Chapter 11 True/False Questions 1. The merger of banks with assets of $1 billion or more in total assets is called a megamerger.

Answer: True Page: 326 Level: Easy 2. The primary source of funds for a bank is equity capital. Answer: False Page: 316 Level: Easy 3. Loans comprise the single largest asset category for a bank. Answer: True Page: 316 Level: Easy 4. The major risk faced by commercial banks today is credit risk. Answer: True Page: 318 Level: Easy 5. Banks are more highly leveraged than most non-financial firms. Answer: True Page: 318 Level: Easy 6. Revenue economies of scale are cost reductions that occur as banks add related product lines. Answer: False Page: 326 Level: Medium 7. Time deposits of more than $100,000 with a maturity of at least fourteen days are negotiable instruments and may be sold before maturity. Answer: True Page: 320 Level: Easy

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8. Technology has had the greatest impact on wholesale banking in the area of cash management. Answer: True Page: 335 Level: Easy 9. Since 1980 the number of banks in the U.S. has been increasing dramatically due to deregulation of the industry. Answer: False Page: 325-326 Level: Medium 10. If average costs to produce a given product are lower for larger firms, cost economies of scope exist. Answer: False Page: 326-327 Level: Medium 11. The proportion of industry assets controlled by small banks has increased over the last 10 years. Answer: False Page: 331 Level: Easy 12. Commercial letters of credit are off balance sheet items that are used to back issues of commercial paper by corporate borrowers. Answer: False Page: 322-324 Level: Difficult 13. All banks having total assets over $1 billion are considered money center banks. Answer: False Page: 331 Level: Medium Multiple Choice Questions 14. Major liabilities for banks include A) Business loans B) Interest expense paid on deposits C) Deposits D) Equity capital E) Securities held for sale Answer: C Page: 318 Level: Medium

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15. A decline in the average cost of producing bank services as the size of the bank expands is called A) Cost economies of scope B) Revenue economies of scope C) Cost economies of scale D) Revenue economies of scale E) X efficiencies Answer: C Page: 326 Level: Medium 16. A decrease in unit costs after a merger due to joint use of inputs in producing multiple products is an example of: A) Cost economies of scope B) Revenue economies of scope C) Cost economies of scale D) Revenue economies of scale E) X efficiencies Answer: A Page: 326-327 Level: Medium 17. Revenue or cost reduction resulting in gains from mergers that are not due to scale or scope economies are called A) Cost economies of scope B) Revenue economies of scope C) Cost economies of scale D) Revenue economies of scale E) X efficiencies Answer: E Page: 326-327 Level: Medium 18. Banks with total assets under _____ are normally called community banks. A) $50 million B) $100 million C) $500 million D) $1 billion Answer: D Page: 331 Level: Medium

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19. A money center bank is a bank that is A) Large B) Operates in a major financial center C) Rely on non-deposit sources of funds D) A. and C. only E) A. B. and C. Answer: E Page: 331-332 Level: Medium 20. 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 the above Answer: C Page: 332 Level: Medium 21. In terms of profitability, a well run bank usually has an ROA of A) 0.5-3% B) 3-5% C) 5-10% D) 10-15% E) 15-20% Answer: A Page: 334 Level: Medium 22. A card that has a chip implanted in the card that allows the customer to store and spend money for various transactions is called a A) POS card B) Smart card C) Debit card D) ATM card E) Platinum credit card Answer: B Page: 337 Level: Easy

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23. As a percentage of the typical bank's balance sheet, over the last 50 years _________ have risen and ___________ have fallen. A) Securities ; consumer loans B) Business loans ; mortgages C) Securities ; all loans D) Mortgages ; securities E) Consumer loans ; mortgages Answer: D Page: 319 Level: Medium 24. Key federal regulators of the banking industry include: A) Office of Comptroller of Currency B) Federal Deposit Insurance Corporation C) Federal Reserve System D) State bank regulators E) Office of Thrift Supervision F) Only A, B, and C Answer: F Page: 338 Level: Easy 25. 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) Any of the above may grant a charter and approve a merger Answer: B Page: 338 Level: Medium 26. 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 Answer: C Page: 339-340 Level: Easy

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27. The largest single category of loans on the typical bank's balance sheet in 2002 was: A) Real estate loans B) U.S. government securities C) Commercial and industrial loans D) Consumer loans E) Inter-bank loans Answer: A Page: 317 Level: Medium 28. Deposit sources of funds at commercial banks in 2001 comprised almost _____ of liabilities and equity: A) 50% B) 60% C) 70% D) 80% E) 90% Answer: C Page: 317 Level: Medium 29. From 1951 to the present the fastest growing asset on the balance sheet for U.S. commercial banks has been: A) Consumer loans B) Mortgages C) Business loans D) Securities E) Equities Answer: B Page: 319 Level: Easy 30. The provision of banking services to other banks, such as check clearing, foreign exchange trading, etc. are examples of A) Correspondent banking B) Trust services C) Off balance sheet assets D) Economies of scope E) Credit derivatives Answer: A Page: 325 Level: Medium

