Financial Institutions T/F

Banks which assume higher risk will always earn higher returns.

Banks operate under the same regulatory structure as any other financial services firms.

Banks usually pay low explicit interest rates on demand deposit accounts.

Savings deposits are a larger percent of funding for small banks, compared to large banks.

Most banks issue negotiable certificates of deposits.

Fed Funds purchased is an important short-term asset for large banks.

Eurodollars are dollar denominated deposits owned by foreigners.

Banks hold a substantial volume of low-risk corporate bonds because of their high yields.

The prime rate is the lowest loan rate offered by banks.

With interest rates expected to decrease in the future, banks would prefer to make floating-rate loans rather than fixed rate loans.

Demand deposits represent the largest deposit source of funds for commercial banks.

A bank's investment account provides liquidity and income.

Matched-funding loan pricing is a practical application of term structure.

Loan pricing must attempt a competitive rate of return on bank shareholder's equity.

Unlike loan sales, the originating bank continues to earn interest on its securitized loans.

Fed Funds sold represent an important source of borrowed funds for commercial banks.

Capital notes are a nondeposit liability of banks.

A sale of Fed Funds by a bank most likely represents a decrease in its excess reserves.

"Off-balance-sheet" activities are exempt from regulation.

A bank holding company might apply for a "financial" holding company status from the Fed if it were planning to purchase a life insurance company.

Banks need more liquidity than other businesses because of their large proportion of short-term assets.

Banks have lower capital ratios than industrial firms because bank assets are less risky.

Liability liquidity management suggests that banks hold Treasuries for liquidity.

Concentration ratios are utilized in managing the credit risk of an institution.

Liability management theory assumes certain types of highly rate-sensitive funding sources are always available if the bank pays the market rate or better.

Monitoring customer credit ratings is a commonly used loan workout technique.

A key performance ratio used to evaluate a bank's management is the ratio of net income to total average assets, often called ROAA.

Bank returns on average assets are normally lower than returns to average equity.

A bank that has increased its ROAA by increasing its risk-taking may find its stock price declining.

Banks with high capital ratios tend to have more stable returns to average equity (ROAE) than banks with low capital ratios.

Banks need liquidity for both deposit withdrawals and loan demand.

Banks face a liquidity/profitability trade-off in financial decisions.

A bank with a GAP will see its stock price fall if the Fed tightens monetary policy.

A zero duration gap immunizes a bank against interest rate risk.

Adequate liability liquidity has replaced the need for asset liquidity.

A high positive maturity GAP position is less risky than a high negative GAP position.

A bank with a negative maturity GAP will see a decline in earnings if interest rates fall.

Interest rate risk can reduce the earnings of the bank, but not its cash flow.

A bank with a high positive duration GAP will see a decline in value if interest rates rise.

A bank with a negative duration GAP can "macrohedge" by selling futures.

IBFs may be established by a U. S chartered depository institution, a U. S. branch or agency of a foreign bank or the U. S. office of an Edge Act Corporation.

The Edge Act of 1919 permitted U.S. banks to create international banking facilities.

U.S. bank regulators allow U.S. banks overseas to engage in all banking activities allowed by the host country.

Representative offices can accept deposits and make loans in the host country.

Foreign branches of U. S. banks are subject to both the host nation's regulations and the regulations in the U. S.

International banking facilities (IBFs) operate as subsidiaries of bank holding companies.

Edge Act corporations can engage in some types of equity investments.

An international loan syndicate is a risk reduction technique.

Expropriation and nationalization are two methods of guaranteeing payment of U.S. bank loans to developing countries.

Until the passage of the International Bank Act of 1978, foreign banks enjoyed substantial operating advantages over domestic banks.

Pooling risk entails lending by several banks to a foreign borrower.

Foreign branches of U.S. banks evolved in the 1960s as a reaction to capital flow regulations in the U.S.

Shell branches pay no local taxes and generally operate in relatively stable political environment.

U.S. banks have been permitted to engage in a wider range of business activities in foreign countries than at home in order to be competitive with foreign banks.

Representative offices are usually established to coordinate business between domestic and foreign banks.

Shell branches are developed for international money market transactions without contact with the public of the host country.

IBFs collect small domestic deposits and make foreign loans.

Sovereign loans to LDCs are usually rescheduled rather than foreclosed.

Pooling and third-party guarantees are two methods of reducing international currency risk.

Bank failures are now treated as a remote contingency at best.

Regional and industry recessions were and still are a major cause of bank failures.

The Comptroller of the Currency is the oldest bank regulatory agency.

