Financial Institutions & Markets Exam #3

Front 1

the largest group of depository institutions measured by size

Back 1

commercial banks

Front 2

What are the three depository institutions?
NOTE: All depository institutions offer similar services

Back 2

1. Banks
2. Savings
3. Credit Unions

Front 3

Banks are normally larger; liabilities usually include several types of ______ sources of funds; loans are ______ in range

Back 3

non-deposit, broader

Front 4

Bank Services
______ Banking:
- consumer lending, residential mortgage lending, consumer installment loans, credit card financing, automobile and boat financing, brokerage services, student loans, and individual-oriented financial investment services
- interest income and fee income are generated from mortgage lending and credit card financing

Back 4

Individual

Front 5

Bank Services:
______ Banking:
- loans to non-financial corporations, financial corporation, and government entities
- also commercial real estate financing, leasing activities, and factoring
-loans and leasing generate interest income
- other services that banks offer these customers generate fee income - management of assets of private and public pension funds, fiduciary and custodial services, and cash management services

Back 5

Institutional

Front 6

Under institutional banking:
______ banking - the provision of banking services to other banks that do not have the staff resources to perform the service themselves; e.g. check clearing and collection, foreign exchange trading, hedging services, and participation in large loan and security issuances

Back 6

correspondent

Front 7

Bank Services
______ Banking:
- covers a broad range of activities involving corporate financing and capital market and foreign-exchange products and services; most activities generate fee income rather than interest income
-corporate financing
*the procuring of funds for customers - can go beyond traditional bank loans to involve the underwriting of securities
* provide bankers acceptances, letters of credit, and other types of guarantees for their customers
- capital market and foreign-exchange products and services involve transactions where the bank may act as a dealer or broker in a service
- financial products that banks have developed to manage risk also yield fee income (include interest rate swaps, interest rate agreements, currency swaps, forward contracts, interest rate options)

Back 7

global

Front 8

Balance Sheet of Commercial Banks:
Assets (aka ______ of funds) -
The majority of the assets held by commercial banks are ______.

Back 8

uses, loans

Front 9

Commercial banks have total loans (asset) of 53.3%: business or commercial and industrial loans, commercial and residential real estate loans, individual loans, and all other loans
- U.S. government securities 11.6%: generate ______ income for the bank and are used for trading and ______ management purposes

Back 9

interest, liquidity

Front 10

Balance Sheet of Commercial Banks:
Liabilities (aka ______ of funds) - The largest source of funds for commercial banks are ______, which account for 68.9%. These are can be in ______ accounts [checkable deposits that either bear no interest (demand deposits) or are interest bearing (most commonly called negotiable order of withdrawal accounts (NOW accounts)].

They can also be in the form of __________ deposits.

Back 10

sources, deposits, transaction, non-transaction

Front 11

______ comprise borrowings and other liabilities -> commercial banks (19.7%)

Back 11

Non-deposit liabilities

Front 12

Balance Sheet of Commercial Banks
Equity:
- consists mainly of ______ and ______ stock, surplus or additional ______, and ______
- capital ______ specify the min amount of capital a bank must maintain
- regulators define other accounts that may serve as equity for the purposes of calculating minimum capital requirements

Back 12

common, preferred, paid-in-capital, retained earnings, requirements

Front 13

Examples of ______ activities include: [commercial banks]
swap agreements, written or purchased options contracts, forward contracts other than for foreign exchange, commitments to buy or sell foreign exchange at spot or forward, loan commitments, standby letters of credit, credit derivatives, mortgages sold with recourse

Back 13

off-balance sheet (OBS)

Front 14

[commercial banking]
Banks have both ______ and ______ "tax -avoidance" incentives to undertake activities off their balance sheets

Back 14

earnings, regulatory

Front 15

OBS activities can involve risks that add to the overall ______ exposure of a financial intermediary.

Back 15

insolvency

Front 16

What regulator of commercial banks insures the deposits of commercial banks; levies insurance premiums on banks, manages the deposit insurance fund, and conducts bank examinations?

Back 16

FDIC (Federal Deposit Insurance Corp.)