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31. Economies of scale imply that the average cost curve is _____ with respect to bank size. A) Downward sloping B) Upward sloping C) Flat D) Vertical Answer: A Page: 327 Level: Difficult 32. A bank had average revenues of $130 million and average costs of $100 million. An insurer had average revenues of $75 million and average costs of $60 million. After a merger between the two, the new institution had average revenues of $220 million and average costs of $160 million. This is an example of A) Cost economies of scale B) Cost economies of scope C) Revenue economies of scale D) Revenue economies of scope E) X efficiencies Answer: D Page: 329-330 Level: Difficult 33. Recently, the largest off balance sheet activity by banks has been in A) Swap agreements B) Standby letters of credit and commercial letters of credit C) Futures and forward contracts D) Loan commitments E) Commitments to buy/sell foreign exchange Answer: A Page: 320-323 Level: Medium 34. 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/an A) Loan commitment B) Off balance sheet liability C) Off balance sheet asset D) Net charge off E) Loan sold without recourse Answer: B Page: 321 Level: Medium

Chapter 12 True/False Questions

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1. Thrifts are comprised of three types of depository institutions: savings banks, credit unions, and finance companies. Answer: False Page: 345 Level: Medium 2. Federally chartered savings banks first appeared in the U.S. in the 1980s Answer: True Page: 346 Level: Easy 3. There are more savings associations than banks, but banks are usually quite a bit larger. Answer: False Page: 351 Level: Easy 4. To help overcome the adverse effects of rising rates and disintermediation, Congress passed the DIDMCA in 1980 and the Garn St - German Act in 1982. Answer: True Page: 347 Level: Easy 5. Interest income minus interest expense divided by earning assets is called the net interest margin. Answer: True Page: 347 Level: Easy 6. The FIRREA of 1989 abolished the FSLIC and created the FDIC in its place. Answer: False Page: 349 Level: Medium 7. The FDICIA of 1991 introduced risk based deposit insurance premiums and a prompt corrective action policy to force regulators to more quickly close insolvent banks and thrifts. Answer: True Page: 349 Level: Medium

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8. After deposits, the second largest source of funds at savings associations is FHLB loans. Answer: True Page: 350 Level: Easy 9. Savings associations must have at least 65% of their assets in mortgage related areas in order to maintain their favorable tax status and obtain FHLB loans. Answer: True Page: 350 Level: Medium 10. In a mutual organization the depositors and common stockholders are co-owners of the institution. Answer: False Page: 352 Level: Easy 11. In recent years larger savings institutions have had better profit margins than smaller institutions. Answer: True Page: 356 Level: Easy 12. Most mutual savings banks were traditionally found in the northeast United States. Answer: True Page: 352 Level: Easy 13. A steepening yield curve is likely to improve profitability of a savings association. Answer: True Page: 347 Level: Medium 14. The FDIC operates the bank insurance fund but has nothing to do with insuring thrifts. Answer: False Page: 354 Level: Medium 15. Anyone can choose to become a member of a credit union, but no one can be a member of two or more credit unions. Answer: False Page: 356 Level: Medium

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16. Credit unions are not taxed, as a result well run credit unions are able to charge lower loan rates and pay slightly higher deposit rates than banks. Answer: True Page: 356-357 Level: Medium 17. The National Credit Union Administration is the primary regulator of federally chartered credit unions. Answer: True Page: 362-363 Level: Easy 18. Credit union equity is composed of common stock sold, paid in capital and retained earnings. Answer: False Page: 362 Level: Medium 19. Credit unions currently have about 80 million members. Answer: True Page: 358 Level: Medium 20. There are more credit unions than other types of thrifts, but credit unions are generally quite small. Answer: True Page: 360 Level: Easy 21. The largest U.S. banks are larger than the entire credit union industry. Answer: True Page: 360 Level: Easy

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Multiple Choice Questions 22. There has never been a savings association crisis in any other country of the world other than the U.S. This is probably true because: A) Only in the U.S. have most savings association managers been crooks. B) Only in the U.S. have we had a Congress that have mostly been crooks. C) The rest of the world has had a more stable economy than the U.S. D) We have less regulatory overlap of financial services than most of the world. E) Only in the U.S. have the savings associations been insulated from competition, then deregulated and allowed to operate without adequate supervision. Answer: E Page: None Level: Difficult 23. Which type of thrift has the greatest percentage of commercial loans on their balance sheet? A) Mutual savings associations B) Stock savings associations C) Federal Credit unions D) Savings Banks E) State Credit unions Answer: D Page: 352 Level: Medium 24. The QTL test requires that thrifts A) Limit the amount of mortgage related assets on the balance sheet to improve diversification B) Invest in a minimum percentage of government backed securities to protect their mortgage loans C) Lend no more than 80% of the value of a home to a borrower to ensure mortgage safety D) Keep 35% of their assets in safe liquid investments to ensure adequate deposit liquidity E) Invest at least 65% of their assets in mortgages or mortgage related assets Answer: E Page: 349-350 Level: Medium

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25. Which one of the following has the highest concentration of mortgage related assets on the balance sheet? A) Savings institutions B) Commercial banks C) Credit unions D) Finance companies E) Pension funds Answer: A Page: 350-351 Level: Easy 26. After 1989 savings institutions have primarily been regulated by: A) Federal Home Loan Bank Board B) Federal Deposit Insurance Corporation C) Office of Thrift Supervision D) National Credit Union Administration Answer: C Page: 349 Level: Easy 27. Disintermediation refers to A) Taking money out of depository institutions B) Putting money in depository institutions C) A negative net interest margin D) Making disparaging remarks about banks and thrifts Answer: A Page: 347 Level: Easy 28. Regulatory forbearance refers to A) The creation of the Resolution Trust Corporation B) Not enforcing existing regulations C) Regulation Q ceilings on deposit rates D) The creation of the Office of Thrift Supervision Answer: B Page: 348 Level: Easy 29. The majority of assets of savings associations are A) Mortgage related B) Commercial loans C) Consumer loans D) Consumer checking accounts Answer: A Page: 350 Level: Easy