Traditional level-premium deposit insurance encouraged excessive risk-taking.

Federal deposit insurance has prevented widespread bank panics.

The FDIC charters many state banks.

All state banking authorities have the power to charter banks.

The FDIC generally prefers to just pay off depositors of a failed bank.

A "too big to fail" policy encourages small banks to take higher risks.

Private deposit insurance has not proven effective in preventing depositor panic.

In a clean bank purchase and assumption, the FDIC retains a "put" option to return bad loans to the acquiring bank.

The American public has determined that the market is an adequate regulator of banks.

Banks are regulated in part to protect the nation's money supply, much of which is a liability of the banking industry.

A role of the central bank is to provide liquidity and prevent panic.

Bailout of large banks by federal regulators is an example of market discipline.

The Federal Reserve System controls the money supply and is not a bank regulator.

Regulators have eliminated moral hazard in large bank and thrift firms.

The Glass Steagall restrictions separating investment and commercial banking were finally repealed in 1999.

In a purchase and assumption, the acquiring bank assumes all deposits in the failed bank.

Safety and soundness regulations promote price competition among banks.

"Mutual" institutions are owned by their depositors.

S&Ls were originally established to take advantage of a tax loophole.

Federal Home Loan Banks are among the regulators of savings institutions.

"Negative maturity GAP" S&Ls may actually profit in a recession.

Federal Home Loan Banks were disbanded years ago.

Thrifts assume interest rate risk because maturities of their liabilities and assets are typically unmatched.

The Federal Savings and Loan Insurance Corporation insures deposits of S&Ls.

The Office of Thrift Supervision is the principal federal regulator of S&Ls.

Congress gave thrifts the right to make consumer loans so they could diversify their assets and shorten their asset durations.

Adjustable rate mortgages insulate thrifts against risk.

Mortgages remain the most important asset of savings institutions.

Securitization has not "caught on" in the thrift industry.

Noninterest income has become an important source of revenue for thrifts.

Noninterest expenses of thrifts have declined significantly.

Thrifts assume less interest rate risk and manage it better than they did 25 years ago.

Credit unions were originally organized with the idea that members could pool their funds together and make low-cost loans to themselves as a group.

Credit risk may be reduced by selling credit life insurance to credit union members.

Liquidity risk is reduced by deposit insurance and the presence of credit union "centrals".

Credit unions have shortened the duration of their loan portfolios by making mortgage loans.

Credit unions have higher loan losses than commercial banks.

Credit unions are exempt from federal income tax on income from financial assets.

A finance company in a recession would worry more about credit risk than interest rate risk.

Consumer lending is subject to more regulations than business lending.

Consumer protection legislation has had an impact on the strategy of finance companies.

The fixed cost of loan origination and servicing explains why finance companies prefer small shorter-term loans over large longer-term loans.

Finance companies borrow in large amounts, lend in small amounts.

Most business credit extended by finance companies is unsecured.

The major expenses of a finance company are salaries and loan losses.

Deregulation has made all lending institutions more alike than different.

The thrift crisis of the 1980s was caused by a combination of unsound lending practices and inadequate interest rate risk management.

The U.S. Central Credit Union is a principal regulator of credit unions.

Industrial banks may arguably be likened to finance companies that issue savings deposits.

Life insurance companies provide protection against death.

Life insurance companies are the oldest financial intermediary in the United States.

The assets of life insurance companies are not as marketable as those of casualty/property insurance companies because life companies have greater certainty of claims.

An annuity provides both insurance against premature death and savings features.

Property/liability insurance companies pay little federal income tax, thus explaining their large portfolio of state and municipal, tax-exempt securities.

Social Security is a fully funded pension program.

Health insurance includes protection against the risk of large, unexpected medical expenses and/or the loss of income from illness or disability.

Objective risk is the deviation of actual from expected.

Universal life became popular in the inflationary, high interest periods of the 1980s because interest rates on universal life policies vary with market rates.

Pension funds, which count on current contributions to make payments to retirees, are under funded.

The nature of the assets of life insurance companies influence the type of liabilities they may issue.

The sale of term life insurance was an important factor explaining the growth and large size of life insurance companies.

Pure risk and objective risk are both assumed by life insurance companies.

Insurance premiums are directly related to expected dollar losses.

The liability of Lloyds of London members on assumed risks are unlimited.

Though stock companies dominated the number of life insurance companies, mutuals are dominant in terms of assets and insurance in force.

A deductible is a form of loss-sharing.

Term life policies provide maximum life insurance dollar protection for consumers for a given amount of premium.

