Chapter 1

An Overview of the Changing Financial-Services Sector

Fill in the Blank Questions

1. ____safekeeping of valuables ________________ is a traditional service provided by banks in

which the banks store the valuables of their customers and certify their true value.
2. The fact that financial institutions make loans based on confidential information is the
___________delegated monitoring (giam sat uy quyen)____________ theory of banking.

3. ___currency exchanges____________________ refers to when a financial institution trades

one form of currency for another. An example of this would be when the bank trades dollars for yen
for a fee.

1. A(n) _____Offering checking account__________________ is a traditional service which

permits a depositor to write a draft in payment for goods and services.
5. ________Making business loans_______________ is a service provided by banks where the
bank lends money to individuals for the purchase of durable and other goods.

6. The _______offering savings deposit________________ of a bank is a traditional service

where the bank manages the financial affairs and property of individuals (and in some cases
businesses).
7. Companies such as Merrill Lynch and Sears which offered some but not all banking services
in the 1980s were called _non-bank ______________________.
8. The loosening of government regulation and control of financial institutions is called Trust
services_______________________.
9. ___________offering equipment leasing________________ is an alternative to lending in
which the financial institution purchases the equipment and rents it to its customers.
10. The___________________________ is a landmark act which allows financial service
providers to offer an expanded menu of financial services for the customer. This law allows banks to
truly become conglomerate financial service providers.
Answer: Financial Services Modernization Act (Gramm-Leach-Bliley Act)

11. The country with the most banks is _______________________.

Answer: United States

12. According to Congress a ____________ is defined as any institution that can qualify for
deposit insurance administered by the FDIC.
Answer: Bank

13. A bank which spans regions, nations, and continents, offering the widest menu of financial
services is known as a __________bank.
Answer: money-center bank

14. _____________ refers to the movement of businesses across industry lines in order to broaden
its base.
Answer: Convergence
15. Banks which serve primarily households and small firms are known as __retail__________
banks.

16. Banks that sell deposits and make loans to businesses and individuals are known as
commercial ______banks.

17. Banks which underwrite issues of new securities for their corporate customers are known as
____investment____ banks.

18. Banks which function under a federal charter through the Comptroller of the Currency in the
United States are known as ____________ banks.

19. Banks which supply both debt and equity capital to businesses are known as
merchant_________ banks.

1. A bank that offers its services only over the internet is known as a(n) virtual
bank .

1. When a local merchant sells the accounts receivables they hold against their customer
to a bank this generally known discount commercial notes

2. A(n) commercial bank offers loans to commercial

enterprises (such as appliance dealers) or to individuals using funds borrowed in the
open market or from other financial institutions. Examples of this type of financial
service provider include GMAC Financial Services and Household Finance.

3. A(n) finance company buys and sells securities on

behalf of their customers and for their own accounts. Examples of this type of
financial service provider include Merrill Lynch and Charles Schwab.

4. A(n) sells shares mainly to upscale investors in a

broad group of different kinds of assets including nontraditional investments in
commodities, real estate, loans to ailing companies and other risky assets.

5. When a bank agrees to handle the cash collections and disbursements for a
company and invest any temporary cash surpluses in interest bearing assets, they
are providing services to their customers.
True/False Questions

T F 26. Under U.S. federal law, an institution making only loans to households and
offering uninsured checkable deposits and savings deposits qualifies as a commercial bank.
Answer: False

T F 27. Nonbank banks can offer deposits to the public, but these deposits are not
eligible for insurance coverage by the FDIC.
Answer: False

T F 28. The etymological roots of the word "bank" trace this word back to an Italian
term referring to a "money-changer's table".
Answer: True

T F 29. According to the textbook, banks are those financial institutions that today
offer the widest range of financial services of any business firm in the economy.
Answer: True

T F 30. According to the delegated monitoring theory banks are able to attract
borrowing customers because they pledge confidentiality.
Answer: True

T F 31. Managing the financial affairs and property of individuals and business firms
falls under the type of banking service line known as cash management services.
Answer: False

T F 32. The role performed by banks in the economy in which they transform savings
into credit is known as the intermediation role.
Answer: True

T F 33. The role performed by banks in which they stand behind their customers
when those customers are unable to pay a debt obligation is known as the guarantor role.
Answer: True

T F 34. When banks serve as conduits for government policy this is referred to as
their agency role.
Answer: False