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30. The predominant liabilities for savings associations are A) Commercial deposits and FHLB borrowings B) Wholesale money market notes and reserves at the Fed C) Small time and savings deposits and FHLB borrowings D) Checking accounts and money market mutual funds Answer: C Page: 350 Level: Medium 31. Historically, most savings associations and savings banks were established as A) Mutual organizations B) Stockholder organizations C) Partnerships D) Charitable organizations Answer: A Page: 352 Level: Easy 32. Deposits at savings banks are insured under the _____ and deposits at savings associations are insured under the _____. A) BIF, BIF B) BIF, SAIF C) SAIF, BIF D) SAIF, SAIF E) SAIF, NCVSIF Answer: B Page: 352 Level: Medium 33. _________ are the most numerous of depository institutions and ___________ are on average the smallest depository institutions. A) Banks ; savings institutions B) Credit unions ; banks C) Credit unions ; credit unions D) Banks ; credit unions E) Savings institutions ; banks Answer: C Page: 357,360 Level: Medium

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34. Throughout the 1990s to the present, assets of credit unions have _________ and the number of credit unions has __________. A) increased ; increased B) decreased ; decreased C) increased ; decreased D) decreased ; increased E) increased ; stayed the same Answer: C Page: 358 Level: Medium 35. Credit unions are I. Mutual associations II. Not open to the general public III. For profit institutions A) I only B) II only C) I and II only D) I, II and III E) II and III only Answer: C Page: 356 Level: Easy 36. The U.S. central credit union and the corporate credit union A) Are the primary regulators of the credit union industry B) Pool funds and provide investment services to local credit unions C) Serve as the trade organization for the industry D) Charter credit unions E) Provide deposit insurance for credit unions Answer: B Page: 358 Level: Medium 37. Credit unions have several advantages over banks. These include: I. Credit unions are not taxed II. Credit unions can collectively pool funds III. Credit unions are better diversified than banks A) I only B) II only C) III only D) I and III only E) I and II only Answer: E Page: 359-360 Level: Difficult

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38. As a percentage of total assets, credit unions invest _______ in securities than banks and ______ in consumer loans than banks. A) More ; more B) Less ; less C) More ; less D) Less ; more E) Less ; about the same Answer: A Page: 361 Level: Medium 39. About what percentage of credit union funds come from member deposits? A) 50% B) 60% C) 70% D) 80% E) 90% Answer: E Page: 361 Level: Easy 40. The American Banker's Association claims that the tax advantage of credit unions is worth about how much money per year? A) $100 million B) $500 million C) $1 billion D) $50 billion E) None of the above Answer: C Page: 359 Level: Medium 41. Throughout the 1990s the number of credit unions has steadily _____ while the assets and the number of members of credit unions has steadily _____. A) Fallen, fallen B) Fallen, risen C) Risen, fallen D) Risen, risen Answer: B Page: 358 Level: Easy

Chapter 13 True/False Questions 1. The report of condition presents the bank's major categories of revenues and expenses over a period of time.
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Answer: False Page: 367 Level: Easy 2. Foreign deposits at commercial banks are explicitly insured by the FDIC. Answer: False Page: 374 Level: Medium 3. Banks have higher leverage than most manufacturing firms. Answer: True Page: 370 Level: Easy 4. Vault cash is used primarily to meet reserve requirements and check clearing. Answer: False Page: 370 Level: Easy 5. Deferred availability credit items are checks that the bank owes to other banks but has not yet paid. Answer: True Page: 370 Level: Medium 6. C&I loans are loans to businesses used to finance capital needs, equipment purchases and plant expansions. Answer: True Page: 372 Level: Easy 7. For the typical commercial bank, commercial real estate is the largest type of real estate loan on the balance sheet today. Answer: False Page: 372 Level: Medium

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8. The allowance for loan and lease losses is bank management's estimate of the amount of gross loans and leases that will not be repaid to the bank. Answer: True Page: 372-373 Level: Medium 9. Investment securities plus net loans and leases is equal to a bank's earning assets. Answer: True Page: 373 Level: Easy 10. In ratio analysis, the profit margin times the asset utilization ratio equals return on equity. Answer: False Page: 385 Level: Medium 11. Loans are the major item on a bank's balance sheet, and they generate the largest amount of revenue. Answer: True Page: 371 Level: Easy 12. Net loans and leases plus unearned income plus the allowance for loan and lease losses equals gross loans and leases. Answer: True Page: 372-373 Level: Medium 13. Unearned income on a loan is the amount of income that the bank has received on a loan from a customer but has not yet recorded on the income statement. Answer: True Page: 373 Level: Easy 14. Banks generally pay higher interest rates on NOW accounts than on MMDAs. Answer: False Page: 374 Level: Easy 15. Wholesale CDs obtained from an investment house rather than directly from a customer are referred to as brokered deposits. Answer: True Page: 374 Level: Easy

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16. The largest market available for purchased funds is the Fed funds market. Answer: True Page: 375 Level: Medium 17. A loan commitment is a contra asset account. Answer: False Page: 376 Level: Easy 18. A commercial letter of credit is often issued by a bank to guarantee that an exporter of goods will receive payment even if the importer of goods defaults. Answer: True Page: 377 Level: Easy 19. Financial standby letters of credit are an alternative to loan commitments. Answer: True Page: 379 Level: Medium 20. Loans sold with recourse may be returned to the selling bank in the event of borrower default. Answer: True Page: 380 Level: Medium

