Chapter 3

The Organization and Structure of Banking and the Financial-Services

Industry
Fill in the Blank Questions
1. A(n) ___________________ is a machine located at the merchant's place of business which
allows depositors to use their debit card to pay for purchases directly.
Answer: POS
2. A(n) _____________________ is a bank which offers its full range of services from several
locations.
Answer: branch bank
3. A(n) _____________________ is a bank which offers its full range of services from only one
location.
Answer: unit bank
4. A(n)________________________ is a corporation chartered for the express purpose of holding
the stock of one or more banks.
Answer: Bank Holding Company
5. Managers who value fringe benefits, plush offices and ample travel budgets over the pursuit of
maximum returns for stockholders are exhibiting signs of __________________________.
Answer: Expense Preference Behavior

6. A(n) __________________________ can invest in corporate stock as sell as loan money to help
finance the start of new ventures or support the expansion of existing businesses .
Answer: Merchant bank

7. A bank which operates exclusively over the internet is known as a ___________ bank.
Answer: Virtual
8. One new 21st century bank organizational structures is _____________________ . This is a
special type of holding company that may offer the broadest range of financial services.
Answer: Financial Holding Company (FHC)

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9. The key problem in a large money center bank is

Managers may be knowledgeable about banking practices but may be less

informed about products and services of subsidiary companies.
Answer: span of control

10. The Gramm-Leach-Bliley Act moved the U.S. banking industry closer to

banking in which banks may provide securities, insurance, and other financial
products.
Answer: universal

11. A bank that is not associated with a bank holding company is called a(n)
bank.
Answer: independent

12.

is a view of how modern corporations operate

which analyzes the relationship between a firms owners and its managers.
Answer: Agency theory

13. Many experts believe that

, the relationships
that exist between managers, the board of directors and stockholders, is
more complicated in financial institutions. Answer: Because of government
regulations.

14.

is the idea that there will be a lower

cost of production per unit as the firm gets larger.
Answer: Economies of scale

15.

is the idea that there will be lower cost of

producing multiple services using the same organization and resources.
Answer: Economies of scope

16. Over the years, managers of banks and other financial institutions have
evolved different organizational forms to address changes in the industry.
Indeed, these firms are organized to carry out various roles in the most
efficient way. This is referred to as _________________________.
Answer: Organizational form follows function
True/False Questions
T

F 17. Bank size is not considered a significant factor in determining how banks are organized.
Answer: False

Test Bank, Chapter 3

F 18. Nearly three quarters of all U.S. banks exceed $100 million in asset size apiece.
Answer: False

F 19. Nearly all U.S. banks with federal or state charters have their deposits insured by the
Federal Deposit Insurance Corporation.
Answer: True

F 20. State-chartered banks in the United States represent about a quarter of all U.S.-chartered
banks, while national banks account for approximately three quarters of all U.S. chartered
banks.
Answer: False

F 21. The majority of all U.S. banks are members of the Federal Reserve System.
Answer: False

F 22. A banking corporation chartered by either federal or state governments that operates only
one full-service office is called a unit bank.
Answer: True

F 23. Over half of all U.S. states today limit branching activity.
Answer: False

F 24. The average U.S. bank is larger in size (in terms of number of branch offices) than the
average Canadian bank.
Answer: False

F 25. Despite the rapid growth of automation in U.S. banking, there are more full-service
branch banking offices than automated teller machines across the whole U.S.
Answer: False

F 26. In the United States there are more one-bank holding companies than multi-bank holding
companies.
Answer: True

F 27. Bank holding companies hold more than 90 percent of the industrys assets in the United
States.
Answer: True

F 28. Research evidence suggests that banks taken over by interstate banking organizations

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have generally increased their market shares over their competitors within the same state
and generally are more profitable than their competitors.
Answer: False

F 29. The concentration of bank deposits at the local level (that is in urban communities and
rural counties) has displayed only moderate changes in recent years.
Answer: True

F 30. There is evidence that branch banks charge higher fees for some banking services than do
unit banks.
Answer: True

F 31. Branch banks tend to offer a wider menu of services than unit banks.
Answer: False

F 32. Recent research suggests that branch banks tend to be more profitable than either unit or
holding company banks, while interstate banks tend to be the most profitable of all.
Answer: False

F 33. Less than 10 percent of the largest banks in the U.S. control almost 90 percent of the
industry assets.
Answer: True

F 34. Agency theory suggests that bank management will always pursue the goal of
maximizing the return of the bank's shareholders.
Answer: False

F 35. Recent research suggests that the relationship between bank size and the cost of
production per unit is roughly U shaped.
Answer: True

F 36. Bank holding companies that want to achieve the goal of risk reduction in earnings risk
through interstate banking can achieve the same level of risk reduction by entering any of
the fifty states.
Answer: False

F 37. Bank holding companies are allowed to own nonbank businesses as long as those
businesses offer services closely related to banking.
Answer: True

Test Bank, Chapter 3

F 38. Banks tend to have a higher proportion of outside directors than a typical manufacturing
firm.
Answer: True

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T
F
39.
Answer: False

Banks which operate entirely on the web are known as invisible banks.

