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Answers To Review Questions: Expanding The Boundaries of Banking

Banks have expanded their activities over the past 50 years. They now rely less on traditional lending like commercial, consumer, and real estate loans. Instead, banks generate more revenue from fees rather than interest by expanding into non-traditional lending and off-balance sheet activities not recorded on their balance sheets, like foreign exchange trading. Investment banks are also considered part of "shadow banking" due to brokerage, advising, and other non-deposit taking activities where they earn fees instead of interest.

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763 views1 page

Answers To Review Questions: Expanding The Boundaries of Banking

Banks have expanded their activities over the past 50 years. They now rely less on traditional lending like commercial, consumer, and real estate loans. Instead, banks generate more revenue from fees rather than interest by expanding into non-traditional lending and off-balance sheet activities not recorded on their balance sheets, like foreign exchange trading. Investment banks are also considered part of "shadow banking" due to brokerage, advising, and other non-deposit taking activities where they earn fees instead of interest.

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CHAPTER 14

EXPANDING THE BOUNDARIES OF BANKING

Answers to Review Questions

1. The activities of banks have changed dramatically during the past five
decades. Between 1960 and 2018, banks
1) increased the amount of funds they raise from time deposits and
negotiable certificate of deposits;
2) increased their borrowings from repurchase agreements;
3) reduced their reliance on commercial and industrial loans and on
consumer loans;
4) increased their reliance on real estate loans; and
5) expanded into nontraditional lending activities and into activities
where their revenue is generated from fees rather than from interest.

2. Off-balance sheet activities are activities that are not reflected or


recorded in the balance sheet of the banks. For example
a) When the bank buys and sells foreign exchange for customers. The
exchange does not appear on the bank’s balance sheet.
b) When a bank agrees to provide a borrower funds during a specified
period of time
c) When a bank provides standby letters credit
d) When the bank engages in trading of futures, swaps and options
e) Loan sales

3. Investment banks are considered engaged in shadow banking because of


the activities they undertake such as brokerage and corporate advising.

4. Investment banks receive fees in return for providing advice,


underwriting services, loans and guarantees, brokerage services and
research and analysis. They also receive dividend for investments in
equity securities & interest from loans.

5. Refer to page 227.

6. Refer to page 227.

14 - 1

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