Question 1

Why are banks restricted in the assets that they can own? For example, why do you think banks are prohibited from owning common stock?

Accepted Answer

There are a few reasons for this; one, m

Question 2

Banking regulations prevent banks from:

Accepted Answer

A)  holding more than 10 percent of their assets in common stock of companies. 
B)  owning corporate jets. 
C)  owning common stocks of corporations. 
D)  building big office buildings. 
A)  holding more than 10 percent of their assets in common stock of companies. 
B)  owning corporate jets. 
C)  owning common stocks of corporations. 
D)  building big office buildings.

Question 3

One reason customers do not care about the quality of their bank's assets is:

Accepted Answer

A)  most people cannot distinguish an asset from a liability. 
B)  the quality of a bank's assets changes almost daily. 
C)  they assume the bank only has high quality assets. 
D)  with deposit insurance, there isn't any real reason to care; their deposits are protected even if the bank fails. 
A)  most people cannot distinguish an asset from a liability. 
B)  the quality of a bank's assets changes almost daily. 
C)  they assume the bank only has high quality assets. 
D)  with deposit insurance, there isn't any real reason to care; their deposits are protected even if the bank fails.

Question 4

If we lived in an economy where interest rates were highly volatile, would you expect the maximum asset to capital ratio that a regulator would allow to increase or decrease and why?

Accepted Answer

An environment where interest rates are

Question 5

The first test of the Federal Reserve as lender of last resort occurred with the:

Accepted Answer

A)  attack on Pearl Harbor by the Japanese. 
B)  widespread failures of Savings and Loans in the 1980's. 
C)  introduction of flexible exchange rates in the U.S. in 1971. 
D)  stock market crash in 1929. 
A)  attack on Pearl Harbor by the Japanese. 
B)  widespread failures of Savings and Loans in the 1980's. 
C)  introduction of flexible exchange rates in the U.S. in 1971. 
D)  stock market crash in 1929.

Question 6

The FDIC used to charge all banks the same rate for insurance on deposits. From what you have learned, what problems did this create for not only the FDIC but for well-run banks?

Accepted Answer

For FDIC the immediate problem is advers

Question 7

The purpose of the government's safety net for banks is to do each of the following, except:

Accepted Answer

A)  protect the integrity of the financial system. 
B)  eliminate all risk that investors face. 
C)  stop bank panics. 
D)  improve the efficiency of the economy. 
A)  protect the integrity of the financial system. 
B)  eliminate all risk that investors face. 
C)  stop bank panics. 
D)  improve the efficiency of the economy.

Question 8

Does the lender of last resort function guarantee an end to bank runs? Explain.

Accepted Answer

The Great Depression is evidence to the

Question 9

Why might there be a trade-off between a bank's profitability and its safety?

Accepted Answer

The assets that tend to bring the bank t

Question 10

One negative consequence of regulatory competition is:

Accepted Answer

A)  it is expensive. 
B)  financial institutions are over regulated at a cost to customers. 
C)  financial institutions often seek out the most lenient regulator. 
D)  it minimizes competition. 
A)  it is expensive. 
B)  financial institutions are over regulated at a cost to customers. 
C)  financial institutions often seek out the most lenient regulator. 
D)  it minimizes competition.

Question 11

The best way for a government to stop the failure of one bank from turning into a bank panic is to:

Accepted Answer

A)  make sure solvent institutions can meet the withdrawal demands of depositors. 
B)  declare a bank holiday until solvent banks can acquire adequate liquidity. 
C)  limit the withdrawals of depositors. 
D)  provide zero-interest rate loans to all banks regardless of net worth. 
A)  make sure solvent institutions can meet the withdrawal demands of depositors. 
B)  declare a bank holiday until solvent banks can acquire adequate liquidity. 
C)  limit the withdrawals of depositors. 
D)  provide zero-interest rate loans to all banks regardless of net worth.

