FIN 4324 - Midterm MCQ

True/False: A bank can be defined as the economic functions it preforms, the services it offers its customers, or the legal basis for its existence.

True

True/False: Congress defined a bank as any institution that might qualify as a investment bank.

False

Which of the following best describes a money centered bank?

A large institution, offering a wide possible of financial services.

Saving deposits many focuses on.

Interest bearing funds with financial institutions

True/False: State banking commissions are the primary regulators of American banks at the state level.

True

The Federal Reserve Act (1913) many focus was to implement the Office of Comptroller of the Currency.

False

Which act first implemented the Federal Deposit Insurance Corporation?

The Banking Glass-Stegall Act

The Riegle-Neal Interstate Banking and Branching Efficiency Act mainly focused on what?

Allowed banks to freely branch across state lines

True/False: A bank holding company is a corporation that owns and controls one or more banks and is subject to regulation by the Federal Reserve Board

True

Unit banking laws require banks to operate across multiple states and branch locations to remain federally charted

False

Which of the following best describes a bank holding company?

A corporation that owns one or more banks and can engage in nonbanking activities

The McFadden Act of 1927 was significant in U.S. banking history because it:

Restricted national banks from branching across state lines, keeping them competitive with state banks

True/False: A bank must receive approval from both its chartering authority and the FDIC before it can legally accept deposits from the public

True

True/False: The FDIC plays no role in the approval process for establishing a new federally insured bank

False

Which of the following best describes the purpose of a bank branch compared to a full-service bank?

A branch is an extension of a parent bank that offers banking services without being a separately chartered institution

Which of the following is NOT typically a factor regulator to consider when approving a new bank charter?

The personal political affiliations of the bank's founders

The two most important financial statements for a banking firm are its Balance Sheet and its income and expense statement

True

A balance sheet, or Report of Condition, lists the assets, liabilities, and equity capital (owners’ funds) held by or invested in a bank or other financial firm on any given date.

True

What is the first asset item normally listed on a banking firm’s Report of Condition

Cash and Due from Depository Institutions

Which asset item is by far the largest on a banking firm’s Report of Condition, often accounting for half to nearly three-quarters of the total value of all bank assets?

Loans and Leases

Credit risk is the primary risk faced by commercial banks, accounting for the largest portion of potential losses in the banking system.

True

Under Peter Rose's framework, the loan approval process is less important than the initial credit analysis phase in managing credit risk.

False

Which of the following is NOT typically considered a key component of comprehensive lending policies?

Deposit interest rate setting strategies

In Rose's framework, the primary purpose of establishing loan covenants is to:

Protect the bank's interest by restricting borrower behavior and maintaining financial condition

Which of the following best describes how Basel III has enhanced credit risk management standards for banks?

Basel III introduced more rigorous capital requirements, stress testing, and counterparty credit risk management

Interest-sensitive gap management is used to help financial institutions reduce exposure to interest rate risk.

True

Duration gap management completely eliminates all interest rate risk for financial institutions.

False

Which of the following is a goal of interest rate hedging?

Protect the net interest margin

What does an upward-sloping yield curve indicate?

Long-term rates are higher than short-term rates

Financial futures contracts are agreements to buy or sell securities at a preset price on a future date.

True

A call option gives the holder the right to sell securities at a specified price.

False

Which derivative tool is most commonly used by banks to hedge interest rate risk?

Swaps

What is the purpose of an initial margin in futures trading?

To guarantee performance of the contract

Credit default swaps are designed to reduce credit risk exposure.

True

Standby letters of credit require immediate cash payment by the issuing bank.

False

Which credit derivative acts similarly to insurance against default?

Credit default swap (CDS)

What is the main purpose of securitization?

Convert illiquid assets into marketable securities

Investment securities help financial institutions stabilize income during periods when loan revenues decline.

True

Treasury bills usually mature in more than ten years

False

Which of the following is considered one of the safest money market instruments?

Treasury bills

Which investment instrument is backed by pools of loans such as home mortgages?

Securitized assets

Money-Center banks are not personalized as much as Community banks.

True

Financial systems main purpose is to discourage savings and investment.

False

Choose the institutions that are insures deposits in the U.S.

FDIC

Choose the banks that serves to local communities and small towns.

Community Bank

Investment banking and commercial banking is separated by The Glass-Steagall Act.

