Chat with AIExam 13:Financial Industry Structure
Many insurance companies sell group policies that cover all of the employees at a particular firm, or all of the members of a particular organization. How could this policy help to overcome the problem of adverse selection?
(75) 
VerifiedBy requiring all of the members of the firm or organization to purchase insurance then an average premium based on the group would work. If, on the other hand the average premium is charged but purchasing is voluntary, only the people who are high risk or feel they really need the insurance will purchase it.
Considering the government-sponsored enterprises like Freddie Mac, Fannie Mae, and others, do you see any indication that the managers of these agencies are creating a moral hazard? Explain.
(86) VerifiedThese agencies can borrow at interest rates less than what private lenders must pay because they are viewed as being "backed" by the U.S. government.
Because of the lower rate that they can then offer or the guarantees they can provide on private mortgages, their services are in high demand. If the managers really believe that they will ultimately be backed by the U.S. government in the event of not being able to meet their obligations, they (as well as the stockholders) have a strong incentive to take on a lot more risk than if the implied guarantee from the U.S. government did not exist. Also, due to the sheer volume of business done by these firms they may be in the "too big to fail category" which also compounds the moral hazard issue.
Explain why anti-branching laws often created credit crunches that slowed economic growth.
(62) VerifiedWhen a small community bank is protected from competition almost all of its deposits and loans go to the community. For example, a small bank in a farming community would have a disproportionate number of depositors and borrowers that would be farmers. This is not sufficient diversification, which creates risk. The bank managers, aware of the risk of poor diversification may stop making loans to farmers, causing farmers to curtail operations. However, as incomes fall so will deposits and the problem can grow causing the local economy to contract.
One way that a bank could offer non-bank services across more than one state was to:
(72) The Federal Deposit Insurance Corporation (FDIC) was created:
(83) The interest rate at which banks lend each other Eurodollars is known as:
(84) Evaluate the pros and cons of the repeal of the Glass-Steagall Act of 1933.
(73) Which of the following is not true about the information and advice investment bankers provide to clients?
(70) The gap between LIBOR and the expected Federal Reserve policy interest rate provides a key measure of which of the following:
(90) A person who discovers that he/she has advanced stages of cancer and calls his/her life insurance agent to double his/her insurance policy is an example of:
(74) Why do you think Congress and the President are reluctant to fix the problems
(identified in the text) with the Social Security System?
(83) Within the insurance industry a common saying is that insurance works because of the
"law of large numbers". What do you think is meant by this?
(84) In 2008, as a result of a run on government-sponsored enterprise debt, the U.S. Treasury placed Fannie Mae and Freddie Mac in:
(80) Which of the following is an example of the economies of scope argument for increased profits for large financial holding companies?
(79) 
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