Question 1

Banks engage in regulatory arbitrage by

Accepted Answer

A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. 
B) keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. 
C) hiding risky assets from regulators. 
D) buying risky assets from arbitragers. 
A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. 
B) keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. 
C) hiding risky assets from regulators. 
D) buying risky assets from arbitragers.

Question 2

The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is known as

Accepted Answer

A) competition in laxity. 
B) depositor supervision. 
C) regulatory arbitrage. 
D) a dual banking system. 
A) competition in laxity. 
B) depositor supervision. 
C) regulatory arbitrage. 
D) a dual banking system.

Question 3

When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them,they were pursuing a policy of

Accepted Answer

A) regulatory forbearance. 
B) regulatory kindness. 
C) ostrich reasoning. 
D) ignorance reasoning. 
A) regulatory forbearance. 
B) regulatory kindness. 
C) ostrich reasoning. 
D) ignorance reasoning.

Question 4

Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government

Accepted Answer

A) regulation. 
B) ownership. 
C) recall. 
D) forbearance. 
A) regulation. 
B) ownership. 
C) recall. 
D) forbearance.

Question 5

The S&L Crisis can be analyzed as a principal-agent problem.The agents in this case,the ________,did not have the same incentive to minimize cost to the economy as the principals,the ________.

Accepted Answer

A) politicians/regulators; taxpayers 
B) taxpayers; politician/regulators 
C) taxpayers; bank managers 
D) bank managers; politicians/regulators 
A) politicians/regulators; taxpayers 
B) taxpayers; politician/regulators 
C) taxpayers; bank managers 
D) bank managers; politicians/regulators

Question 6

The Resolution Trust Corporation was created by the FIRREA in order to

Accepted Answer

A) manage and resolve insolvent S&Ls. 
B) build up trust in government regulation. 
C) regulate the S&L industry. 
D) purchase large amounts of government debt. 
A) manage and resolve insolvent S&Ls. 
B) build up trust in government regulation. 
C) regulate the S&L industry. 
D) purchase large amounts of government debt.

Question 7

Because of asymmetric information,the failure of one bank can lead to runs on other banks.This is the

Accepted Answer

A) too-big-to-fail effect. 
B) moral hazard problem. 
C) adverse selection problem. 
D) contagion effect. 
A) too-big-to-fail effect. 
B) moral hazard problem. 
C) adverse selection problem. 
D) contagion effect.

Question 8

"Bureaucratic gambling" refers to

Accepted Answer

A) the strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of thrift regulators. 
B) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. 
C) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. 
D) the risk that regulators took in going to Congress to ask for additional funds. 
A) the strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of thrift regulators. 
B) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. 
C) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. 
D) the risk that regulators took in going to Congress to ask for additional funds.

Question 9

One of the criticisms of Basel 2 is that it is procyclical.That means that

Accepted Answer

A) banks may be required to hold more capital during times when capital is short. 
B) banks may become professional at a cyclical response to economic conditions. 
C) banks may be required to hold less capital during times when capital is short. 
D) banks will not be required to hold capital during an expansion. 
A) banks may be required to hold more capital during times when capital is short. 
B) banks may become professional at a cyclical response to economic conditions. 
C) banks may be required to hold less capital during times when capital is short. 
D) banks will not be required to hold capital during an expansion.

Question 10

When one party to a transaction has incentives to engage in activities detrimental to the other party,there exists a problem of

Accepted Answer

A) moral hazard. 
B) split incentives. 
C) ex ante shirking. 
D) pre-contractual opportunism. 
A) moral hazard. 
B) split incentives. 
C) ex ante shirking. 
D) pre-contractual opportunism.

Question 11

The collapse of the Bank of Credit and Commerce International,BCCI,showed the difficulty of international banking regulation.BCCI operated in more than ________ countries and was supervised by the small country of ________.

Accepted Answer

A) 70,Luxembourg 
B) 100,Monaco 
C) 70,Monaco 
D) 100,Luxembourg 
A) 70,Luxembourg 
B) 100,Monaco 
C) 70,Monaco 
D) 100,Luxembourg

Question 12

Under the Basel Accord,assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________.

Accepted Answer

A) 2; adverse selection 
B) 2; credit risk 
C) 4; adverse selection 
D) 4; credit risk 
A) 2; adverse selection 
B) 2; credit risk 
C) 4; adverse selection 
D) 4; credit risk

Question 13

The evidence from banking crises in other countries indicates that

Accepted Answer

A) deposit insurance is to blame in each country. 
B) a government safety net for depositors need not increase moral hazard. 
C) regulatory forbearance never leads to problems. 
D) deregulation combined with poor regulatory supervision raises moral hazard incentives. 
A) deposit insurance is to blame in each country. 
B) a government safety net for depositors need not increase moral hazard. 
C) regulatory forbearance never leads to problems. 
D) deregulation combined with poor regulatory supervision raises moral hazard incentives.