Multiple Choice Questions 21. Core deposits are deposits that are A) At the bank solely for the interest rate earned B) Very stable funds sources C) Typically for larger denominations than hot money sources D) Very frequently turned over Answer: B Page: 376 Level: Easy

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22. The following definition refers to which CAMELS composite rating? Institutions in this group have an immoderate volume of serious financial weaknesses or a combination of other conditions that are unsatisfactory. A) Composite 1 B) Composite 2 C) Composite 3 D) Composite 4 E) Composite 5 Answer: D Page: 366-367 Level: Medium 23. In the acronym CAMELS the S stands for what? A) Satisfactory level of capital B) Sensitivity to market risk C) Sufficient accounting controls D) Satisfactory level of reserves at the Fed E) Sufficient level of provision for loan losses Answer: B Page: 367 Level: Medium 24. Uniform principles, standards and report forms for depository institutions are prescribed by the A) FDIC B) Federal Reserve C) Federal Financial Institutions Examination Council D) Office of Comptroller of Currency Answer: C Page: 368 Level: Medium 25. The bank's top earning asset category is A) Cash and balances due from other depository institutions B) Investment securities C) Loans D) Physical plant and equipment Answer: C Page: 371 Level: Easy

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26. Deposits at the Federal Reserve are used for all of the following except A) To meet legal reserve requirements B) To assist in check clearing C) To purchase Treasury securities D) To earn interest E) To facilitate wire transfers Answer: D Page: 370 Level: Medium 27. Cash in the process of collection is A) A deposit at another financial institution B) A Fed funds transaction C) Checks the bank owes other institutions that have not yet been paid D) Checks that the bank is owed but has not yet collected E) Equity capital Answer: D Page: 370 Level: Medium 28. More than _____ percent of Fed funds transaction have a maturity of one day A) 50 B) 60 C) 70 D) 80 E) 90 Answer: E Page: 371 Level: Medium 29. Interest bearing retail accounts with limited checking features designed to compete with money market mutual fund investments are called ________________. A) NOWs B) Retail CDs C) MMDAs D) Special savings deposits E) Negotiable CDs Answer: C Page: 374 Level: Medium

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30. Long maturity investments for a bank typically include all but which one of the following? A) U.S. Treasury bonds B) U.S. agency securities C) Mortgage backed securities D) Common stocks E) Municipal bonds Answer: D Page: 371 Level: Easy 31. Purchased funds include all but which one of the following? A) Brokered deposits B) Wholesale CDs C) Fed funds purchased D) Repurchase agreements E) Demand deposits Answer: E Page: 376 Level: Easy 32. Core deposits include all except which one of the following? A) Demand deposits B) NOW accounts C) MMDAs D) Eurodollar deposits E) Passbook savings accounts Answer: D Page: 376 Level: Easy 33. A corporate customer gets a one year $5 million loan commitment from a bank. The commitment requires a facility fee of 1/2 of 1% of the commitment and a back end fee of 1/4 of 1%. The bank charges a 9% interest rate on the amount borrowed. If the firm borrows $3 million for one year, what is the total amount of both fees and interest paid to the bank over the year? A) $480,000 B) $300,000 C) $270,000 D) $295,000 E) $292,500 Answer: B Page: 386 Level: Difficult

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34. A person who enters a forward contract to sell British pounds in six months would worry about the counterparty defaulting on the contract if over the next six months: A) The dollar depreciated B) The pound appreciated C) The exchange rate remained unchanged D) The NYSE went out of business E) The dollar appreciated Answer: E Page: 380-381 Level: Easy 35. A person who purchased a futures contract on British pounds on an exchange would worry about counterparty default only if: A) The counterparty declared bankruptcy B) The pound appreciated C) The exchange rate remained unchanged D) The exchange went bankrupt E) The dollar appreciated Answer: D Page: 380 Level: Medium 36. The largest source of income at a typical bank is A) Interest income on securities held for sale B) Interest income on securities held for investment C) Interest income on loans and leases D) Non-interest income E) Dividends or stock Answer: C Page: 371 Level: Easy 37. A municipal bond is paying a 6% annual coupon. An equivalent risk corporate bond is paying 7%. Investors in a tax bracket of _____ or higher would prefer the municipal bond. A) 85.7% B) 14.28% C) 19.25% D) 80.75% E) 25.75% Answer: B Page: 383 Level: Medium

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38. A bank raises the rate from 3% to 4% on $100,000 of its 6 month CD liabilities that are currently maturing. Assuming no change in volume of deposits, pre-tax net income would A) Rise by $1000 B) Fall by $1000 C) Be unchanged D) Rise or fall but can't tell by how much Answer: B Page: 375 Level: Easy Use the following to answer questions 39-43: B A C S L O T I I I I N N P T N a n k A s s e t s a s h $ e c u r i o a n s t h e r o t a l $ c o m t e r e s t e r e s t e r e s -o i n n t e r -o i n n t e r r o v i s a x e s I L i a b i l i t y D 3 e p o s i t s t 1 i e 8 Os t h e r B o 6 2 E q u i t y 1 T7 o t a l 1 0 0 e S t a t e m e n t I n c o m $e 7 o t I n c o m e4 o t E x p e n s3 e e s t I n c o m2 e e s t E x p e 4n s i o n f o r L 1o a ( 4 0 % ) 2 $ 3 a n $ d E i n q g u i t y