True

(FOMC) The Federal Open Market Committee provides deposit insurance to bank customers.

False

What are the laws that allows banking companies to affiliates with securities firms under common ownership

Gramm-Leach-Bliley Act

The organizations that conducts open market operations in the U.S

Federal Reserve

Unit banks provide all of their services from one main office location.

True

Branch banking organizations usually operate without a home office.

False

Which type of bank usually offers services from only one office location?

Unit bank

Which law helped expand interstate banking and branching in the United States?

Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994

New banks usually become profitable within the first 2–3 years of operation.

True

ATMs increase bank operating costs because they require more employees.

False

Who issues national bank charters in the United States?

Office of the Comptroller of the Currency (OCC)

Which of the following is considered a branchless banking service?

Automated Teller Machine (ATM)

Which of the following is considered the major asset category for most banks?

Loans and leasing financings

Net Interest Income is calculated as:

Interest Income – Interest Expenses

Equity capital provides a long-term and relatively stable source of financial support for a bank

True

Off balance sheet items reduce a bank’s exposure to risk completely

False

What is the basic formula used to find a banks return on assets (ROA)?

Net Income/Total assets

What is the most basic definition of a bank's “assets?”

What the bank owns like loans and cash

Net income is the money a bank has left over after paying all its expenses

True

If a bank has more expenses than revenues, it will make profit

False

Asset liability Management (ALM) is used to mainly control risk from changes in

Market interest rates

A bank has a negative “gap when its interest-sensitive liabilities are

Greater than its interest sensitive assets

A bank has a positive gap when its sensitive assets are exactly equal to its sensitive liabilities

False

If a bank has $10 million in sensitive assets and $10 million in sensitive liabilities, its gap is $5 million.

False

What is the main purpose of derivative contracts for financial institutions?

To protect against financial risks such as interest rate changes

A buyer of futures contract is said to be

Long futures

Interest-rate swaps allow financial institutions to convert from fixed interest rates to floating interest rates or vice versa

True

A call option gives the holder the right to sell securities at a predetermined price

False

Which of the following is the primary purpose of loan sales by banks?

Reduce liquidity and credit risk

A credit derivative allows a bank to primarily:

Transfer credit risk to another party

Asset-backed securities are created by pooling loans and converting them into marketable securities.

True

Credit standbys guarantee that a borrower will never default.

False

Investment securities help financial institutions provide liquidity, stabilize income, diversify risk, and reduce tax exposure

True

Capital market instruments usually mature within one year and are known mainly for low risk and ready marketability.

False

Which of the following is considered a money market investment instrument?

Treasury bills

Which risk occurs when rising market interest rates cause the value of previously issued bonds to fall?

Interest rate risk

 Bank can be defined only by the services it offers to customers.

False

One major reason banks face stronger competition today is that many nonbank financial-service firms now offer similar services to the public.

True

Which statement best explains why the definition of a bank has become harder to separate from other financial-service firms?

Financial-service providers are increasingly offering similar products and one-stop financial services

A community bank is most likely different from a money-center bank because a community bank usually:

serves local communities with a more personalized range of services.

Government regulation of banks exists partly because banks hold the public’s savings and can affect the money supply through lending.

True

The Gramm-Leach-Bliley Act required commercial banks, investment banks, and insurance companies to remain completely separate from each other,

False

Why did the creation of the FDIC become important to the banking system?

It helped protect depositors and restore public confidence in banks.

Which action would most likely make it harder for banks to create new loans?

The central bank raises reserve requirements.

Community banks are primarily focused on serving smaller, locally based markets

True

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 restricted banks from opening branches across state lines.

False

Which of the following best describes a unit bank?

A bank that offers services from one main office

What contributed to the expansion of branch banking in the United States?

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994

In store branches are typically more expensive to operate than traditional stand alone branches

False

Most countries require government approval before a new financial institution can be established.

True

Which organization can issue a federal charter for a new U.S. bank?

Office of the Comptroller of the Currency (OCC)

Which of the following is considered an advantage of a state bank charter?

Lower supervisory fees and easier approval process

Loans are generally the largest asset category on a commercial bank balance sheet.

True

Noninterest income only includes income earned from loans.

False

The account built up by annual noncash expense deductions and subtracted from Gross Loans on the Balance Sheet (Report of Condition) is called:

Allowance for possible loan losses