Question 14

Agreements such as the ________ are attempts to standardize international banking regulations.

Accepted Answer

A) Basel Accord 
B) UN Bank Accord 
C) GATT Accord 
D) WTO Accord 
A) Basel Accord 
B) UN Bank Accord 
C) GATT Accord 
D) WTO Accord

Question 15

The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.

Accepted Answer

A) regulatory forbearance; moral hazard 
B) regulatory forbearance; adverse hazard 
C) regulatory agnosticism; moral hazard 
D) regulatory agnosticism; adverse hazard 
A) regulatory forbearance; moral hazard 
B) regulatory forbearance; adverse hazard 
C) regulatory agnosticism; moral hazard 
D) regulatory agnosticism; adverse hazard

Question 16

Microprudential supervision focuses on the safety and soundness of

Accepted Answer

A) individual financial institutions. 
B) the financial system as a whole. 
C) the shadow banking system. 
D) government credit agencies. 
A) individual financial institutions. 
B) the financial system as a whole. 
C) the shadow banking system. 
D) government credit agencies.

Question 17

A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.

Accepted Answer

A) increases; moral hazard 
B) decreases; moral hazard 
C) decreases; adverse selection 
D) increases; adverse selection 
A) increases; moral hazard 
B) decreases; moral hazard 
C) decreases; adverse selection 
D) increases; adverse selection

Question 18

Who has regulatory responsibility when a bank operates branches in many countries?

Accepted Answer

A) It is not always clear. 
B) The WTO. 
C) The U.S.Federal Reserve System. 
D) The first country to submit an application. 
A) It is not always clear. 
B) The WTO. 
C) The U.S.Federal Reserve System. 
D) The first country to submit an application.

Question 19

When comparing the banking crisis in the United States to the crises in Latin America,cost to the taxpayers of the government bailouts was

Accepted Answer

A) higher in Latin American than in the United States. 
B) higher in the United States than in Latin America. 
C) about the same in both Latin America and the United States. 
D) positive in Latin America but negative in the United States. 
A) higher in Latin American than in the United States. 
B) higher in the United States than in Latin America. 
C) about the same in both Latin America and the United States. 
D) positive in Latin America but negative in the United States.

Question 20

The leverage ratio is the ratio of a bank's

Accepted Answer

A) assets divided by its liabilities. 
B) income divided by its assets. 
C) capital divided by its total assets. 
D) capital divided by its total liabilities. 
A) assets divided by its liabilities. 
B) income divided by its assets. 
C) capital divided by its total assets. 
D) capital divided by its total liabilities.

Exam 11: Economic Analysis of Financial Regulation

Banks engage in regulatory arbitrage by

The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is known as

When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them,they were pursuing a policy of

Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government

The S&L Crisis can be analyzed as a principal-agent problem.The agents in this case,the ________,did not have the same incentive to minimize cost to the economy as the principals,the ________.

The Resolution Trust Corporation was created by the FIRREA in order to

Because of asymmetric information,the failure of one bank can lead to runs on other banks.This is the

"Bureaucratic gambling" refers to

One of the criticisms of Basel 2 is that it is procyclical.That means that

When one party to a transaction has incentives to engage in activities detrimental to the other party,there exists a problem of

The collapse of the Bank of Credit and Commerce International,BCCI,showed the difficulty of international banking regulation.BCCI operated in more than ________ countries and was supervised by the small country of ________.

Under the Basel Accord,assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________.

The evidence from banking crises in other countries indicates that

Agreements such as the ________ are attempts to standardize international banking regulations.

The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.

Microprudential supervision focuses on the safety and soundness of

A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.

Who has regulatory responsibility when a bank operates branches in many countries?

When comparing the banking crisis in the United States to the crises in Latin America,cost to the taxpayers of the government bailouts was

The leverage ratio is the ratio of a bank's

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Banking and the Management of Financial Institutions

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory,inflation and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

The ISLM Model

Filters

The S&L Crisis can be analyzed as a principal-agent problem.The agents in this case,the ,did not have the same incentive to minimize cost to the economy as the principals,the .

The collapse of the Bank of Credit and Commerce International,BCCI,showed the difficulty of international banking regulation.BCCI operated in more than countries and was supervised by the small country of .

Under the Basel Accord,assets and off-balance sheet activities were sorted according to categories with each category assigned a different weight to reflect the amount of .

The policy of exacerbated problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.

A problem with the too-big-to-fail policy is that it the incentives for by big banks.