Life insurance and pension reserves are liquid asset balances held by life insurance companies to pay losses and pension benefits.

Investment income tends to offset premium income, thus reducing premiums for the insured.

Business interruption is an example of an indirect loss.

Any risk is insurable for a high enough premium.

Property/casualty insurers have a tax incentive to hold preferred stock.

Municipal bonds are a logical investment for qualified pension plans.

Liability risk is much easier to gauge than property risk.

The law of large numbers practically guarantees that an insurer will be profitable if it has enough policy holders.

"Fully contributory plans" are funded with employee contributions only.

All insurers must deal with the problem of adverse selection.

"Superannuation" is an unwelcome development to the underwriter of a life annuty.

Insurance is almost entirely regulated by state, not federal law.

Investment banking operations occur in the direct financial market.

The Glass-Steagall Act of 1933 has eliminated banks from any underwriting activities.

Commercial banks may underwrite low-risk securities in the direct financial markets.

A security underwriting takes place in the primary market, subsequent trading in the security takes place in the secondary market.

A dealer earns a commission for bringing buyers and sellers together.

An underwriter's selling group assumes underwriter risk.

Discount brokers offer investment advice at prices below full-service security brokerage houses.

Venture capital financing usually entails some managerial involvement and equity ownership.

The Banking Act of 1933, known as the Glass-Steagall Act, has effectively kept commercial banks out of the commercial lending area.

Investment banking firms provide both financing and investment services for borrowers and lenders, respectively.

The 40% margin rule requires the buyer/seller of a security to provide at least 60% of the funds necessary to cover the transaction, borrowing 40%.

Venture capital firms compete with commercial banks for new business loans.

Discount brokers offer investment advice at prices below full service security brokerage houses.

Security brokers and dealers obtain most of their funds from customers and banks.

Venture capital recipients are often called angels.

Seed financing is the first stage of venture capital financing.

Under the Glass-Steagall Act commercial banks were permitted to underwrite and trade Federal government securities and general obligation bonds of states and municipalities.

Before the Financial Services Modernization Act of 1999, the Supreme Court (1988) of the U.S. provided commercial banks permission to underwrite commercial paper and municipal revenue bonds, but not equities.

SEC Rule 144A permitted borrowers in private placements the opportunity to trade their obligations.

A best efforts sale of securities is likely to generate more revenue for the investment banker than an equivalent underwriting of securities.

Mezzanine or bridge financing is the interim financing before public offerings of securities.

In an underwritten offer, the risk of selling the issue at a price higher than that promised to the issuer is borne by the investment bank.

In an underwritten offering, the investment bank is compensated based on the number of securities sold.

Universal banks are financial institutions that are allowed to do only commercial banking activities.

The Banking Act of 1933, known as the Glass-Steagall Act, has effectively kept commercial banks out of the commercial lending area.

Balanced funds generate higher proportion of income than growth and income funds and are less volatile.

Market arbitrage by hedge funds is the simultaneous buying and selling of a security or derivative of the security to exploit market pricing differentials.

When purchasing load mutual fund, the NAV includes the load charge for purchasing the mutual funds.

Money market mutual funds invest in commercial paper, large bank CDs, and short-term government securities.

Unit investment trusts have a high security turnover rate, increasing their costs over equivalent mutual funds.

Income funds are made up of a portfolio of mortgage-backed securities only.

Mutual funds offer diversification and professional investment management for the fees charged.

Closed-end investment companies stand ready to redeem their shares at their present asset value.

Money market mutual funds invest in commercial paper, large bank CDs, and short-term government securities.

Money market mutual funds are not subject to reserve requirements.

When purchasing load mutual fund, the NAV includes the load charge for purchasing the mutual funds.

Closed-end investment companies provide shareholders with maturity intermediation.

An underwriting of General Motor's common stock is an IPO.

Security brokers and dealers obtain most of their funds from customers and banks.

No-load mutual funds are commonly sold by security brokers and dealers.

Load mutual fund shares may be sold back to the fund.

Closed-end investment companies= securities often sell at a discount of their NAV.

If interest rates are expected to fall very soon, the bond mutual fund manager is likely to have a high cash position.

Unit investment trusts have a high security turnover rate, increasing their costs over equivalent mutual funds.

The major investment of mutual funds is common stock.

Hedge funds are typically organized as limited partnerships with the fund manager as the general partner.

Hedge funds have been popular diversification investments for high wealth investors.

Arbitrage activities of hedge funds tend to increase capital market efficiency.

Short-selling activities of hedge fund look for high growth companies.