6 5 r 2 r o6 w 9 $ 1 0 0 t n n e n L o L S

n n n n

o a n s e c u r i t i e s

s s

39. The bank's ROA is A) 33.0% B) 3.0% C) 3.75% D) 2.21% E) None of the above Answer: B Page: 386 Level: Easy

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40. The bank's ROE is approximately A) 33.33% B) 3.00% C) 22.22% D) 11.66% E) None of the above Answer: A Page: 386 Level: Easy 41. The profit margin and the asset utilization ratios are A) 60.00%; 5.00% B) 27.27%; 11.00% C) 23.08%; 13.00% D) 19.43%; 14.25% E) None of the above Answer: C Page: 386 Level: Medium 42. If the average net interest margin for this type of bank is 5%, then, ceteris paribus, this particular bank is performing A) The same as average because this bank has a NIM of 5% B) Better than average because this bank has a NIM of 10% C) Better than average because this bank has a NIM of 7% D) Poorer than average because this bank has a NIM of 3% E) One can't determine with the information given Answer: B Page: 393-394 Level: Medium 43. If the typical bank of this type has an overhead efficiency ratio of 0.90, then this particular bank is, ceteris paribus, ___________________ than the typical bank. A) Doing a better job generating profitable off-balance sheet activities B) Having a more difficult time managing non-interest income and expenses C) Is paying higher taxes D) Has fewer loan losses E) None of the above Answer: B Page: 394 Level: Medium

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44. If a bank has more purchased funds than the average bank, you would not be surprised to see a higher than average _____ ratio A) Provision for loan loss B) Tax ratio C) Non-interest expense ratio D) Interest expense ratio E) None of the above Answer: D Page: 394 Level: Medium 45. The AU ratio measures the bank's ability to _____ and the PM ratio measures the bank's ability to _____. A) Control expenses; generate income from assets B) Generate income from assets; control expenses C) Maximize interest revenue; minimize interest expense D) Control leverage; minimize physical plant E) None of the above Answer: B Page: 391-393 Level: Medium Chapter 14 True/False Questions 1. Banks are prohibited from making loans exceeding more than 10 percent of their own equity capital to any one company or borrower. Answer: False Page: 400 Level: Medium 2. Regulators impose minimum capital requirements on all depository institutions. Answer: True Page: 401 Level: Easy 3. The part of the money supply produced by the private banking system is called inside money. Answer: True Page: 402 Level: Easy 4. The higher the net regulatory burden on DIs the more efficiently the DIs produce financial services. Answer: False Page: 401-402 Level: Easy 5. The quantity of notes and coin in the economy is called inside money but the bulk of the money supply is outside money.
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Answer: False Page: 402 Level: Medium 6. The Federal Deposit Insurance Corporation Improvement Act introduced the prompt corrective action policy that requires the FDIC to intervene when a bank's capital falls below certain minimums. Answer: True Page: 405 Level: Easy 7. The reserve requirement in the U.S. is essentially costless to banks. Answer: False Page: 402 Level: Easy

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8. A financial intermediary that can engage in a broad range of financial service activities is termed a universal FI. Answer: True Page: 405-406 Level: Easy 9. During the Great Depression over 10,000 banks failed. Answer: True Page: 406 Level: Easy 10. The Community Reinvestment Act and the Home Mortgage Disclosure Act are designed to ensure banks do not discriminate against potential borrowers and participate in lending in their local community. Answer: True Page: 402 Level: Easy 11. Restricting the number of institutions that can enter an industry increases profitability of firms already in the industry. Answer: True Page: 403 Level: Easy 12. A bank that offers demand deposits or makes commercial loans, but does not do both is called a nonbank bank. Answer: True Page: 410 Level: Easy 13. The QTL test is an example of a credit allocation regulation. Answer: True Page: 402 Level: Medium 14. States that only allow unit banking often still allow existing banks to create new de novo branches. Answer: False Page: 410-411 Level: Medium 15. The Glass-Steagall Act came about due to concerns about excessive risk taking at banks and conflicts of interest between commercial and investment banking activities. Answer: True Page: 406 Level: Easy

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16. Beginning in 1987 a bank could establish a Section 20 affiliate to underwrite all types of insurance. Answer: False Page: 407 Level: Easy 17. There were a greater number of bank failures from 1980 to 1990 inclusive than from 1933 to 1979. Answer: True Page: 413 Level: Medium 18. Insurance companies are regulated solely at the state level. Answer: True Page: 409 Level: Easy 19. The FDIC is required to collect additional insurance premiums from insured institutions if the BIF reserves fall below 1.5% of insured deposits. Answer: False Page: 414 Level: Medium Response: 1.25% is correct 20. The Financial Services Modernization Act of 1999 allows the establishment of full service financial institutions in the U.S. Answer: True Page: 408 Level: Easy

Multiple Choice Questions 21. A bank that has an equity to asset ratio equal to 15% can normally lend no more than _____ of its assets to any one borrower. A) 0.95% B) 1.05% C) 15.00% D) 1.50% E) 2.25% Answer: E Page: 400 Level: Medium

