Financial institutions industry Flashcards
“The commercial banking industry in Canada is less competitive than the commercial banking
Industry in the United States because in Canada only a few large banks dominate the industry,
while in the United States there are around 7,500 commercial banks.” Is this statement true,
false, or uncertain? Explain your answer.
False, Regardless of the many banks in the U.S. that does not mean the banking system is more competitive. There are many banks in the US Because of the ANTI-COMPETITIVE REGULATIONS.
If reserve requirements were eliminated in the future, as some economists advocate, what effects would this have on the size of money market mutual funds?
If the reserve requirements were to be eliminated it would decrease the size of money market mutual funds, this is so as banks will be able to offer higher interest rates on deposits, causing money to be transferred from money market mutual funds and into the banks.
Why have banks been losing income advantages on their assets in recent years?
The growth of commercial paper market and the development of the junk bond market gave companies alternatives to borrowing from banks thus ending the competitive advantage of banks on the lending side.
“The invention of the computer is the major factor behind the decline of the banking industry.”
Is this statement true, false, or uncertain? Explain your answer.
Uncertain, the invention of the computer did help to lower transaction costs and the cost of obtaining information which made financial institutions more competitive with banks as companies could borrow directly from securities market. However, another factor in the decline in banking industry was the loss of cost advantage due to rise in inflation and regulations which produced disintermediation.
How does the mutual form of ownership differ from the typical corporate form of ownership?
Depositors at a mutual fund are owners of the firm. Instead of receiving interest payment they received dividend payment.
What is the primary disadvantage of the mutual form of ownership?
The primary disadvantage of mutual form of ownership is that most shareholders do not own a large percentage (%) is the company therefore it is not cost effective for them to provide management oversight.
What are the primary assets of savings and loan institutions?
The primary assets of savings and loan institutions are loans; mainly mortgage loans.
What type of customers are credit unions focused on servicing?
Credit unions provide financial services to individuals as well as small companies.
Describe the common bond membership rule.
Only people living in a specific geographic area or employed with a specific company are eligible for membership in a credit union
Why does the commercial banking lobby object to the nonprofit, tax-exempt st.at.us enjoyed by credit unions?
The tax exempt status lowers the service fees for credit union which causes them to be able to offer higher interest rate as well as low rates on loans making it a cheaper service than commercial banks.
Are most credit. unions larger or smaller than commercial banks? Why?
Because of the common bond membership rule; the rule restricts the membership of credit unions which causes them not to be as larger as commercial banks.
What are share accounts, share certificates, and share drafts?
Share accounts are compatible to savings account however instead of interest they get dividend, while share certificates are compatible to Certificate of deposit (CDs) and share drafts are seen as cheques.
What are the primary advantages enjoyed by credit unions?
- Tax exempt status - support of employer -strong trade association
What features of mutual funds and the investment environment have led to mutual fund’s rapid growth in the last two decades?
- Managerial expertise
- Cost advantages
- Denomination intermediation
- Liquidity intermediation
Distinguish between an open and closed-end mutual fund.
The open end mutual fund is continuously issuing new shares while the closed end mutual fund only issues shares one.
