Exam 15: Regulation of Financial Institutions

A "too big to fail" policy encourages excessive risk taking at large banks.

Bailouts of large banks by federal regulators are an example of market discipline.

In a purchase and assumption, the acquiring bank assumes all deposits in the failed bank.

The term "bank contagion" refers to the possibility that one bank failure will cause a panic that leads to other bank failures.

Systemic risk is the risk that a bank failure could imperil the entire economy.

The Office of the Comptroller of the Currency (OCC) is the oldest bank regulatory agency.

Redlining was first allowed under the Community Reinvestment Act of 1977.

The Fair and Accurate Credit Transactions (FACT) Act of 2003 was the first law to promote the accuracy, fairness, and privacy of personal information assembled by credit-reporting agencies.

The FDIC generally prefers to just pay off depositors of a failed bank rather than have another bank purchase the failing institution.

Under the Community Reinvestment Act, banks that cannot show that they have complied with the CRA requirements may be prohibited from merging, branching, or engaging in other new areas of business.

The FDIC's Deposit Insurance Fund is required by law to hold reserves of at least 10% of insured deposits.

Off balance sheet commitments are not considered in calculating bank capital requirements.

Describe three methods by which the FDIC may handle a failed bank. Which method do you believe is of most benefit to depositors? Which of these methods causes a moral hazard? Explain.

Bank capital is a major safeguard against another financial crisis that might result from a decline in asset values.

New banking rules have now eliminated moral hazard in large bank and thrift firms.

Basel capital requirements apply only to U.S. banks.

The Dodd-Frank Act of 2010 created the BCFP to help protect consumers from informational asymmetry problems in their financial transactions.

A role of the central bank is to act as a lender of last resort in a systemic crisis and to provide regulations that reduce the probability of a bank crisis.

The Glass Steagall restrictions separating investment and commercial banking were finally repealed in 1999 by Financial Services Modernization Act.

In a clean bank purchase and assumption, the FDIC retains a "put" option to return bad loans to the acquiring bank.