall

A) Schedule I and Schedule II banks have different powers.
B) Widely held foreign banks can own 50 percent of a Canadian bank subsidiary.
C) Any widely held and regulated Canadian financial institution, other than a bank, may own
100 percent of a bank.
D) Schedule I banks have the same powers than Schedule II banks.
Answer: C
Diff: 1 Type: MC
Skill: Recall

A) Schedule I banks have more powers than Schedule II banks.
B) A Schedule II bank may enter the Canadian banking industry only as a Schedule II bank.
C) A Schedule II bank may have a significant shareholder (more than 10 percent) for up to 10
years after chartering.
D) A foreign bank may enter the Canadian banking industry only as a Schedule III bank.
Answer: C
Diff: 1 Type: MC
Skill: Recall
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5) The difference between a Schedule II and a Schedule III bank is that ________.
A) a Schedule II bank is a Canadian subsidiary of a foreign bank
B) a Schedule III bank is a foreign bank is not allowed to branch directly into Canada
C) a foreign bank may enter the Canadian banking industry only as a Schedule III bank
D) widely held foreign banks can own 50 percent of a Canadian bank subsidiary
Answer: A
Diff: 1 Type: MC
Skill: Recall
11.4 Comparison with the United States
1) The presence of so many commercial banks in the United States is most likely the result of
________.
A) consumers' strong desire for dealing with only local banks
B) adverse selection and moral hazard problems that give local banks a competitive advantage
over larger banks
C) prior regulations that restrict the ability of these financial institutions to open branches
D) consumers' preference for state banks
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 11.4 Summarize the factors that led to the consolidation in the chartered banking
industry
2) The large number of banks in the United States is an indication of ________.

A) vigorous competition within the banking industry
B) lack of competition within the banking industry
C) regulations that restrict branch operations
D) consumer preference for local banks
Answer: B
Diff: 1 Type: MC
Skill: Recall
industry
3) Lack of competition in the United States banking industry can be attributed to ________.
A) the fact that competition does not benefit consumers
B) the fact that branching has eliminated competition
C) recent legislation restricting competition
D) past regulations that the ability of banks to open branches
Answer: D
Diff: 1 Type: MC
Skill: Recall
industry
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4) Which of the following is a true statement concerning bank holding companies?
A) Bank holding companies own few large banks.
B) Bank holding companies are an important advantage to circumvent restrictive branching
regulations.
C) The McFadden Act has prevented bank holding companies from establishing branch banks.
D) Bank holding companies can own only banks.
Answer: B
Diff: 1 Type: MC
Skill: Recall
industry
5) A financial innovation that developed as a result of banks avoidance of bank branching

restrictions was ________.
A) money market mutual funds
B) commercial paper
C) junk bonds
D) bank holding companies
Answer: D
Diff: 1 Type: MC
Skill: Recall
industry
6) ATMs were developed because of breakthroughs in technology and as a ________.

A) means of avoiding restrictive branching regulations
B) means of avoiding paying interest to corporate customers
C) way of concealing transactions from the SEC
D) increasing the competition from foreign banks
Answer: A
Diff: 1 Type: MC
Skill: Recall
industry
19
7) Describe the financial innovations that were stimulated as a response to branching
restrictions in the U.S.?
Answer: Bank holding companies: a bank holding company is a corporation that owns several
different companies. This form of corporate ownership has important advantages for banks. It
has allowed them to circumvent restrictive branching regulations, because the holding company
can own a controlling interest in several banks even if branching is not permitted. Also, these
corporations can engage in other activities related to banking such as the provision of
investment advice, data processing and transmission services, leasing, credit card services, and
servicing of loans in other states.
Automated teller machines: Banks realized that if they did not own or rent the ATM, but
instead let it be owned by someone else and paid for each transaction with a fee, the ATM
would probably not be considered a branch of the bank and thus would not be subject to
branching regulations.
Diff: 2 Type: ES
Skill: Recall
industry
11.5 Competition Across All Four Pillars
1) The separation of the banking and other financial services industries was known as
________.
A) convergence
B) consolidation
C) the four-pillar approach
D) underwriting
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 11.5 Assess the reasons for separating banking from other financial services through
legislation
2) The four-pillars were identified as ________.