Front 17

The FDIC manages both the commercial bank insurance fund (______) and the Savings Insurance Fund (______).

Back 17

BIF, SAIF

Front 18

The ______ insurance fund combined BIF (bank insurance fund) and SAIF (savings association insurance fund).

Back 18

deposit insurance fund (DIF)

Front 19

What is the oldest U.S. regulatory agency & was organized as a sub-agency of the U.S. Treasury?

Back 19

Office of the Comptroller of the Currency (OCC) [commercial banks]

Front 20

What commercial bank regulator's primary function is to charter national banks as well as to close them? It examines national banks and has the power to approve or disapprove their merger applications.

Back 20

Office of the Comptroller of the Currency (OCC)

Front 21

Nationally chartered banks are automatically members of what commercial bank regulator? For state-chartered banks, membership is optional.

Back 21

Federal Reserve System (FRS)

Front 22

All banks have to meet the same non-interest-bearing ______ requirements whether or not they are members of the FRS.

Back 22

reserve

Front 23

What commercial bank regulator regulates and examines bank holding companies as well as the banks themselves?

Back 23

Federal Reserve System (FRS)

Front 24

[Commercial Banks]
State authorities regulate ______-chartered commercial banks. They perform similar functions as the ______ performs for national banks. Federally-insured state-chartered banks pass into receivership of the FDIC if they fail. State-chartered banks are generally [MORE/LESS] heavily regulated than nationally-chartered banks.

Back 24

state, OCC, less

Front 25

______ and ______ Regulation - layers of regulation have been imposed on DIs to protect depositors and borrowers against the risk of failure

Back 25

safety, soundness

Front 26

______ Regulation - regulates control and implement monetary policy by requiring minimum levels of cash reserves to be held against depository institution deposits

Back 26

monetary policy

Front 27

______ Regulation- regulations support the DIs lending to socially important sectors such as housing and farming
- e.g. Qualified Thrift Lender (QTL) Test

Back 27

credit allocation

Front 28

______ Regulation - regulations are imposed to prevent the DI from discriminating unfairly in lending
- e.g. HMDA 1975; CRA 1977 (revised 1995)

Back 28

consumer protection

Front 29

______ regulation - laws protect investors who directly purchase securities and/or indirectly purchase securities by investing in mutual or pension funds
- e.g. Securities Act 1933; Securities 1934; Investment Company Act 1940

Back 29

investor protection

Front 30

______ and ______ regulation - entry and activity regulations limit the number of DIs in any given financial services sector; thus impacting the charter values of DIs operating in that sector

Back 30

Entry & Chartering

Front 31

The U.S. tends to have more ______ overlap than other countries.

Back 31

regulatory

Front 32

Prior to 1930 the focus of the banking laws during this highly regulated era (post 1933) as to limit the number of failures by limiting:
* ______ banks could compete
* ______ banks could compete
* what lines of ______ banks
could engage in

- The laws were also designed to protect ______ banks from being outcompeted and driven out of business by ______ banks.

Back 32

how, where, business, small, large

Front 33

Regulation of Product and Geographic Expansion [commercial banks]:
-most states prohibited or limited ______ because they feared that allowing branch banking would eliminate the small local independent banks
- The ______ Act of 1927 required nationally-chartered banks to adhere to state branching restrictions.

Back 33

branching, McFadden

Front 34

Regulatory Factors Impacting Geographic Expansion
- ______ holding companies that led to defacto intrastate and interstate banking
- 1956 ______ Act limited the ability of multi-ank holding companies to operate out-of-state subsidiaries
- After this, one-bank holding companies were formed that had non-bank subsidiaries operating across state lines. Congress closed this loophoole in the 1970 Amendments to the Bank Holding Company Act.

Back 34

Multi-bank, Banking Holding Company

Front 35

What act (in 1994) allows interstate banking by allowing banks to consolidate out-of-state subsidiaries into a branch network or by acquiring existing banks across state lines.