T F 35. According to the textbook, high-volume banking is required to make efficient

use of automation and other technological innovations.
Answer: True

T F 36. The number of independently owned banks has risen in the United States over
the last decade.
Answer: False
T F 37. Money-center banks usually service local communities, towns, and cities,
offering a narrow menu of services to the public.
Answer: False

T F 38. A greater proportion of major corporations have deserted the banking system
in recent years to raise borrowed funds directly from the open market.
Answer: True

T F 39. The recent erosion of the banking market share relative to other financial
institutions means that banking is a dying industry.
Answer: False

T F 40. Lending institutions act as delegated monitors and can diversify and reduce
their risk exposure, resulting in increased safety for savers’ funds.
Answer: True

T F 41. Current theory suggests that banks exist because of imperfections in our
financial system.
Answer: True

T F 42. Today U.S. banks account for approximately fifty percent of the largest banks
in the world.
Answer: False

T F 43. According to the textbook, traditional banking may be on the decline.

Answer: True

T F 44. Convergence refers to the fact that the number of bank mergers has increased
in recent years.
Answer: False

T F 45. Banks which offer virtually all financial services are known as universal
banks.
Answer: True

T F 46. Life insurance companies, securities firms, and mortgage companies all
compete with the traditional bank.
Answer: True
Multiple Choice Questions

47. In the United States a commercial bank qualifies as a "bank" under federal law if it offers:
A) Consumer installment loans, CDs
B) Savings deposits, commercial loans
C) Checking accounts, commercial loans
D) Security investments, inventory loans to business customers
E) Commercial deposit accounts, consumer savings plans

48. E. F. Hutton, J.C. Penney, and Sears Roebuck are among leading firms that in the1980’s
organized competitors with banks that are known as:
A) Nonbank Banks
B) Discount Security Brokerage Companies
C) Money Market Funds
D) Finance Companies
E) Investment Banking Units

49. A study of history shows that one of the first services offered by banks was:
A) Equipment Leasing
B) Currency Exchange
C) Security Brokerage and Underwriting
D) Sale of Real Estate
E) None of the above

50. Banks perform the indispensable task of:

A) Creating money without making loan.
B) Absorbing the excess liquidity created by other financial institutions
C) Intermediating between surplus-spending individuals or institutions and deficit-spending
individuals or institutions
D) Issuing risky deposits
E) None of the above

51. The view that depositors hire banks to analyze the financial condition of prospective
borrowers and continually evaluate the condition of outstanding loans is referred to as:
A) Delegated monitoring
B) The concept of financial intermediation
C) The liquidity function in banking
D) Market imperfection theory
E) The efficiency contribution of banking

1. Which of the following has been an important trend regarding consolidation (sự hợp nhất) and
geographic expansion in banks?
A) Increased bank branching activity
B) The formation of more holding companies to purchase smaller banks
C) Mergers among some of the largest banks in the industry
D) A and C above
E) All of the above.

53. Included among leading structural trends in the U.S. banking industry in recent years are:
A) The number of independently owned banks has declined
B) The average size of individual banking firms has increased
C) Entry across state lines from neighboring states has increased
D) A and B only
E) All of the above.
Answer: E

54. Smaller, locally focused commercial and savings banks that offer narrower but more
personalized menu of financial services are known as:
A) Money center banks
B) Community banks
C) Mutual Funds
D) State banks
E) Fringe banks.

55. The banking services that includes executing buy and sell orders for security trading
customers and marketing new securities to raise funds for corporations and other institutions is
referred to:
A) Comprehensive Packaging
B) Wrap-around Accounts
C) Investment Banking
D) Professional Banking
E) None of the above.

1. A bank that wires funds for the purchase of a beach house in South Carolina for a customer in
Oklahoma is carrying out the __________ of banks.
A) The intermediation role
B) The payment role
C) The guarantor role
D) The agency role
E) The policy role

57. Examples of imperfections in the financial system which allow banks to exist include which of
the following?
A) Informational asymmetry
B) Efficiency of markets
C) All individuals and businesses have full information about all investment opportunities.
D) All individuals and businesses have no difficulty meeting their liquidity needs on their own.
E) All of the above are examples of the imperfections that exist.

