Question 1

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 A

Question 2

The Japanese equivalent of the CDIC played a ________ role in that country's banking crisis.

Accepted Answer

A)  tiny 
B)  huge 
C)  important 
D)  dominant 
A)  tiny 
B)  huge 
C)  important 
D)  dominant A

Question 3

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 A

Question 4

The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S. in the 1980s.

Accepted Answer

A)  regulatory forbearance 
B)  policy antagonism 
C)  regulatory ignorance 
D)  policy renewal 
A)  regulatory forbearance 
B)  policy antagonism 
C)  regulatory ignorance 
D)  policy renewal

Question 5

Banking crises have occurred throughout the world. What similarities do we find when we look at the different countries?

Accepted Answer

Financial deregulation with inadequate s

Question 6

One of the reasons for the failure of Canadian Commercial and Northland banks was ________.

Accepted Answer

A)  moral hazard 
B)  adverse selection 
C)  the lack of deposit insurance 
D)  rising oil prices 
A)  moral hazard 
B)  adverse selection 
C)  the lack of deposit insurance 
D)  rising oil prices

Question 7

An analysis of the political economy of the savings and loan crisis helps one to understand ________.

Accepted Answer

A)  why politicians aided the efforts of thrift regulators, raising regulatory appropriations and encouraging closing of insolvent thrifts 
B)  why thrift regulators were so quick to inform Congress of the problems that existed in the thrift industry 
C)  why thrift regulators willingly acceded to pressures placed upon them by members of Congress 
D)  why politicians listened so closely to the taxpayers they represented 
A)  why politicians aided the efforts of thrift regulators, raising regulatory appropriations and encouraging closing of insolvent thrifts 
B)  why thrift regulators were so quick to inform Congress of the problems that existed in the thrift industry 
C)  why thrift regulators willingly acceded to pressures placed upon them by members of Congress 
D)  why politicians listened so closely to the taxpayers they represented

Question 8

The government safety net creates both an adverse selection problem and a moral hazard problem. Explain.

Accepted Answer

The adverse selection problem occurs bec

Question 9

Deposit insurance covers deposits up to $100,000, but as part of a doctrine called "too-big-to-fail" the CDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the CDIC does this, it uses the ________.

Accepted Answer

A)  "payoff" method 
B)  "purchase and assumption" method 
C)  "inequity" method 
D)  "Basel" method 
A)  "payoff" method 
B)  "purchase and assumption" method 
C)  "inequity" method 
D)  "Basel" method

Question 10

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the ________.

Accepted Answer

A)  moral hazard problem 
B)  adverse selection problem 
C)  assigned risk problem 
D)  ill queue problem 
A)  moral hazard problem 
B)  adverse selection problem 
C)  assigned risk problem 
D)  ill queue problem

Question 11

As in the United States, an important factor in the banking crises in Latin America was the ________.

Accepted Answer

A)  financial liberalization that occurred in the 1980s 
B)  decline in real interest rates that occurred in the 1980s 
C)  high inflation that occurred in the 1980s 
D)  sluggish economic growth that occurred in the 1980s 
A)  financial liberalization that occurred in the 1980s 
B)  decline in real interest rates that occurred in the 1980s 
C)  high inflation that occurred in the 1980s 
D)  sluggish economic growth that occurred in the 1980s

Question 12

The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets.

Accepted Answer

A)  10 percent 
B)  8 percent 
C)  5 percent 
D)  3 percent 
A)  10 percent 
B)  8 percent 
C)  5 percent 
D)  3 percent

Question 13

When the CDIC takes control of the bank, rather than liquidate it, it believes that the takeover ________.

Accepted Answer

A)  was a good investment opportunity for the government 
B)  could be part of a new governmentally owned banking system 
C)  was too big to fail 
D)  would become the center of the new central bank system 
A)  was a good investment opportunity for the government 
B)  could be part of a new governmentally owned banking system 
C)  was too big to fail 
D)  would become the center of the new central bank system

Question 14

During times of financial crisis, mark-to-market accounting ________.

Accepted Answer

A)  requires that a financial firms' assets be marked down in value which can worsen the lending crisis 
B)  leads to an increase in the financial firms' balance sheets since they can now get assets at bargain prices 
C)  leads to an increase in financial firms' lending 
D)  results in financial firms' assets increasing in value 
A)  requires that a financial firms' assets be marked down in value which can worsen the lending crisis 
B)  leads to an increase in the financial firms' balance sheets since they can now get assets at bargain prices 
C)  leads to an increase in financial firms' lending 
D)  results in financial firms' assets increasing in value

Question 15

What are the provisions under the October 15, 1999 Opting-Out By-law?

Accepted Answer

According to the By-law, Schedule III ba

Question 16

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 17

Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry.

Accepted Answer

A)  moral hazard 
B)  adverse selection 
C)  ex post shirking 
D)  post-contractual opportunism 
A)  moral hazard 
B)  adverse selection 
C)  ex post shirking 
D)  post-contractual opportunism

Question 18

If the CDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.

Accepted Answer

A)  payoff; large 
B)  payoff; no 
C)  purchase and assumption; large 
D)  purchase and assumption; no 
A)  payoff; large 
B)  payoff; no 
C)  purchase and assumption; large 
D)  purchase and assumption; no

Question 19

Banking reform possibilities include ________.

Accepted Answer

A)  coinsurance 
B)  bank mergers 
C)  reduced capitalization requirements 
D)  reducing the scope of deposit insurance 
A)  coinsurance 
B)  bank mergers 
C)  reduced capitalization requirements 
D)  reducing the scope of deposit insurance

Question 20

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

Exam 9: Economic Analysis of Financial Regulation

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 Japanese equivalent of the CDIC played a ________ role in that country's banking crisis.

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

The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S. in the 1980s.

Banking crises have occurred throughout the world. What similarities do we find when we look at the different countries?

One of the reasons for the failure of Canadian Commercial and Northland banks was ________.

An analysis of the political economy of the savings and loan crisis helps one to understand ________.

The government safety net creates both an adverse selection problem and a moral hazard problem. Explain.

Deposit insurance covers deposits up to $100,000, but as part of a doctrine called "too-big-to-fail" the CDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the CDIC does this, it uses the ________.

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the ________.

As in the United States, an important factor in the banking crises in Latin America was the ________.

The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets.

When the CDIC takes control of the bank, rather than liquidate it, it believes that the takeover ________.

During times of financial crisis, mark-to-market accounting ________.

What are the provisions under the October 15, 1999 Opting-Out By-law?

Banks engage in regulatory arbitrage by ________.

Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry.

If the CDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.

Banking reform possibilities include ________.

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

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour 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

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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

Filters

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

If the CDIC decides that a bank is too big to fail, it will use the method, effectively ensuring that depositors will suffer losses.