Back 35

Riegle-Neal

Front 36

This History of Bank and Thrift Guaranty Funds
- The Federal Deposit Insurance Corporation (FDIC)
* 1991 FDIC Improvement Act -
Bank Insurance Fund (BIF)

Back 36

NOTE

Front 37

The History of Bank & Thrift Guaranty Funds
- The Federal Savings and Loan Insurance Corporation (FSLIC) and its demise
* 1989 - Financial Institutions ______, ______, and ______ Act (FIRREA) - Savings Association Insurance Fund (SAIF), managed by FDIC
* Currently, the FDIC manages the Deposit Insurance Fund (DIF - the combined ______ and ______)

Back 37

Reform, Recovery, Enforcement
BIF, SAIF

Front 38

The History of Bank and Thrift Guaranty Funds
- Reform of Deposit Insurance
* ______-based deposit insurance program

Back 38

risk

Front 39

The History of Bank and Thrift Guaranty Funds
- Non-______ Deposit Insurance Systems
*deposit insurance systems are being increasingly adopted worldwide

Back 39

U.S.

Front 40

Regulations on Depository Institution Liquidity:
- Under Federal Reserve Regulation ______ banks are required to hold the following "target" minimum reserves against net transaction accounts (transaction accounts - demand deposit balances due from U.S. depository institutions and cash items in process of collection).
*less than $10.7 mil - _____%
*$10.7-55.2 mil - ______%
*more than 55.2 mil - _____%

Back 40

D
0
3
10

Front 41

Regulations on Depository Institution Liquidity
- Since 1980 all DIs must back their net transactions deposits with reserves held at the ______

Back 41

Federal Reserve

Front 42

Regulations on Capital Adequacy (Leverage):
- The Federal Deposit Insurance Corporation Improvement Act (FDICIA, 1991) requires ______ and ______ to meet identical risk-based capital requirements.
- The FDICIA requires regulators to mandate ______ (PCA) if a bank falls below the well-capitalized area.

Back 42

banks, thrifts, prompt corrective actions

Front 43

Regulations on Capital Adequacy (Leverage)
- 1989 ______
* defined what DIs could count as capital
* increased the amount of capital a DI is required to hold by requiring a stricter minimum capital/asset ratios
*made the required capital levels reflect the risk of the institution

Back 43

Basle Accord

Front 44

Savings Institutions (savings associations and savings banks) - can be ______ owned or ______ owned.

Back 44

mutually, stockholders

Front 45

Savings institutions may be chartered under either ______ or ______ statutes - majority ______ chartered.

Back 45

state, federal, federally

Front 46

Savings Institutions are much ______ in size and market power than banks.

Back 46

smaller

Front 47

Savings Institutions traditionally made long-term fixed-rate ______ to individuals funded by short-term ______.

Back 47

mortgages, deposit

Front 48

The Balance Sheet for Savings Institutions have a large concentration of assets in ______ and ______ -related areas (68.35%).

Back 48

mortgage, mortgage

Front 49

The ______ test requires that savings institutions have a minimum holding of 65% in mortgage-related assets.

Back 49

Qualified Thrift Lender test (QTL)

Front 50

What are savings institutions main liabilities? They account for 71.78%.

Back 50

total deposits, primarily small time and savings deposits

Front 51

What regulator of savings institutions charters and examines all federal savings institutions, as well as supervises the holding companies of savings institutions?

Back 51

The Office of Thrift Supervision (OTS)

Front 52

What manager of thrift institutions manages the Deposit Insurance Fund (DIF)?

Back 52

The FDIC

Front 53

Who regulates state-chartered savings institutions?

Back 53

state regulators

Front 54

With credit unions, members must have a ______ bond. They are ______ organizations, meaning earnings are not taxed.

Back 54

common, not-for-profit

Front 55

Credit Unions are exempt from ______ prohibitions, can act cooperatively and pool funds for their mutual benefit.

Back 55

anti-trust

Front 56

Most credit unions are ______ chartered.

Back 56

federally

Front 57

Credit unions are very ______ compared to banks and other thrifts.

Back 57

small

Front 58

Deposits in credit unions are called ______. Regular shares are ______ savings, share drafts are ______ accounts, share certificates are ______.