A) banking, brokerage, trusts, and mutual funds
B) banking, brokerage, credit unions, and mutual funds
C) banking, brokerage, credit unions, and insurance
D) banking, brokerage, trusts, and insurance
Answer: D
Diff: 1 Type: MC
Skill: Recall
legislation
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3) The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from
________.
A) issuing equity to finance bank expansion
B) engaging in underwriting and dealing of corporate securities
C) selling new issues of government securities
D) purchasing any debt securities
Answer: B
Diff: 1 Type: MC
Skill: Recall
legislation
4) The primary reason for the recent reduction in the number of financial institutions is
________.
A) financial failures
B) re-regulation of banking
C) restrictions on branching
D) financial consolidation
Answer: D
Diff: 1 Type: MC
Skill: Recall
legislation
5) The ability to use one resource to provide different products and services is ________.
A) economies of scale
B) economies of scope
C) diversification
D) vertical integration
Answer: B
Diff: 1 Type: MC
Skill: Recall
legislation
6) The business term for economies of scope is ________.

A) economies of scale
B) diversification
C) cooperation
D) synergies
Answer: D
Diff: 1 Type: MC
Skill: Recall
legislation
21
7) Experts predict that the future structure of the banking industry will have ________.
A) an increased number of banks
B) as few as ten banks
C) large, complex banking organizations
D) many, small banking organizations
Answer: C
Diff: 1 Type: MC
Skill: Recall
legislation
8) Bank consolidation will likely result in ________.

A) less competition
B) the elimination of credit unions
C) large, complex banking organizations
D) a shift in assets from larger banks to smaller banks
Answer: C
Diff: 1 Type: MC
Skill: Recall
legislation
9) Banking consolidation in Canada will result in ________.

A) an increased number of small banks
B) an increase in bank size
C) a reduction in bank size
D) elimination of small banks
Answer: B
Diff: 1 Type: MC
Skill: Recall
legislation
10) As the banking system in Canada evolves, it is expected that ________.

A) the number and importance of small banks will increase
B) the number and importance of large banks will decrease
C) small banks will grow at the expense of large banks
D) the number and importance of large banks will increase
Answer: D
Diff: 1 Type: MC
Skill: Recall
legislation
22
11) Bank consolidation will likely result in ________.
A) less competition
B) the elimination of credit unions
C) more competition
D) a shift in assets from larger banks to smaller banks
Answer: C
Diff: 1 Type: MC
Skill: Recall
legislation
12) 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.
A) universal
B) British-style universal
C) short-fence
D) compartmentalized
Answer: B
Diff: 1 Type: MC
Skill: Recall
legislation
13) In a ________ banking system, commercial banks engage in securities underwriting.

A) British-style universal
B) German-style universal
C) Japanese-style universal
D) South American-style universal
Answer: A
Diff: 2 Type: MC
Skill: Recall
legislation
14) In a ________ banking system, commercial banks provide a full range of banking,
securities, and insurance services, all within a single legal entity.
A) universal
B) severable
C) barrier-free
D) dividerless
Answer: A
Diff: 1 Type: MC
Skill: Recall
legislation
23
15) In a ________ banking system, commercial banks are allowed to hold equity stakes in
commercial firms.
A) British
B) German
C) Japanese
D) North American
Answer: C
Diff: 2 Type: MC
Skill: Recall
legislation
16) A major difference between the British-style and Japanese banking systems is that
________.
A) British-style banks are allowed to hold substantial equity stakes in commercial firms,
whereas Japanese banks cannot
B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas
British-style banks cannot
C) bank holding companies are illegal in British-style banks
D) Japanese banks are usually organized as bank holding companies
Answer: B
Diff: 3 Type: MC
Skill: Recall
legislation
17) What is the international experience on the separation of banking and other financial
services industries throughout the world? What are the main frameworks ?
Answer: Canada and the U.S.: Not many other countries after the Great Depression followed
them in separating the banking and other financial services industries. This separation was the
most prominent difference between banking regulation in Canada and the U.S. versus the rest
of the world.
The frameworks
British: This framework is found also in the U.K., Australia, Canada and now the U.S. In this
framework banks engage in in securities underwriting but it differs from the German in three
ways: separate legal entities are common, bank equity holdings and combinations of banking
and insurance firms are less common.
Japanese: The main difference between the Japanese and British frameworks is that Japanese
banks are allowed to hold substantial equity stakes in commercial firms.
Diff: 3 Type: ES
Skill: Recall
legislation
24
11.6 The Near Banks: Regulation and Structure
1) Near banks are defined as ________.

A) banks, brokers, and credit unions and caisses populaires
B) banks and trust and mortgage loan companies
C) trust and mortgage loan companies, and credit unions and caisses populaires
D) trust and mortgage loan companies, and brokers
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 11.6 Summarize the distinctions between chartered banks and near banks (trust and
loan companies and credit union and caisses populaires
2) Trust and mortgage loan companies are usually ________.

