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Prior to the financial crisis of 2007-2008, J.P. Morgan Chase was the largest bank holding company in the world and operations in 60 countries.
As of 2009, U.S. FIs held assets totaling over $35 trillion.
Financial institutions act as intermediaries between suppliers and demanders of money.
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.
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.
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.
The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity risk.
Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower.
FIs typically provide secondary claims to household savers that have inferior liquidity than primary securities of corporations such as equity and bonds.
Because the average maturity of assets and the average maturity of liabilities are often different on an FI's balance sheet, the FI is exposed to liquidity risk.
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.
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.
Financial institutions are subject to economies of scale in the collection of information.
As an asset transformer, the FI issues financial claims that are more attractive to household savers than the claims directly issued by corporations.
The asset transformation function of an FI is to issue primary financial claims to corporations while purchasing primary claims issued by households and other investors.
Secondary securities are securities that serve as collateral for primary securities.
FIs are independent market entities that create financial assets whose value is the transformation of financial risk.
The more costly it is to supervise the use of funds by a borrower, the less likely a saver will encounter agency costs.
As a delegated monitor, an FI's actions reduce agency costs.
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.
Research shows that there is a significant reduction in risk achieved by investing in as few as 8 different securities.
Depository institutions serve as the primary conduit through which monetary policy actions impact the economy.
The liabilities of depository institutions are significant components of the money supply.
The goal of credit allocation is the encouragement of FIs to diversity the composition of their assets.
Credit allocation regulations are typically designed to benefit customers as well as the financial institution that must implement the guidelines.
The qualified thrift lender test is utilized to determine whether an institution can serve as an FI.
Commercial banks and finance companies have traditionally served the needs of the residential real estate market.
The Federal Reserve mandates reserve requirements for depository institutions so that the DIs may provide payment services for the U.S. economy.
The ability of savers to transfer wealth between youth and old age and across generations is called maturity intermediation.
Time intermediation involves the investment of small amounts by investors into mutual funds that invest in long-term securities such as stocks and bonds.
The efficiency with which FIs provide payment services directly benefits the economy.
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.
Unfairly excluding some potential financial service consumers from the financial services marketplace is a reason why FIs must absorb net regulatory burden.
Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs of providing FI services.
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.
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.
Small investors in mutual funds are often able to realize larger returns than they would receive from bank deposits.
The purpose of guaranty funds in safety and soundness regulation is to protect claim-holders when an FI collapses or fails.
In most countries, cash is required to be held in reserve against deposits.
The passage of legislation to prevent discrimination in lending is an example of regulation to protect investors.
The passage of legislation to ensure that FIs are meeting the needs of their local communities is an example of entry regulation.
Firms in industries that have low costs of entry tend to enjoy larger profits than firms in industries with high costs of entry.
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.
The proportion of financial assets controlled by depository institutions has been increasing in recent years.
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.
Pension and mutual funds have a lower correlation between the maturities of their assets and liabilities than do commercial banks and thrifts.
Savers increasingly favor investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs.
The standardization of many FI products is evidence of the inefficient institutionalization by financial markets and the mechanisms through which these products trade.
The Internet has allowed individual investors to purchase securities while benefiting from decreased transactions costs.
Services provided by depository institutions have become relatively less significant as a portion of all services provided by FIs.
During the 1930s, economic collapse the banking system in the U.S. performed directly or indirectly all financial services. Those functions included all of the following EXCEPT
Depository financial institutions include all of the following EXCEPT
Nondepository financial institutions are represented by all of the following EXCEPT
Which of the following statements is FALSE?
Which function of an FI reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings?
In its role as a delegated monitor, an FI
Which of the following is NOT a major function of financial intermediaries?
Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following EXCEPT
Many households place funds with financial institutions because many FI accounts provide
The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in relatively illiquid and higher risk assets is
The federal government has traditionally extended safety nets to DIs consisting of
The asset transformation function of FIs typically involves
Which of the following refers to the possibility that a firm's owners or managers will take actions contrary to the promises contained in the covenants of the securities the firm issues to raise funds?
Which of the following refers to the term "maturity intermediation"?
Traditionally, regulation of FIs in the U.S. has been
Depository institutions (DIs) play an important role in the transmission of monetary policy from the Federal Reserve to the rest of the economy primarily because
Which of the following measures the difference between the private costs of regulations and the private benefits of those regulations for the producers of financial services?
Negative externalities exist in the depository sector when
Which of the following is the term used when a banker refuses to make loans to residents living within certain geographic boundaries?
Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer?
Why do households prefer to use FIs as intermediaries to invest their surplus funds?
Which of the following observations is true?
Net regulatory burden for FIs is higher because regulators may require the FI to
What distinguishes financial intermediaries from industrial firms?
The origination of a home mortgage loan is considered to be a
How have the innovations of global financial networks and computerized money and information transfer systems changed financial intermediation?
The charter values of FIs will be higher if regulators
In a world without FIs, households will be less willing to invest in corporate securities because they
FIs perform their intermediary function in two ways
Which of the following is true of secondary securities?
Each of the following is a special function performed by FIs at a macro level EXCEPT
Which of the following is closely associated with credit allocation regulation?
Verifying the minimum level of capital or equity that must be held to fund the operations of an FI is part of the goal of
The Community Reinvestment Act and the Home Mortgage Disclosure Act were both passed to provide incentives to comply with
Price and quantity restrictions in regulation are usually aimed at determining whether an FI is meeting certain
The following are protective mechanisms that have been developed by regulators to promote the safety and soundness of the banking system EXCEPT
Safety and soundness regulations include all of the following layers of protection EXCEPT
Which of the following groups of FIs have experienced the highest percentage growth in assets in the U.S. financial services industry during the past sixty years?
Which of the following repealed the 1933 Glass-Steagall barriers between commercial banking, insurance, and investment banking?
A significant recent trend in the provision of financial services is that households increasingly prefer denomination intermediation and information services provided by
When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-sell" model, the change is likely to result in
As DIs made a shift from an "originate-to-hold" banking model to an "originate-to-sell" model over the last decade,
The recent financial crisis highlighted, in retrospect, how heavily households and businesses had come to rely on FIs to act as specialists in