Back 58

shares, passbook, NOW, CDs

Front 59

There are 3 tiers of credit unions-
1. credit unions at the ______ level
2. ______ Credit Union (CCU) - state or regional level - 34 CCUs cooperatively owned by their member CUs
- U.S. ______ Credit Union - national level - acts as a bank to the corporate central credit unions

Back 59

local, corporate, central

Front 60

Balance sheet of credit unions:
- assets - emphasis on ______ and ______ lending, 25.3% small consumer loans, 35.5% home mortgages, total 60.8%; also heavily invest in investment securities (18.1%)

- liabilities - 81% ______

Back 60

retail, consumer
member deposits

Front 61

Regulators of credit unions:
- ______(NCUA)
- ______ (NCUSIF)

Back 61

1. National Credit Union Administration Board
2. National Credit Union Share Insurance Fund

Front 62

Two major forms of life insurance companies: ______ and ______

Back 62

stock, mutual

Front 63

Life insurance companies - ______ since 1995

Back 63

demutualizations

Front 64

Life insurance companies remove income ______ due to death or retirement form individuals

Back 64

uncertainty

Front 65

Taxation of life insurance:
* the inside buildup of cash value life insurance policies is not taxed as either ______ or ______
* neither is the beneficiary of the death benefit of a life insurance policy subject to an income tax
* the death benefit of the policy may or may not be subject to ______ tax, depending on how the beneficiary status is structured

Back 65

income, capital gains, estate

Front 66

Types of Products
- Ordinary Life Policies - marketed on an individual basis

1) ______ Life - pure insurance, no savings feature

The remaining policies accrue a cash value over time.

2) ______ Life - insurer will pay a death benefit to the policy holder's beneficiaries

3) ______ Life - pay a death benefit if the insured dies during the endowment period; if the insured is alive at the endowment date, he/she receives the face value of the policy

4) ______ Life - invest fixed premiums into variable-rate securities (mutual funds)

5) ______ Life and ______ Life - allow policy holders to change, or even skip, premiums and change the maturity of the policy;
- Variable Universal Life Policy - cash value invested in variable rate-earning assets

Back 66

Term, Whole, Endowment, Variable, Universal & Variable Universal

Front 67

Group Life Insurance - usually ______ insurance.

Back 67

term

Front 68

Credit Life - pay off an outstanding ______ if a borrower dies during the term of the loan.

Back 68

loan

Front 69

______ - either immediate or deferred payment contracts where life insurers make regular payments to an annuitant

Back 69

Annuities

Front 70

Private pension funds are called ______ pension funds. ______ (GICs) are instrumental.

Back 70

"insured", Guaranteed Investment Contracts

Front 71

______ and ______ Insurance protect against morbidity or ill-health risk.

Back 71

Accident, Health

Front 72

Balance Sheet of Insurance Companies:
- Assets - primarily ______-term assets: corporate bonds, corporate equities, government securities, mortgages

Liabilities - net ______ reserves; separate account business

Back 72

long, policy

Front 73

Insurance Companies:
- Interest-Rate Risk
*very sensitive to interest rate fluctuations because carry large amount of ______-rate ______-term securities
*have been reducing average maturity on securities and investing in long-term assets that offer ______ rates
* increasingly utilizing ______ contracts and interest rate ______ to manage their exposure

Back 73

fixed, long
floating
futures, swaps

Front 74

Insurance Companies:
- Credit Risk
* the corporate bonds, mortgages, state and local government securities, and real estate holdings in insurance companies' asset portfolios are subject to credit risk
- typically invest only in securities assigned a ______ credit rating
- also ______ among securities issuers

Back 74

high, diversify

Front 75

Insurance Companies:
- Market Risk
* ______ economy could cause stock values to decline
* Economic downturn could adversely affect ______ holdings

Back 75

weak, real estate

Front 76

Insurance Companies:
- Liquidity Risk
* a high frequency of claims at a single point in time could force a company to liquidate assets at a time when the market value is ______, thereby depressing its performance
* can reduce their exposure to this risk by ______ the age distribution of their customer base
* if the customer base becomes unbalanced and is heavily concentrated in the older age group, life insurance companies should ______ their proportion of liquid assets to prepare for a higher frequency of claims
* as interest rates ______, consumers tend to accelerate their voluntary terminations of life insurance and use the funds to make their own investments; consequently, the cash inflows to life insurance companies are reduced, endangering their ______ position

Back 76

low, diversifying, increase, rise, liquidity

Front 77

Insurance Companies Regulation -
- the ______ Act of 1945 - left regulation of life insurers up to individual states; chartering is entirely at the state level.