F 40. Banks acquired by holding companies are referred to as affiliated banks.

Answer: True

F 41. Bank organizational structure has become more complex in recent years.
Answer: True

F 42. There are only a very small number of unit banks in the U.S. today.
Answer: False

F 43. Traditional brick-and-mortar bank branch offices are on the decline in the U.S. today.
Answer: False

F 44. Community banks are usually smaller banks that are devoted principally to the markets
for smaller, locally based deposits and loans.
Answer: True

F 45. The question of whether financial firms operate as efficiently as possible requires
researchers to look into the issue of x-efficiency. The concept requires an assessment of
the financial firms operating costs in relation to its cost-efficient frontier.
Answer: True

Multiple Choice Questions

46. In banking, organizational form follows __________ because banks usually are organized in such
a way as to carry out the tasks and supply the services demanded of them. The term that correctly
fills in the blank in the sentence above is:
A) Bank size
B) Management's decision
C) Function
D) Regulation
E) Location
Answer: C

47. Which one of the following is charged with setting policy and overseeing a bank's performance?
A) Stockholders
B) Board of directors

Test Bank, Chapter 3

C) Regulators
D) Depositors
E) None of the above.
Answer: B

48. The largest banks possess some potential advantages over small and medium-size banks,
according to the textbook. What specific advantage of the largest banks over small and mediumsized banks is not mentioned in the text?
A) Greater diversification geographically and by product line
B) Availability of financial capital at lower cost
C) Greater professional expertise to allocate capital to the most promising products and services
D) Better positioned to take advantage of the opportunities afforded by interstate banking.
E) All of the above were mentioned in the text as advantages typically possessed by the largest
banks.
Answer: E

49. Before any financial services can be offered to anyone a bank in the United States must have a:
A) Certificate of deposit insurance
B) Charter of incorporation
C) List of established customers
D) New building constructed to be the bank's permanent home
E) None of the above.
Answer: B

50. In the United States there are close to __________ commercial banks in operation. Which
number shown below is closest to the actual total number of U.S. banks operating in the U.S.?
A) 20,500
B) 13,500
C) 11,500
D) 9,000
E) 7,500
Answer: E

51. One of the few states that has opted out of interstate banking is:
A) New York
B) Ohio
C) Texas
D) Montana
E) None of the above
Answer: D

52. The concentration of U.S. bank deposits in the hands of the largest banks has _________ during
the most recent period,
A) Declined
B) Increased

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C) Remained essentially unchanged

D) Exhibited large fluctuations in both directions
E) None of above.
Answer: B

53. Bank holding company organizations have several advantages over other types of banking
organizations. Among the advantages mentioned in this chapter is:
A) Greater ease of access to capital markets
B) Tax advantage
C) Product-line diversification
D) All of the above.
E) None of the above.
Answer: D

54. A company which owns the stock of three different banks is known as a(n):
A) Unit Bank
B) Interstate Bank
C) One Bank Holding Company
D) Multi Bank Holding Company
E) None of the above
Answer: D

55. Which of the following is considered an advantage of branch banking?

A) Increased availability and convenience of services
B) Decreased chance of failure
C) Reduced transaction costs
D) B and C above
E) All of the above
Answer: E

56. The types of nonbank businesses a bank holding company can own include which of the
following?
A) Retail Computer Store
B) Security Brokerage Firm
C) Retail Grocery Store
D) Wholesale Electronic Distribution Company
E) All of the above
Answer: B

57. A bank which offers its full range of services from only one office is known as a:
A)
B)
C)
D)
E)

Unit Bank
Branch Bank
Correspondent Bank
Bank Holding Company
None of the above

Test Bank, Chapter 3

Answer: A

58. Why did so many states and the federal government finally enact interstate banking laws?
A)
B)
C)
D)

The need for new capital in order to revive struggling economies

The expansion of services by nonbank financial institutions
Competition from neighboring states that already liberalized their laws
Advances in technology which allowed banks to service customers in broader geographic
areas
E) All of the above are reasons for the passage of interstate banking laws
Answer: E

59. What is a bank holding company?

A) It is a bank that offers all of its services out of one office
B) It is a bank that offers all its services out of several offices
C) It is a corporation formed to hold the stock of one or more banks
D) It is a merchant bank
E) None of the above
Answer: C

60. Which of the following is a type of service a bank holding company is not allowed to own?
A) Merchant banking company
B) Savings and loan association
C) Retail electronics equipment sales company
D) Security brokerage firm
E) Insurance agency
Answer: C