58. A bank which manages the investment portfolio and pays the bills of an elderly customer who
is unable to do it for him or herself is carrying out the __________ of banks.
A) The intermediation role
B) The payment role
C) The guarantor role
D) The agency role
E) The policy role
59. Which of the following is a trend that has affected all banks today?
A) Increased isolation of banks in the U.S.
B) Decreased competition from other financial institutions
C) Decreased amount of services provided by modern banks
D) Rising funding costs
E) Increased regulations

60. Which of the following is not a current trend in the banking industry?
A) The number of banks is declining
B) The number of bank branches is declining
C) The number of bank services is increasing
D) The number of bank competitors is increasing
E) Bank industry convergence

61. Which of the following types of banks would most likely offer the largest number of financial
services?
A) A retail bank
B) A community bank
C) A commercial bank
D) A universal bank
E) An international bank

62. The phenomenon of convergence refers to:

A) Financial service firms expanding into other product lines
B) Firms reducing their product lines
C) Bank merger activity
D) Globalization in banking
E) Technological innovation in banking

63. Bank equipment leasing activity involves:

A) A bank leasing its office facilities instead of buying
B) A bank buying equipment and then leasing the item to a customer
C) A customer buying equipment and then leasing it to a bank
D) A bank leasing computer equipment
E) None of the above
Answer: B

64. Wholesale banks are those banks that:

A) Sell at a discount relative to all commercial banks
B) Only make loans to the wholesale industry
C) Lend almost exclusively to farmers
D) Are large banks which serve corporations and government
E) Have only retail customers
1. Jonathan Robbins has an account in a bank that does not have a physical branch.
Jonathan does all of his banking business over the internet. What type of bank does
Jonathan have his account at?
A) Virtual Bank
B) Mortgage Bank
C) Community Bank
D) Affiliated Bank
E) None of the above

2. The Edmond National Bank serves only the City of Edmond, Oklahoma and
concentrates on providing the best possible service to this city. What type of bank is
this most likely to be?
A) Virtual Bank
B) Mortgage Bank
C) Community Bank
D) Affiliated Bank
E) None of the above

3. The Charleston Southern Bank makes loans for families to purchase new and
existing homes but does not take deposits. What type of bank is this most likely to
be?
A) Virtual Bank
B) Mortgage Bank
C) Community Bank
D) Affiliated Bank
E) None of the above

4. Which of the following is considered a fringe bank?

A) Community Bank
B) Wholesale Bank
C) Merchant Bank
D) Payday Lender
E) None of the above

5. During the middle ages, banks encountered religious opposition because:

A) Loans to the poor often carried high interest rates
B) Loans and deposits were primarily for wealthy customers
C) The Industrial Revolution demanded new methods of making payments and
obtaining credit
D) Savings and wealth were lost due to war, theft and expropriation by governments
E) All of the above

6. Religious opposition decreased during the Renaissance because:

A) Loans to the poor often carried high interest rates
 B) Loans and deposits were primarily for wealthy customers
C) The Industrial Revolution demanded new methods of making payments and
obtaining credit
D) Savings and wealth were lost due to war, theft and expropriation by governments
E) All of the above

7. Banks like the Medici Bank in Italy and the Hochstetter Bank in Germany were
successful because and
they responded well to these new needs.
A) Loans to the poor often carried high interest rates
B) Loans and deposits were primarily for wealthy customers
C) The Industrial Revolution demanded new methods of making payments and
obtaining credit
D) Savings and wealth were lost due to war, theft and expropriation by governments
E) All of the above

8. Early European banks were places for safekeeping of wealth because:

A) Loans to the poor often carried high interest rates
B) Loans and deposits were primarily for wealthy customers
C) The industrial revolution demanded new methods of making payments and
obtaining credit
D) Savings and wealth were lost due to war, theft and expropriation by governments
E) All of the above
Answer: D

9. The U.S. government wants to prevent money laundering by drug cartels. To

promote this goal, they have asked banks to report any cash deposits greater than
$10,000 to the government. Which of the following roles is the bank performing?
A) The intermediation role
B) The payment role
C) The risk management role
D) The guarantor role
E) The policy role
Answer: E

10. The Edmond Wine and Cheese shop wants to buy 30 cases of French Champagne
on credit. Bank of America writes a letter of credit stating that the Edmond Wine and
Cheese shop is a good risk and that if they do not pay off the loan, Bank of America
will. Which of the following roles is the bank performing?
A) The intermediation role
B) The payment role
C) The risk management role
D) The guarantor role
E) The policy role
Answer: D
11. Alexander Phua goes to his local bank and gets an insurance policy that protects him
against loss in case he is in a car accident. Which of the following roles is the bank
performing?
A) The intermediation role
B) The payment role
C) The risk management role
D) The guarantor role
E) The policy role
Answer: C

12. Chris Jones gets a cashier’s check from Wachovia Bank to make his down payment
on a new home. Which of the following roles is the bank performing?
A) The intermediation role
B) The payment role
C) The risk management role
D) The guarantor role
E) The policy role
Answer: B

