Chapter 1

Question 1

FIs are corporate entities whose primary business are __________

Answer 1

financial intermediation activities

Question 2

The Four Pillars of Financial Intermediation are:

Answer 2

1. banking
2. IB & securities trading
3. trust or fiduciary
4. insurance

Question 3

How are FIs capital structure different from other corporate entities?

Answer 3

very high leverage

Question 4

The 5 Classifications of FIs are: DTIs
Finance Companies,
Securities & Brokerage Firms,
Investment Funds, and
\_\_\_\_\_\_\_\_\_\_\_\_\_

Answer 4

Insurance Companies

Question 5

The 5 Classifications of FIs are DTIs,
Finance Companies,
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_,
Investment Funds, and
Insurance Companies

Answer 5

Securities & Brokerage Firms

Question 6

The 5 Classifications of FIs are: DTIs
Finance Companies,
Securities & Brokerage Firms,
\_\_\_\_\_\_\_\_\_\_\_\_\_, and
Insurance Companies

Answer 6

Investment Funds

Question 7

FI Assets in Canada are dominated by ____

Answer 7

Banks

Question 8

FIs often offers a wide set of financial services and functions compared to the 1970s because of:

Answer 8

increased deregulation;
technological and financial innovations;
competitive pressures

Question 9

What are two advantages of universal banks?

Answer 9

cross-selling benefits;

diversification

Question 10

Holding companies are FIs structured with __________.

Answer 10

controlling ownership of multiple subsidiaries offering multiple products

Question 11

FIs link the _____ side and the _____ side of financial markets.

Answer 11

demand, supply

Question 12

FIs _________ between financial (demand-supply) counterparties and overall market through several special roles

Answer 12

facilitate the flow of funds

Question 13

Consequences for investors without FIs

Answer 13

info asymmetry; 
lack of monitoring;
much less liquidity;
high fair price risk;
investment risks outweigh returns

Question 14

Two Functional Roles of FIs are:

Answer 14

Brokerage and Asset Transformation

Question 15

Brokerage act as ___ agents on behalf of customers and provide info & facilitate transactions

Answer 15

passive

Question 16

Asset transformation roles act as ____ agents transforming primary securities into specialized products for customers

Answer 16

active

Question 17

FIs are susceptible to ___ and are sources of ____ externalities

Answer 17

risks;

negative

Question 18

FIs warrant more diligent __________ & strict _____ to a far greater extent than other corporations

Answer 18

risk management;

regulation

Question 19

Panic Runs or Bank Runs:

Answer 19

if one major bank fails,
customers of other banks panic and market becomes
bearish

Question 20

Very large volume of inter-FI borrowings/lendings and

financial transactions can result in:

Answer 20

strong interdependence of cash flows & interlinking of

financial fortunes

Question 21

Net Regulatory Burden equation:

Answer 21

= Costs of regulation – Benefits from regulation

Question 22

2 key factors that define the degree of regulation

Answer 22

1. what is the economic role of the FI in the financial system and what are likely systematic consequences if the FI fails?
2. who are the key customers of the FI and what consequences they face if the FI fails?

Question 23

Safety and soundness regulation:

Answer 23

e.g., banks need to diversify,

maintain reserves and liquidity, disclose info, etc.

Question 24

Monetary policy regulation:

Answer 24

e.g., controls inside and outside

money of banks

Question 25

Credit allocation regulation:

Answer 25

e.g., banks must make loans to socially important sectors

Question 26

Consumer protection regulation:

Answer 26

e.g., protect customer deposits and investments via insurance

Question 27

Investor protection regulation:

Answer 27

e.g., regulation of trading activities of FIs to prevent frauds and insider trading

Question 28

Entry regulation:

Answer 28

e.g., regulation of new startup FIs or foreign entrants

Question 29

Post Financial Crisis trends resulted in:

Answer 29

Increasing trend of deleveraging - decline in debt-to-equity ratios;
Increased regulations;
Greater reliance on risk management practices