Back 77

McCarran-Ferguson

Front 78

Insurance Companies Regulation -
- the ______ (NAIC) created a national examination system used by state regulators to examine insurers

Back 78

National Association of Insurance Commissioners

Front 79

Insurance Companies Regulation -
- ______ guaranty funds may exist; no federal backing, and virtually all states do not maintain a fund reserve

Back 79

state

Front 80

Insurance Companies Regulation -
- ______ Act 1999 - allows insurance companies, commercial banks, and investment banks to engage in each other's business, but requires commercial banks and investment banks entering insurance business to be subject to insurance regulations of the state in which they operate

Back 80

Financial Services Modernization

Front 81

Property insurance covers the loss of ______ and ______ property. Casualty (liability) insurance provides protection from legal ______ exposures.

Back 81

real, personal, liability

Front 82

______ Insurance and ______ Lines - protect against the perils of fire, lightning, and removal of property damaged in a fire

Back 82

Fire, Allied

Front 83

______ Multiple ______ Insurance
- combines features of both property and liability insurance
- protects against multiple perils of damage to a personal dwelling and personal property as well as liability coverage against the financial consequences of legal liability resulting from injury to others

Back 83

Homeowners, Peril

Front 84

______ Multiple ______ Insurance
- protects commercial firms against perils similar to homeowners multiple peril insurance

Back 84

commercial, peril

Front 85

______ Liability and ______ Damage Insurance
- provides protection against (1) losses resulting from legal liability due to the ownership or use of the vehicle and (2) theft or damage to vehicles

Back 85

Automobile, Physical

Front 86

______ Insurance (non-automobile)
- provides protection against non-automobile-related legal liability

Back 86

liability

Front 87

Fire Insurance and Allied Lines, Homeowners Multiple Peril Insurance, Commercial Multiple Peril Insurance, Automobile Liability and Physical Damage Insurance, Liability Insurance (non-automobile), Accident and Health, Worker's Compensation

All are examples of ______ insurance

Back 87

property-casualty

Front 88

Balance sheet of property-casualty companies:
- assets- majority in ______-term securities (bonds - T-Bond & Municipal, preferred stocks, common stocks), but have more liquid asset holdings (%) than life insurers because P&C claims are generally much less ______than life insurance claims

- Liabilities - major liabilities are ______ reserves and loss ______ expense; also unearned ______

Back 88

long, predictable

loss, adjustment, premiums

Front 89

Loss rate is the expected ______ of loss times the ______(cost) of the loss

Back 89

frequency, severity

Front 90

Loss ratio = the actual losses on a specific policy (claims and loss adjustment expenses) relative to earned ______

Back 90

premiums

Front 91

Loss adjustment expenses related to the costs surrounding the loss ______ process.

Back 91

settlement

Front 92

Expense ratio = general expenses such as ______ commissions to premiums earned

Back 92

broker

Front 93

Combined ratio after dividends = ______ ratio + ______ ratio + ______ ratio

Back 93

loss, expense, dividend

Front 94

P&C firms invest premiums in assets between the time they receive the premiums and the time they make payments to meet claims: investment ______.

Back 94

yield

Front 95

opening ratio = combined ratio after dividends - ______ yield

Back 95

investment

Front 96

Profitability = premiums received - cost of claims incurred - loss adjustment expenses - dividends paid + income earned on premiums invested

Back 96

note

Front 97

Regulation of P&C firms
- chartered and regulated at the ______ level
- the ______ (NAIC) assists state regulators in providing examination forms and data on ratios at insurers.

Back 97

state, National Association of Insurance Commissioners

Front 98

______ selection - those entering the insurance pool are more likely than the population as a whole to file a claim

Back 98

adverse

Front 99

______ hazard - once people get into the pool, their behavior will be altered and they will behave in a more reckless manner than they would be if they were uninsured.