13. The Bank, N.A. accepts deposits from thousands of individuals and lends that money
to (among others) the Stillwater Body Shop to expand their work bays. Which of the
following roles is the bank performing?
A) The intermediation role
B) The payment role
C) The risk management role
D) The guarantor role
E) The policy role

14. Major trends affecting the performance of financial firms today include all of these
except:
A) Greater product-line diversification
B) Reduced branching
C) Geographic diversification
D) Convergence
E) Increasing automation

15. The First National Bank of Lakeland makes risky loans to business to expand and
grow their businesses while at the same time accepting funds into checking accounts
that are insured by the FDIC. Which of the following services is this bank offering to
their customers?
A) Risky arbitrage services
B) Liquidity services
C) Ability of the bank to evaluate information
D) Divisibility of money services
 E) Credit services
Answer: A

16. Jonathan Wynn knows that if he wanted to purchase a Treasury Bill, the minimum
amount he would spend would be close to $10,000. He also knows that he could
deposit $1,000 in a money market deposit account at a bank and earn about the
same rate of interest. Jonathan does not have $10,000 to invest in a Treasury Bill. If
Jonathan puts his money in the bank, which service that a bank can provide is he
taking advantage of?
A) Risky arbitrage services
B) Liquidity services
C) Ability of the bank to evaluate information
D) Divisibility of money services
E) Credit services
Answer: D

17. Nick Rodr gets a loan from the First State Bank of Guthrie to purchase a new
refrigerator for his condo. What service that a bank provides is he taking advantage
of?
A) Risky arbitrage services
B) Liquidity services
C) Ability of a bank to evaluate information
D) Divisibility of money services
E) Credit services
Answer: E

18. Drew Davis goes to his local bank to get help developing a financial plan and making
investment decisions. Which of the more recent services banks offer is Drew taking
advantage of?
A) Getting a consumer loan
B) Getting financial advice
C) Managing cash
D) Getting venture capital services
E) Buying a retirement plan
Answer: B

19. The Bartholemew Bakery receives a lot of payments in cash. They deposit it in their
local bank who invests the money in an interest bearing account until it is needed to
pay bills. Which of the financial services banks offer is the Bartholemew bakery
taking advantage of?
A) Getting a consumer loan
B) Getting financial advice
C) Managing cash
D) Getting venture capital services
E) Buying a retirement plan
Answer: C
20. MyWebCast is a new company that makes it easy for individuals to create streaming
videos on the internet to share with friends and family for a small fee. MyWebCast
wants to expand their offerings of video streaming services but needs cash to be able
to do this. The Second National Bank of Oklahoma City, through a subsidiary, gives
them the cash they need for an ownership share in the company. Which of the more
recent services that banks offer is MyWebCast taking advantange of?
A) Getting a consumer loan
B) Getting financial advice
C) Managing cash
D) Getting venture capital services
E) Buying a retirement plan
Answer: D

21. Chandriga Suppiah has opened a Roth IRA with North Carolina State Bank and plans
on making regular contributions to this account until she retires. Which of the
financial services is Chandriga taking advantage of?
A) Getting a consumer loan
B) Getting financial advice
C) Managing cash
D) Getting venture capital services
E) Buying a retirement plan
Answer: E

22. Banks with less than ___________in assets are generally called community banks.
A. More than $1 billion
B. Less than $1 billion
C. More than $10 billion
D. Less than $1 trillion
E. More than $1 trillion
Answer: B

23. The principal functions and services offered by many financial-service firms today
include:
A) Lending and investing money
B) Making payments of behalf of customers to facilitate their purchases of goods and
services
C) Managing and protecting customers’ cash and other property
D) Assisting customers in raising and investing funds profitably
E) All of the above

24. Which of the following is considered a depository financial institution?

A. Mortgage company
B. Mutual fund
C. Savings and Loan associations
D. Federal Reserve
E. Insurance company
Answer: C
25. Which of the following is not a purpose of bank regulation:
A. Guarantee minimal profitability of the banking system
B. Provide monetary stability
C. Ensure safety and soundness of banks
D. Provide competitive financial system
E. Protect consumers from abuses by banks
Answer: A

26. During the financial crisis of 2007-2009, the collapse of Lehman Brothers and the
bailout of Bear Stearns reaffirmed the importance of the fundamental principle of:
A) Superior management
B) Globalization
C) Government bailout
D) Regulatory arbitrage
E) Public trust and confidence in the system
Answer: E