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22. The FDIC manages the A) Bank insurance fund B) Savings association insurance fund C) National credit union share insurance fund D) All of the above E) A and B only Answer: E Page: 401 Level: Medium 23. The reduction in deposit funds cost brought about by government insurance is an example of the A) Social benefit of regulation B) Private cost of regulation to DIs C) Private benefits of regulation to DIs D) Net regulatory burden E) None of the above Answer: C Page: 401-402 Level: Medium 24. U.S. depository institutions may be subject to as many as ____ separate regulators. A) 4 B) 5 C) 6 D) 7 E) 8 Answer: A Page: 404 Level: Medium 25. The act that first established the Federal Deposit Insurance Corporation was the A) Glass-Steagall Act B) McCarran-Ferguson Act C) National Bank Act 1863 D) Federal Reserve Act E) McFadden Act Answer: A Page: 404 Level: Medium

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26. The Glass-Steagall Act prohibited affiliations between commercial and investment banking activities with three major securities underwriting exemptions. Which one of the following underwriting activities was not exempted A) Issues of treasury bills, notes, and bonds B) Issues of municipal general obligation bonds C) Private placements of all types D) Issues of municipal revenue bonds E) All of the above were exempted Answer: D Page: 406 Level: Difficult 27. Major provisions of the Financial Services Modernization Act of 1999 include all of the following except: A) Allowing bank holding companies to open insurance underwriting affiliates and vice versa B) Allowing bank holding companies to open or merge with investment banks C) Created one regulator to oversee all activities of financial service firms D) All of the above are included Answer: C Page: 408 Level: Easy 28. Commercial banks belonging to a financial service holding company can have a controlling interest in a nonfinancial enterprise only if: I. The investment in the nonfinancial is only for a limited time period II. The investment arises as a result of a foreclosure on a loan III. The bank does not engage in management of the nonfinancial enterprise A) I only B) II only C) III only D) II and III only E) I and III only Answer: E Page: 410 Level: Medium

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29. Under the Financial Services Modernization Act of 1999 a financial services holding company is defined as a holding company that has at least ____ percent of its total assets in the form of financial assets. A) 70 B) 75 C) 80 D) 85 E) 90 Answer: D Page: 410 Level: Medium 30. Which act has led to interstate banking in the U.S.? A) Glass-Steagall Act B) DIDMCA C) McFadden Act D) Riegle-Neal Act E) Financial Services Modernization Act Answer: D Page: 412 Level: Easy 31. The _____________ created the Savings Association Insurance Fund. A) FDIC Improvement Act B) Financial Institutions Reform, Recovery and Enforcement Act C) Financial Services Modernization Act D) Riegle-Neal Act E) Competitive Equality in Banking Act Answer: B Page: 414 Level: Medium 32. Moral hazard A) Is reduced by providing deposit insurance. B) Causes bankers to overstate the provision for loan loss account. C) Requires the FDIC to charge all banks a constant deposit insurance premium. D) Refers to the increased risk of lending to sovereign states. E) Arises when the insured takes on more risk because he or she is insured. Answer: E Page: 415 Level: Medium

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33. Deposit insurance A) Reduces bank runs B) Helped cause the insolvency of the FSLIC C) Induced moral hazard at DIs D) All of the above Answer: D Page: 414-416 Level: Easy 34. All banks located in the European Union offer deposits that are insured for __________ Euros, although depositors are subject to a _________________ in the event of loss. A) 100,000; 2.5% insurance premium B) 50,000; 95% recovery rate C) 20,000; 10% deductible D) 45,000; 5% fine E) 75,000; 90% recovery rate Answer: C Page: 418 Level: Medium 35. To be classified as an adequately capitalized bank, the bank must have a leverage ratio of at least _____ %, Tier I capital to risk adjusted asset ratio of at least _____ % and a total risk based capital ratio of at least _____ % and does not meet the definition of a well capitalized bank. A) 4; 4; 8 B) 5; 6; 10 C) 3; 3; 8 D) 4; 8; 4 E) 4; 6; 10 Answer: A Page: 420-422 Level: Difficult Response: See Table14-5 36. To be well capitalized a bank must have a leverage ratio of at least _____%, Tier I capital to risk adjusted asset ratio of at least _____ % and a total risk based capital ratio of at least _____ %. A) 4; 4; 8 B) 5; 6; 10 C) 3; 3; 8 D) 4; 8; 4 E) 4; 6; 10 Answer: B Page: 420-422 Level: Difficult Response: See Table14-5

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37. The FDIC may require an undercapitalized bank to I. Provide the FDIC with a capital restoration plan II. Cease acquiring brokered deposits III. Obtain FDIC approval for all acquisitions IV. Suspend dividends and management fees V. Suspend payments on subordinated debt A) I and II only B) III only C) I, II, III and IV only D) I, II, III, IV and V E) I, II, III and V only Answer: C Page: 423 Level: Difficult 38. Basel II consists of three overlapping areas that are designed to bolster the safety and soundness of the financial system. The three areas are I. Regulatory capital requirements for credit, market and operational risk. II. Eliminating complex risk based capital requirements for on and off balance sheet accounts. III. Ensuring that banks have sound internal control procedures in place to measure and limit risk. IV. Requirements to disclose to market participants the institution's capital structure, risk exposure and capital adequacy. V. Increasing deposit insurance premiums on all accounts. A) I, II and III B) I, III and IV C) II, III and V D) I, IV and V E) II, III and IV Answer: B Page: 420 Level: Difficult 39. Recent regulation such as the Reigle-Neal Act of 1994 has removed some of the federal banking laws that formerly constrained profitable opportunities for commercial banks. The Reigle-Neal Act removes the major restrictions on banks' ability to _____. A) Diversify geographically B) Diversify their product line C) Engage in securities underwriting D) Engage in insurance underwriting E) Engage in loan brokerage Answer: A Page: 412 Level: Easy 40. Tier I (core) capital includes all but which one of the following? A) Common stockholders' equity B) Qualifying cumulative and noncumulative perpetual preferred stock C) Minority interest in equity accounts of consolidated subsidiaries D) Allowance for loan and lease losses E) All of the above may be counted as Tier I capital.
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Answer: D Page: 421 Level: Medium Response: See Table 14-6 41. Mandatory provisions for undercapitalized banks under the FDIC Improvement Act include which of the following? A) Suspend payment of dividends and management fees B) Require the bank to file a capital restoration plan C) Restrict the bank's ability to increase assets D) Require FDIC approval before the bank may acquire another institution E) All of the above are mandatory provisions Answer: E Page: 423 Level: Medium Response: See Table 14-7 42. Requiring foreign banks to operate under the same rules as domestic banks is termed A) Favored status B) IBA clause C) National treatment D) NAFTA E) Post-patriotism requirement Answer: C Page: 425 Level: Easy 43. When banks play the "weekend game" they are A) Minimizing deposits on Friday to help reduce required reserves B) Maximizing deposits on Friday to help make the most of required reserves C) Minimizing their tax liability by recognizing profits before the weekend D) Maximizing the reserve maintenance period with Fed funds loans E) Doing A, C and D Answer: A Page: Appendix C Level: Medium