Back 99

moral

Front 100

To manage adverse selection and moral hazard (two additional forms of risk that have to be managed)
- effective screening
- risk-based premiums
- deductibles
- coinsurance
- threaten or cancel coverage
- restrictive provisions
- fraud prevention
- limit insurance coverage to the value of the insured property
- reinsurance - sharing the risk of a policy with other insurance companies.

Back 100

NOTE

Front 101

Services offered by securities firms vs. investment banks
- ______ involves market analysis, advising, securities pricing, underwriting, and distribution of newly created securities
- ______ provide brokerage, research and advising services and trade securities for their own account
- full line firms provide both ______ and ______ services

Back 101

investment banking
securities firms
investment banking, brokerage

Front 102

Securities Firms and Inv. Banks
- Size, structure, composition
* The industry underwent shakeouts in the 1970s after "May Day" and again after the 1987 crash
* Concentration of business among the largest firms has ______ dramatically.
* Three major subdivisions:
- national full-line firms that serve both ______ and ______ customers
- national full-line firms specializing in corporate ______ and ______
- ______ firms such as regional investment bankers, discount brokers, internet brokers and subsidiaries of commercial banks

Back 102

increased
retail, corporate
finance, trading
specialized

Front 103

Investment Banking
- underwriting and distributing new issues of ______ and ______
- placement methods
* ______ commitment
* best ______
* ______ placements

Back 103

debt, equity
firm, efforts, private

Front 104

Securities firm and investment bank activity areas -
Market Making
- creating a ______ market for securities or contracts
- involves both agency (brokerage) and principal (dealer) functions

Back 104

secondary

Front 105

Securities firm and investment bank activity areas-
______ - block trading (position trading), pure arbitrage, risk arbitrage, program trading, stock brokerage, electronic brokerage

Back 105

Trading

Front 106

Securities Firm and Investment Bank Activity Areas
- ______- managing pools of assets
- ______ management - these accounts are similar to bank checking accounts
- ______ & ______ (M&A) - help find merger partners, underwrite new securities to be issued as a result of a restructuring or acquisition, assess the value of a potential target, recommend takeover terms, or assist in fighting off a hostile takeover

Back 106

investing, cash, mergers, acquisitions

Front 107

Securities Firm and Investment Bank Activity Areas-
- ______ Capital
* institutional venture capital firms: venture capital limited partnerships, financial venture capital firms, corporate venture capital firms
* small business investment companies (SBICs)
* angel venture capitalists (angels)

-Other Service Functions - security custodian services, clearance and settlement services, escrow services, research and advice on divestitures and asset sales

Back 107

venture

Front 108

Securities firm and investment banking balance sheet
1. Assets
- ______ from other broker-dealers 33.79%
- ______ positions in securities and commodities 26.54%
- ______ repurchase agreements 26.4%

2. Liabilities and Equity
- payables to other ______-dealers 14.25%
- payables to ______ 13.35%
- ______ positions in securities and commodities 10.29%
- ______ agreements 40.82%
- ______ (min 2% req'd by SEC) 4.94%

Back 108

receivables, long, reverse

broker, customers, short, repurchase, equity

Front 109

Main liability of securities firm and investment banks

Back 109

repurchase agreements 40.82%

Front 110

______ Act 1996 - removed state oversight of securities firms

Back 110

National Securities Markets Improvement Act 1996

Front 111

Primary regulator of securities firms and investment banks - regulates underwriting and trading activities and promulgates a series of rules

Back 111

SEC

Front 112

Day-to-day regulation of trading practices for securities firms and investment banks is performed by ______.

Back 112

Financial Industry Regulatory Authority (FINRA)

Front 113

Daily activities of the securities industry are primarily regulated via the ______ and ______

Back 113

NYSE, NASD

Front 114

July 2002, ______ Act, a corporate governance and accounting oversight bill

Back 114

Sarbanes-Oxley

Front 115

The ______ has some regulatory influence (set margin requirements) - securities firms and investment banks

Back 115

federal reserve board

Front 116

What act allowed banking, securities activities, and insurance to be consolidated?

Back 116

Financial Services Modernization Act 1999