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What are the adjustable-rate mortgages?
Answer: Adjustable-rate mortgages are mortgage loans on which the interest rate changes when
a market interest rate (usually the treasury bill rate) changes.
Diff: 2 Type: SA Page Ref: 243 - 244
Skill: Recall
Objective List: 11.2 Examine financial innovation and the growth of the "shadow banking
system"
What important changes in banking have occurred as the result of low cost information
technology? Discuss four examples of these changes.
Answer: Information technology lowers the cost of procession financial transactions making it
profitable to create new financial services, and it makes it easier for firms to issue new securities.
Examples include credit and debit cards, electronic banking, junk bonds, growth of the
commercial paper market, and securitization.
Diff: 2 Type: SA Page Ref: 243 - 247
Skill: Recall
Objective List: 11.2 Examine financial innovation and the growth of the "shadow banking
system"
Explain why the profitability of traditional banking has declined and how banks have
responded.
Answer: Banks have lost cost advantages because of disintermediation that resulted in
innovations such as money market funds which competed for deposits, and reduced banks'
deposit base. Banks responded with interest-paying chequing deposits that increased bank costs.
The development markets for junk bond, commercial paper, and securitized assets eroded banks'
income advantages.
Banks have responded by making riskier loans (commercial mortgages and funding for takeovers
and buyouts) and have moved into more off-balance-sheet activities.
Diff: 3 Type: SA Page Ref: 250 - 251
Skill: Recall
Objective List: 11.2 Examine financial innovation and the growth of the "shadow banking
system"