Type:
Test Bank
Financial Institutions Resource: Management A Risk Management Approach Edition:
10th Edition
Author(s):
Anthony Saunders Marcia Millon Cornett Otgo Erhemjamts
Chapter 01 Why Are Financial Institutions Special? KEY 1. Currently (2015) J.P. Morgan Chase is the largest bank holding company in the world and operations in 60 countries. FALSE 2. As of 2015, U.S. FIs held assets totaling over $29 trillion TRUE 3. Financial institutions act as intermediaries between suppliers and users of money. TRUE 4. If a household invests in corporate securities and does not supervise how the funds are invested or used by the corporation, the risk of not earning the desired return or not having the funds returned increase. TRUE 5. If not done by FIs, the process of monitoring the actions of borrowers would reduce the attractiveness and increase the risk of investing in corporate debt and equity by individuals. TRUE 6. Failure to monitor the actions of firms in a timely and complete fashion after purchasing securities in that firm exposes the investor to agency costs. TRUE 7. The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity risk. FALSE 8. Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower. FALSE 1-1 Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9. FIs typically provide secondary claims to household savers that have inferior liquidity than primary securities of corporations such as equity and bonds. FALSE 10. An FI is exposed to liquidity risk because the average maturity of assets and the average maturity of liabilities are often different on the FIs balance sheet. FALSE 11. When an FI functions as a broker, they are selling a financial asset that they have created and will continue to hold on their balance sheet. FALSE 12. An FI acting as an agent in matching savers and borrowers of funds can attain economies of scale and provide this service more efficiently than either the saver or borrower could on their own. TRUE 13. Financial institutions are subject to economies of scale in the collection of information. TRUE 14. Compared to households, FIs often have economies of scale when purchasing or selling securities issued by businesses and governments. TRUE 15. As an asset transformer, the FI issues financial claims that are more attractive to household savers than the claims directly issued by corporations. TRUE 16. The asset transformation function of an FI is to issue primary financial claims to corporations while purchasing secondary claims issued by households and other investors. FALSE 17. Secondary securities are securities that serve as collateral for primary securities. FALSE
1-2 Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18. FIs are independent market entities that create financial assets whose value is the transformation of financial risk. TRUE 19. The more costly it is to supervise the use of funds by a borrower, the less likely a saver will encounter agency costs. FALSE 20. As a delegated monitor, an FI's actions reduce agency costs. TRUE 21. Because FIs remove imperfections between households and corporations, households tend to save more than they would if FIs did not exist. TRUE 22. The ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is the result of choosing assets that are less than perfectly positively correlated. TRUE 23. Research shows that there is a significant reduction in risk achieved by investing in as few as 6 different securities. FALSE 24. By diversifying investments, an FI is able to more accurately predict the expected return on its asset portfolio. TRUE 25. Depository institutions serve as the primary conduit through which monetary policy actions impact the economy. TRUE 26. The liabilities of depository institutions are significant components of the money supply. TRUE 27. The goal of credit allocation is the encouragement of FIs to diversity the composition of their assets. 1-3 Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
FALSE 28. Credit allocation regulations are typically designed to benefit customers as well as the financial institution that must implement the guidelines. FALSE 29. The qualified thrift lender test is used to determine whether an institution is classified as a Savings Institution (Thrift). TRUE 30. Commercial banks and finance companies have traditionally served the needs of the residential real estate market. FALSE 31. The Federal Reserve mandates reserve requirements for depository institutions so that the DIs may provide payment services for the U.S. economy. FALSE 32. The ability of savers to transfer wealth between youth and old age and across generations is called maturity intermediation. FALSE 33. Time intermediation involves the investment of small amounts by investors into mutual funds that invest in long-term securities such as stocks and bonds. FALSE 34. The efficiency with which FIs provide payment services directly benefits the economy. TRUE 35. The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities. TRUE 36. Unfairly excluding some potential financial service consumers from the financial services marketplace is a reason why FIs must absorb net regulatory burden. TRUE 1-4 Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
37. Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs of providing FI services. TRUE 38. In an attempt to enhance the net social welfare benefits of the services provided by financial intermediaries, safety and soundness regulation requires a DI to hold a minimum level of cash reserves against deposits. FALSE 39. The part of the money supply produced by depository institutions is referred to outside money because it is produced outside of the government. FALSE 40. Because of changes in regulatory barriers, technology, and financial innovation, a single financial service firm may now be able to offer a full set of financial services. TRUE 41. Small investors in mutual funds are often able to realize larger returns than they would receive from bank deposits. TRUE 42. The purpose of guaranty funds in safety and soundness regulation is to protect claim-holders when an FI collapses or fails. TRUE 43. In most countries, cash is required to be held in reserve against deposits. TRUE 44. The passage of legislation to prevent discrimination in lending is an example of regulation to protect investors. FALSE 45. The passage of legislation to ensure that FIs are meeting the needs of their local communities is an example of entry regulation. FALSE 1-5 Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
46. Firms in industries that have low costs of entry tend to enjoy larger profits than firms in industries with high costs of entry. FALSE 47. In recent years, the proportion of savings and demand deposits have decreased and the proportion of pension funds have increased in the financial assets held by U.S. households. TRUE 48. The proportion of financial assets controlled by depository institutions has been increasing in recent years. FALSE 49. One reason for the increasing proportion of total financial assets controlled by pension funds and investment companies is that these intermediaries exploit the comparative advantages of size and diversification. TRUE 50. Pension and mutual funds have a lower correlation between the maturities of their assets and liabilities than do commercial banks and thrifts. FALSE 51. Savers increasingly favor investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs. TRUE 52. The standardization of many FI products is evidence of the inefficient institutionalization by financial markets and the mechanisms through which these products trade. FALSE 53. The Internet has allowed individual investors to purchase securities while benefiting from decreased transactions costs. TRUE 54. Services provided by depository institutions have become relatively less significant as a portion of all services provided by FIs. TRUE 1-6 Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.