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44. In the U.S. regulators currently use a _____ to calculate required reserve balances A) Lagged reserve accounting system B) Contemporaneous reserve system C) Homoscedastic reserve system D) Two day computation period E) Accrual accounting period Answer: A Page: Appendix C Level: Medium 45. The potential exposure of an off balance sheet currency forward measures the A) Likely loss to the bank if the counter-party defaults in the future B) Replacement cost of the contract today C) Current net present value of the contract D) The maximum of B. or C. E) None of the above Answer: A Page: Appendix D Level: Difficult 46. Among other things, the _____________ prohibits U.S. banks from providing banking services to foreign shell banks. A) International Banking Act B) Financial Services Modernization Act C) USA Patriot Act D) Foreign Bank Supervision Enhancement Act E) Foreign Banking Activity Powers Enforcement Act Answer: C Page: 425 Level: Medium Chapter 15 True/False Questions 1. The primary function of insurance companies is to compensate policy holders or their beneficiaries if some specific adverse event occurs. Answer: True Page: 432 Level: Easy 2. Most insurance companies fund their activities by accepting insured deposits. Answer: False Page: 432 Level: Easy 3. In the U.S., group life policies are the most dominant form of life insurance, followed by ordinary life. Answer: False Page: 434 Level: Easy 4. Two of the newer life insurance policy types first developed in the 1970s and 1980s are variable life and
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endowment life. Answer: False Page: 434 Level: Medium 5. A 65 year old person has saved $450,000 and wishes to receive 15 annual annuity payments, beginning in one year. If the annuity rate is 8%, he can expect to receive $56,750 per year. Answer: False Page: 435-436 Level: Medium 6. On a term life policy, if the policyholder continues to make payments, the insurance company is guaranteed to have to make a payout. Answer: False Page: 434 Level: Easy 7. Policy reserves are the primary asset of the typical life insurer. Answer: False Page: 438 Level: Medium

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8. Health insurance protects against morbidity risk. Answer: True Page: 436 Level: Easy 9. Over 70 percent of life insurance assets are invested in long term securities. Answer: True Page: 437 Level: Medium 10. The cash surrender value of a life insurance policy is the present value of expected future payouts on the policy. Answer: False Page: 438 Level: Medium 11. The McFadden Act allows states the primary right to regulate insurance companies. Answer: False Page: 438 Level: Medium 12. The National Association of Insurance Commissions (NAIC) examines and regulates insurance companies. Answer: False Page: 438 Level: Medium 13. Most states maintain a permanent reserve fund to resolve insurance companies failures. Answer: False Page: 438 Level: Easy 14. The top ten property and casualty firms underwrite over 70% of all the P&C premiums written. Answer: False Page: 440 Level: Medium 15. There are more life insurers than there are property and casualty insurers in the U.S. Answer: True Page: 440 Level: Easy

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16. As of 2000, life insurers held a greater percentage of assets in common stocks than property and casualty insurers. Answer: True Page: 439-442 Level: Medium 17. Property loss risk is generally easier to estimate than liability loss risk. Answer: True Page: 444 Level: Easy 18. In property and casualty insurance the combined ratio is equal to the sum of the loss ratio plus loss adjustment expenses all divided by total premiums written. Answer: False Page: 445-446 Level: Difficult 19. Liability lawsuits related to breast implants are an example of long tail losses. Answer: True Page: 444 Level: Medium 20. Liability losses are more subject to social inflation than property losses. Answer: True Page: 444-445 Level: Easy

Multiple Choice Questions 21. Policy reserves are a/an A) Balance sheet liability B) Balance sheet asset C) Separate account item D) Insurance guarantee fund payment E) Income statement revenue item Answer: A Page: 439 Level: Medium