A) operating under a charter issued by either the federal government or one of the provincial
governments
B) investors in commercial loans
C) more profitable than chartered banks and credit unions and caisses populaires
D) regulated and supervised by the TML
Answer: A
Diff: 1 Type: MC
Skill: Recall
3) An essential characteristic of credit unions is that ________.

A) they are typically large
B) branching is prohibited
C) their lending is primarily for mortgage loans
D) they are organized for individuals with a common bond
Answer: D
Diff: 1 Type: MC
Skill: Recall
4) Credit unions are usually ________.

A) more profitable than Schedule I banks
B) regulated by the OSFI
C) regulated by a central bank
D) investors in mortgage loans
Answer: D
Diff: 1 Type: MC
Skill: Recall
25
5) Describe the characteristics of cooperative banks: credit unions and caisses populaires.
Answer:
- They are small lending institutions.
- They are organized by a particular group of individuals with a common bond.
- Stress the provision of credit to the "little man."
- There are two cooperative financial systems in Canada: the caisses populaires in Quebec and
the credit unions in the rest of the country.
- They carry retail financial services.
- Typically they are quite small.
- They are non-profit-seeking financial institutions.
- They accept deposits and lend money only to members.
- Members have voting rights.
- Not directly covered by CDIC but indirectly through provincial stabilization funds.
Diff: 2 Type: ES
Skill: Recall
11.7 International Banking
1) The spectacular growth in international banking can be explained by ________.

A) the rapid growth in international trade
B) the 1988 Basel Agreement
C) the desire for U.S. banks to escape burdensome domestic regulations
D) the creation of the World Trade Organization
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 11.7 Identify the reasons for Canadian banks to operate in foreign countries and for
foreign banks to operate in Canada
2) What country is given credit for the birth of the Eurodollar market?
A) The United States
B) England
C) The Soviet Union
D) Japan
Answer: C
Diff: 1 Type: MC
Skill: Recall
26
3) Deposits in European banks denominated in dollars for the purpose of international
transactions are known as ________.
A) Eurodollars
B) European Currency Units
C) European Monetary Units
D) International Monetary Units
Answer: A
Diff: 1 Type: MC
Skill: Recall
4) The main center of the Eurodollar market is ________.

A) London
B) Basel
C) Paris
D) New York
Answer: A
Diff: 1 Type: MC
Skill: Recall
5) Eurodollars are ________.

A) dollar-dominated deposits held in banks outside the United States
B) deposits held by U.S. banks in Europe
C) deposits held by U.S. banks in foreign countries
D) dollar-dominated deposits held in U.S. banks by Europeans
Answer: A
Diff: 1 Type: MC
Skill: Recall
6) Reasons for holding Eurodollars include ________.

A) the fact that Eurodollar deposits are insured by the FDIC
B) the fact that dollars are widely used to conduct international transactions
C) the fact that minimum transaction sizes are very low, making Eurodollars an attractive
savings instrument for consumers
D) the fact that Eurodollar deposits are heavily regulated
Answer: B
Diff: 1 Type: MC
Skill: Recall
27
7) During the 1970s and early 1980s, most of the sovereign lending was ________ leading to
________ consequences.
A) unregulated; near disastrous
B) regulated; near disastrous
C) illegal; serious legal
D) regulated; serious legal
Answer: A
Diff: 1 Type: MC
Skill: Recall
8) Canadian banks have most of their foreign branches in ________.

A) the U.S., Mexico, South America, Europe, and Asia
B) Latin America, the Middle East, Mexico, and Europe
C) Mexico, the Middle East, the Caribbean, and London
D) South America, the Middle East, and the Caribbean
Answer: A
Diff: 1 Type: MC
Skill: Recall
9) Foreign banks may enter the Canadian financial services industry ________ as a ________
bank(s).
A) either; schedule II or III
B) either; schedule I or II
C) only as; schedule II
D) only; schedule III
Answer: A
Diff: 1 Type: MC
Skill: Recall
10) Describe how was the Eurocurrencies market created.

Answer: The most important of the Eurocurrencies are Eurodollars and this market was
fatheredironicallyby the Soviet Union. In the early 1950s during the height of the Cold
War the Soviets fearing that the U.S. would freeze its substantial dollar balances held by banks
in the United States, they moved the deposits to Europe so that they would be safe from
expropriatation. They also wanted to keep the deposits in dollars so that they could be used in
their international transactions. When they moved their dollars in Europe the Eurodollar was
born.
Diff: 2 Type: ES
Skill: Applied
28
11.8 The 2001 Bank Act Reform
1) The Bank Act Reform took effect in ________.

