Banking Practice Exam

Section 20 affiliates were established as a part of the Financial Services Modernization Act of 1999, which allowed banks to engage in a wider range of financial services beyond traditional banking. The primary purpose of creating Section 20 affiliates was to permit national banks and state-chartered banks to affiliate with securities firms and engage in investment banking activities, including underwriting and dealing in various types of securities.

This separation enabled banks to maintain a clear distinction between their traditional banking functions, such as accepting deposits and making loans, and their new roles in investment banking and securities activities. The law aimed at increasing competition and providing consumers with broader financial services while still regulating the banking sector to prevent undue risks.

The other options do not accurately reflect the main intentions behind establishing Section 20 affiliates. Making international loans and purchasing savings and loans pertain to different aspects of banking that were not the primary focus of Section 20. Similarly, investing in junk bonds relates to specific investment strategies that are not inherently tied to the foundational purpose of Section 20 affiliates as investment banking entities.