Accounting For Financial Institutions

Section (1)
Ch 1: An Overview of the Changing Financial-Services Sector

1) Essay Questions:

a) What is a bank? How does a bank differ from most other financial-service providers?
 A bank is defined by the economic function it performs, what services it offers its customers, or
the legal basis for its existence.
 Historically, banks have been offering a great range of financial services such as checking and
debit accounts, credit cards, and savings plans. However, banks today are rapidly expanding their
service offerings to include investment banking (security underwriting), insurance protection,
financial planning, advisory service for merging companies, risk-management services, and
numerous other innovative financial products.
 Other financial service providers offer some of the similar financial services offered by a bank
but not all of them within one institution. Although, many financial-service institutions are trying
to be as similar to banks as possible in the services they offer. Not only financial service
industries but several industrial companies have stepped forward in recent decades to control a
bank or a bank like firms.
b) Which businesses are banking’s closest and toughest competitors? What services do they offer
that compete directly with banks’ services?
 Among a bank’s closest competitors are savings associations, credit unions, money market
funds, mutual funds, hedge funds, security brokers and dealers, investment banks, finance
companies, financial holding companies, and life and property-casualty insurance companies.
 All of these financial service providers are converging and embracing each other’s innovations.
Recent changes in government rules has allowed many of these financial service providers to
offer the public one-stop shopping for financial services.
c) Why are some banks reaching out to become one-stop financial-service conglomerates? Is this a
good idea?
 Banks and various financial institutions are converging in terms of the services they offer and
embracing each other’s innovations. There are two reasons that banks are increasingly becoming
one-stop financial service conglomerates. The first reason is the increased competition from
other types of financial institutions and the second reason is the erosion of the bank’s market
share for providing traditional services. Due to these reasons, the banks demanded for a relief
from traditional rules and lobbying for an expanded authority to reach new markets around
globe. This has led to the Recent changes in government rules which allowed banks to expand
their role to be full service providers. It is a beneficial step as it has led the U.S. banks to stay in
the competition and increase the market share by entering into various new industries like the
securities and insurance industries.
d) What is happening to banking’s share of the financial marketplace and why?
 The Recent changes in government rules made way for many financial service competitors to
offer a variety of financial services. In essence, financial-services ideally offered similar services
as banks and as such, the market share has decreased for traditional banks and the challenge of
differentiating banks from other financial-service providers has become difficult.
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2) Fill in the Blank Questions:

a) Safekeeping of valuables and Certification of Value is a traditional service provided by banks in which the
banks store the valuables of their customers and certify their true value.
b) Currency exchange 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.
c) A(n) demand deposit (checking account)is a traditional service which permits a depositor to write a draft in
payment for goods and services.
d) Consumer lending is a service provided by banks where the bank lends money to individuals for the
purchase of durable and other goods.
e) The country with the most banks is the United States
f) According to Congress, a bank is defined as any institution that can qualify for deposit insurance
administered by the FDIC.
g) Convergence refers to the movement of businesses across industry lines in order to broaden its base.
h) Banks which serve primarily households and small firms are known as retail banks.
i) Banks that sell deposits and make loans to businesses, individuals, and institutions are known as
commercial banks.
j) Banks which function under a federal charter through the Comptroller of the Currency in the United
States are known as national banks.
k) Banks which supply both debt and equity capital to businesses are known as merchant banks.
l) A bank that offers its services only over the Internet is known as a(n) virtual bank
m) When a local merchant sells the accounts receivables, they hold against their customer to a bank this
generally known as discounting commercial notes
n) A(n) finance company offers loans to commercial enterprises (such as appliance dealers) and to
individuals and families using funds borrowed in the open market or from other financial institutions.

3) State whether the following statements are true or false and correct the false statements:

a) According to the textbook, the largest banks tend to offer the widest range of services of any financial-
service firm today.  True
 Accounting For Financial Institutions

b) The role performed by banks in the economy in which they transform savings into credit is known as
the intermediation role. True

c) The role performed by banks in which they guarantee to make payments on behalf of their customers
when those customers are unable to pay a debt obligation is known as the guarantor. True

d) Money-center banks usually service local communities, towns, and cities, offering a narrow menu of
services to the public. False (community banks)

e) 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. False (that sells deposits
and make loans to businesses, individuals and institutions) / Savings bank

f) Managing the financial affairs and property of individuals and business firms falls under the type of
banking service line known as cash management services. False (Trust Services)
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4) Multiple Choice Questions

1. Banks perform the indispensable task of:

A. creating money without making loans.

B. absorbing the excess liquidity created by other financial institutions.

C. intermediating between surplus-spending parties and deficit-spending parties.

D. issuing risky deposits.

E. None of the options are correct

2. 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.

3. 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.

4. 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
 Accounting For Financial Institutions

C. Community Bank

D.Minority banks

E. None of the options are correct.

5. 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. Merchant banks

E. None of the options are correct.

6. 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 options are correct.

7. 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 payments role

C. The risk management role

D. The guarantor role

E. The policy role

8. 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
they do not pay off the loan, Bank of America will. Which of the following roles is the bank performing?
 Accounting For Financial Institutions
A. The intermediation role

B.The payments role

C. The risk management role

D. The guarantor role

E. The policy role

9. 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 payments role

C. The risk management role

D. The guarantor role

E. The policy role

10. 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 payments role

C. The risk management role

D. The guarantor role

E. The policy role

11. 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

12. The principal functions and services offered by many financial-service firms today include:

A. lending and investing money.

 Accounting For Financial Institutions

B. making payments on 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.