61. In the last decade, the number of banks has __________ and the number of branches has
_________.
A) Declined; Increased
B) Grown; Increased
C) Grown; Decreased
D) Declined; Decreased
E) Stabilized; Stabilized
Answer: A

62. Websites known as electronic branches offer all of the following except:
A) Internet banking services
B) ATMs
C) Point of sales terminals
D) Computer and phone services connecting customers
E) Traveler's checks
Answer: E

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63. Relative to manufacturing firms, banks tend to have a (the) ___________ number of board
members.
A) Same
B) Larger
C) Smaller
D) Unknown
E) None of the above
Answer: B

64. The percentage of unit banks in the U.S. today is approximately:

A) 10%
B) 30%
C) 50%
D) 75%
E) 100%
Answer: B

65. The typical community bank has:

A) $300 million in assets and is located in a smaller city in the
Midwest.
B) $25 billion in assets and is located in a large city in the East
C) $100 million in assets and is located in a large city the South
D) $10 billion in assets and is located in a small city in the West
E) None of the above
Answer: A
66. The typical money center bank has:
A) $250 million in assets and is located in a smaller city in the Midwest
B) $25 billion in assets and is located in a large city in the East
C) $100 million in assets and is located in a large city in the South
D) $10 billion in assets and is located in a small city in the West
E) None of the above
Answer: B
67. The majority of banks today are:
A) Federally chartered
B) Uninsured
C) State Chartered
D) National Banks
E) All of the above
Answer: C

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Test Bank, Chapter 3

68. Member banks are:

A) Members of the FDIC
B) National Banks
C) Unit Banks
D) Members of the Federal Reserve
E) All of the above
Answer: D
69.

and
more of the publics deposits.
A) National and Member
B) State and Nonmember
C) National and Uninsured
D) State and Insured
E) None of the above
Answer: A

banks tend to be larger and hold

70. Which of the following is a reason for the rapid growth in branch
banks?
A) Exodus of population from cities to suburban areas
B) Bank convergence
C) Business failures
D) Decreased costs of brick and mortar
E) All of the above
Answer: A
71. Under the Bank Holding Company Act control of a bank is assumed to
exist only if:
A) The bank holding company acquires 100% of the banks stock
B) The bank holding company acquires 50% or more of the banks
stock
C) The bank holding company acquires 25% or more the banks stock
D) The bank holding company acquires three banks
E) None of the above
Answer: C
72. When a bank holding company acquires a nonbank business it must be
approved by:
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A) The FDIC
B) The Comptroller of the Currency
C) The Federal Reserve
D) The President of the U.S.
E) All of the above
Answer: C

73. Many financial experts believe that the customers most likely to be
damaged by decreased competition include:
A) Large corporations in large cities
B) Households and business in smaller cities and towns
C) Households that earn more than a billion dollars a year
D) Students away at college
E) None of the above
Answer: B
74. According to Levonian and Rose in order to achieve some reduction in
earnings risk, interstate banks must expand into at least:
A) 2 states
B) 4 states
C) 6 states
D) 10 states
E) 25 states
Answer: B
75. The major competitors of banks have:
A) Fewer but much larger service providers
B) Fewer but smaller service providers
C) More but smaller service providers
D) More but larger service providers
E) None of the above
Answer: A
76. Of the following countries in Europe, which has the largest number of
banks?
A) Belgium
B) France
C) Germany
D) Great Britain
E) None of the above
Answer: C
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Test Bank, Chapter 3

77. Which countrys banks were owned by the state until the 1990s?
A) Belgium
B) France
C) Germany
D) Italy
E) None of the above
Answer: D

78. When financial service providers offer a range of services including

banking, insurance and securities services it is known as:
A) Consolidation
B) Convergence
C) Economies of scale
D) E-Efficiencies
E) None of the above
Answer: B
79. The gradual evolution of markets and institutions such that geographic boundaries do not
restrict financial transactions is known as:
A) Deregulation
B) Integration
C) Re-regulation
D) Globalization
E) Moral suasion
Answer: D
80. Banks with less than _______ in assets are generally called community banks.
A) More than $1 billion
B) Less than $1 billion
C) More than $5 million
D) Less than $1 trillion
E) More than $1 trillion
Answer: B
81. Nonbank financial firms that supply insurance coverage to customers
borrowing money to guarantee repayment of a loan are referred to as:
A) Merchant Bankers
B) Factoring Companies
C) Savings Associations

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D) Investment Bankers
E) Credit Insurance Underwriters
Answer: E
82. A financial holding companies (FHC), defined as a special type of
holding company that may offer the broadest range of financial
services such as securities and insurance activities, were allowed
under which act?
A) Riegle-Neal Interstate Banking and Branching Efficiency Act
B) The Competitive Equality in Banking Act
C) The Basel Agreement
D) The FDIC Improvement Act
E) The Gramm-Leach-Bliley Financial Services Modernization Act
Answer: E

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Test Bank, Chapter 3