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22. The following type(s) of life insurance policies do not have a savings feature A) Term life B) Whole life C) Variable life D) Universal life E) Both C and D do not Answer: A Page: 434 Level: Medium 23. The four basic classes of life insurance are I. Ordinary II. Group III. Annuities IV. Industrial V. Credit A) I, II, III and IV B) I, III, IV and V C) I, II, IV and V D) II, III, IV and V Answer: C Page: 434 Level: Medium 24. The three forms of traditional ordinary life are A) Term life, whole life and credit life B) Variable life, whole and term life C) Universal life, variable life and variable/universal life D) Term life, whole life and endowment life E) Whole life, credit life and industrial life Answer: D Page: 434 Level: Medium 25. The term "variable" in a variable life policy refers to the A) Policyholder's ability to vary the premiums B) Insurer's ability to vary the rate of return on the policy C) Variable growth rate of the cash value of the policy D) Insurer's ability to vary the premiums E) The policy holder's ability to cancel the plan Answer: C Page: 434-435 Level: Medium

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26. The primary regulator of insurance firms is the A) NAIC B) McCarran-Ferguson Commission C) FDIC D) State insurance regulator E) SEC Answer: D Page: 438 Level: Medium 27. Which one of the following statements concerning annuities offered by insurers is not true? A) Interest on annuities is not taxed until the investor receives the payments. B) Annuity payments may be fixed or variable. C) Annuity contributions are not capped by the IRS. D) Annuities can be deferred or immediate. E) Annuity payments must cease upon the policyholder's death. Answer: E Page: 435 Level: Medium 28. An investor has $30,000 which he can invest today. In addition to this amount, he can also invest $9,000 per year for twenty years (beginning one year from now) at which time he will retire. He plans on living for twenty-five years after he retires. If interest rates are 8%, what size annual annuity payment can he obtain for his retirement years? (All annuity payments are at year end) A) $551,686 B) $51,681 C) $56,190 D) $47,248 E) $44,674 Answer: B Page: 436 Level: Difficult Response: [($30,000*1.0820) + ($9,000*FVIFA(8%,20 yrs)] / PVIFA(8%, 25 yrs)

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29. A policy holder wishes to annuitize the cash value of her insurance policy at retirement. She desires an annual payment of $65,000 per year and the cash value is expected to be $750,000 at retirement. How many payments can she expect to receive if the annuity interest rates are 6%? A) 12 B) 11 C) 16 D) 9 E) 8 Answer: C Page: 436 Level: Medium Response: $750,000 / $65,000 = PVIFA(6%, N yrs) 30. The largest asset category of life insurers is _____ and the largest liability category is _____. A) Bonds, separate account items B) Separate account items, current policy claims C) Bonds, policy reserves D) Policy reserves, mortgage loans E) Common stock, dividend reserve Answer: C Page: 439 Level: Medium 31. The most important legislation affecting regulation of life insurance companies prior to 1999 was the A) McCarran-Ferguson Act B) McFadden Act C) Investment Company Act D) SEC Act E) Insurance Freedom Act Answer: A Page: 438 Level: Easy 32. Insurance companies, commercial banks and investment banks may now affiliate with each other and engage in similar lines of business. These powers were granted by the A) Glass-Steagall Act B) Depository Deregulation Act C) Garn-St Germain Act D) Riegle-Neal Act E) Financial Services Modernization Act Answer: E Page: 440 Level: Easy 33. In 2000, the singly largest category of assets on the typical property-casualty insurer's balance sheet was A) Common stock B) Mortgage loans C) Preferred stock D) Bonds E) Policy reserves
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Answer: D Page: 442 Level: Medium 34. In 2000, the average loss to premium ratio was about_____. A) 109% B) 89% C) 71% D) 65% E) 53% Answer: C Page: 441 Level: Medium 35. Flood insurance is an examples of a ____________________ for which it is difficult to predict loss interest. A) Low severity, low frequency event B) High severity, high frequency event C) Low severity, high frequency event D) High severity, low frequency event Answer: D Page: 444 Level: Easy 36. Property and casualty insurers hold _____ short term assets than life insurers because property and casualty loss rates are _____ predictable than life insurance loss rates. A) More, more B) More, less C) Less, less D) Less, more Answer: B Page: 439,442 Level: Medium

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37. The operating ratio is calculated as A) The combined ratio minus the investment yield B) The loss ratio plus the loss adjustment expense ratio plus the commission to premium ratio C) The combined ratio minus the loss ratio D) The loss ratio minus the underwriting cycle lag E) None of the above Answer: A Page: 445 Level: Medium 38. An insurance line has a loss ratio of 82%, an expense ratio of 25%, and the firm pays 2% of premiums to policyholders as dividends. What level of investment yield is needed to make the P&C firm breakeven? A) 5% B) 7% C) 9% D) 11% E) 13% Answer: C Page: 446 Level: Medium 39. The two major components of expense risk for P&C insurers are A) The combined ratio and the premium ratio B) Loss adjustment expenses and variations in commission and other expenses C) Investment yield and premiums earned D) Dividend ratio and investment yield E) None of the above Answer: B Page: 445 Level: Medium 40. At P&C insurers, if the combined ratio is less than 100%, the premiums charged were sufficient to cover A) Losses only B) Expenses only C) Both losses and expenses D) Losses, expenses and investment returns on premiums Answer: C Page: 445-446 Level: Medium 41. For P&C insurers if the combined ratio is more than 100%, that firm A) Could not have been profitable. B) Must have been profitable. C) May have been profitable if investment returns were high enough. D) Was profitable if the LAE was low enough. Answer: C Page: 445-446 Level: Medium

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42. Estimates of the cost of the September 11, 2001 terrorist attacks on the World Trade Center indicate that the cost to insurance companies may be as high as A) $20 billion B) $30 billion C) $40 billion D) $50 billion E) $60 billion Answer: C Page: 447 Level: Easy

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