A) October 2001
B) January 2001
C) December 2001
D) May 2001
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 11.8 Understanding the 2001 Bank Act Reform
2) Prior to the Bank Act Reform, the organizational structure of Canada's bank financial groups
was the ________ model.
A) bank-as-parent
B) financial liberalization
C) securitization
D) British universal
Answer: A
Diff: 1 Type: MC
Skill: Recall
3) One advantage of the holding company form of corporate ownership is that ________.
A) it allows them to engage in other activities related to banking
B) there is more regulation
C) it demands less flexibility to achieve economies of scale
D) it prevents strategic partnerships
Answer: A
Diff: 1 Type: MC
Skill: Recall
4) Holding companies are viable options for financial groups if the transition to a holding
company would be ________ and exhibit ________.
A) tax-neutral; decreased costs
B) tax-neutral; economies of scope
C) tax-free; decreased costs
D) tax-free; fewer joint ventures
Answer: A
Diff: 1 Type: MC
Skill: Recall
29
5) The 2001 Bank Act Reform legislation provides ________.
A) greater flexibility for bank involvement in the IT area
B) a list of restricted activities
C) details on why banks cannot expand their use of information technology
D) less ability for banks to join strategic alliances and joint ventures
Answer: A
Diff: 1 Type: MC
Skill: Recall
6) The 2001 Bank Reform Act states that ________.

A) medium sized banks can be closely held if there is a 35 percent public float
B) large banks with shareholders equity greater than $5 billion can be closely held
C) all banks, regardless of size and capitalization, can be closely held
D) small banks must be widely held
Answer: A
Diff: 1 Type: MC
Skill: Recall
7) Merger review policy within the 2001 Bank Act Reform acknowledges that ________.
A) mergers are legitimate business options
B) mergers are anti-competitive and reduce financial stability
C) mergers are only allowable within small, widely held, banks
D) mergers are only allowable if the public believes they are warranted
Answer: A
Diff: 1 Type: MC
Skill: Recall
8) Describe some of the major implications of the 2001 Bank Act Reform.
Answer: A bank holding company structure, new ownership rules, expanded permitted
investments, expanded access to the payments and clearance system and a transparent merger
review policy will allow opportunities for strategic alliances and joint ventures. These
developments will create a more dynamic market for financial services leading to the
possibility of greater economic growth.
Diff: 1 Type: ES
Skill: Recall
30

Mishkin 6ce TB Ch11

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Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 11 Banking Industry: Structure and Competition

11.1 Historical Development of the Canadian Banking System

1) The modern Canadian banking system began with ________.

5) The U.S. banking system is considered to be a dual system because ________.

6) Which bank became the government's fiscal agent in 1864?

7) The Finance Act of 1914 required that ________.

1) Financial innovations occur because of financial institutions search for ________.

5) Uncertainty about interest-rate movements and returns is called ________.

6) Rising interest-rate risk ________.

7) Adjustable rate mortgages ________.

9) An instrument developed to help investors and institutions hedge interest-rate risk is

13) New computer technology has ________.

14) Credit cards date back to ________.

15) A firm issuing credit cards earns income from ________.

17) A debit card differs from a credit card in that ________.

18) Automated teller machines ________.

21) A disadvantage of virtual banks (clicks) is that ________.

31) Loophole mining refers to financial innovation designed to ________.

41) Financial innovation has caused ________.

42) Disintermediation resulted from ________.

45) Banks have attempted to maintain adequate profit levels by ________.

46) The decline in traditional banking internationally can be attributed to ________.

2) Which of the following are true statements?

3) Which of the following are true statements?

4) Which of the following are true statements?

11.4 Comparison with the United States

2) The large number of banks in the United States is an indication of ________.

5) A financial innovation that developed as a result of banks avoidance of bank branching

6) ATMs were developed because of breakthroughs in technology and as a ________.

11.5 Competition Across All Four Pillars

2) The four-pillars were identified as ________.

6) The business term for economies of scope is ________.

8) Bank consolidation will likely result in ________.

9) Banking consolidation in Canada will result in ________.

10) As the banking system in Canada evolves, it is expected that ________.

13) In a ________ banking system, commercial banks engage in securities underwriting.

1) Near banks are defined as ________.

2) Trust and mortgage loan companies are usually ________.

3) An essential characteristic of credit unions is that ________.

4) Credit unions are usually ________.

11.7 International Banking

1) The spectacular growth in international banking can be explained by ________.

4) The main center of the Eurodollar market is ________.

5) Eurodollars are ________.

6) Reasons for holding Eurodollars include ________.

8) Canadian banks have most of their foreign branches in ________.

10) Describe how was the Eurocurrencies market created.

1) The Bank Act Reform took effect in ________.

6) The 2001 Bank Reform Act states that ________.

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