Question 12

The government provides deposit insurance; this insurance protects:

Accepted Answer

A)  large corporate deposit accounts, but only the amounts that exceed the $250,000 deductible. 
B)  depositors for up to $250,000 should a bank fail. 
C)  the deposits of banks in their Federal Reserve accounts. 
D)  the deposits that people have, but only for federally chartered banks. 
A)  large corporate deposit accounts, but only the amounts that exceed the $250,000 deductible. 
B)  depositors for up to $250,000 should a bank fail. 
C)  the deposits of banks in their Federal Reserve accounts. 
D)  the deposits that people have, but only for federally chartered banks.

Question 13

If the lender of last resort function of the government is to be effective in working to minimize a crisis, it must be:

Accepted Answer

A)  reserved only for those banks that are most deserving. 
B)  used on a limited basis. 
C)  credible, with banks knowing they can get loans quickly. 
D)  only available during economic downturns. 
A)  reserved only for those banks that are most deserving. 
B)  used on a limited basis. 
C)  credible, with banks knowing they can get loans quickly. 
D)  only available during economic downturns.

Question 14

Savings banks and savings and loans are regulated by a combination of agencies which includes the:

Accepted Answer

A)  Federal Reserve System. 
B)  Office of the Comptroller of the Currency. 
C)  Securities and Exchange Commission. 
D)  Internal Revenue Service. 
A)  Federal Reserve System. 
B)  Office of the Comptroller of the Currency. 
C)  Securities and Exchange Commission. 
D)  Internal Revenue Service.

Question 15

The fact that banks can be either nationally or state chartered creates:

Accepted Answer

A)  situations where some banks go unregulated. 
B)  situations where banks operating in more than one state can escape regulation. 
C)  regulatory competition. 
D)  banks being simultaneously regulated by more than one agency. 
A)  situations where some banks go unregulated. 
B)  situations where banks operating in more than one state can escape regulation. 
C)  regulatory competition. 
D)  banks being simultaneously regulated by more than one agency.

Question 16

You hold an FDIC insured savings account at your neighborhood bank. Your current balance is $275,000. If the bank fails you will receive:

Accepted Answer

A)  $275,000. 
B)  $250,000. 
C)  $100,000. 
D)  $125,000. 
A)  $275,000. 
B)  $250,000. 
C)  $100,000. 
D)  $125,000.

Question 17

Bank mergers require government approval because banking officials want to make sure that:

Accepted Answer

A)  the merger will create a larger bank. 
B)  the merger will not create a monopoly. 
C)  the merged bank will be more profitable. 
D)  the merger will not result in regulatory competition. 
A)  the merger will create a larger bank. 
B)  the merger will not create a monopoly. 
C)  the merged bank will be more profitable. 
D)  the merger will not result in regulatory competition.

Question 18

Regulators and supervisors of banks are challenged by all of the following, except:

Accepted Answer

A)  globalization of financial services. 
B)  the use of new financial instruments that shift risk without shifting ownership. 
C)  technological innovation. 
D)  reinforcement by Congress of functional and geographic barriers in banking. 
A)  globalization of financial services. 
B)  the use of new financial instruments that shift risk without shifting ownership. 
C)  technological innovation. 
D)  reinforcement by Congress of functional and geographic barriers in banking.

Question 19

Since the 1920's, the ratio of assets to capital has almost tripled for commercial banks. Many economists believe this is the direct result of:

Accepted Answer

A)  lower quality management in banks. 
B)  the increase in branch banking. 
C)  allowing banks to offer non-bank services. 
D)  government provided deposit insurance. 
A)  lower quality management in banks. 
B)  the increase in branch banking. 
C)  allowing banks to offer non-bank services. 
D)  government provided deposit insurance.

Question 20

A bank supervisor examines the bank's portfolio of loans to see if the loans are being repaid in a timely manner. In terms of the acronym CAMELS, this would be part of rating the bank's:

Accepted Answer

A)  asset quality. 
B)  losses. 
C)  management. 
D)  earnings. 
A)  asset quality. 
B)  losses. 
C)  management. 
D)  earnings.

Exam 14: Regulating the Financial System

Why are banks restricted in the assets that they can own? For example, why do you think banks are prohibited from owning common stock?

Banking regulations prevent banks from:

One reason customers do not care about the quality of their bank's assets is:

If we lived in an economy where interest rates were highly volatile, would you expect the maximum asset to capital ratio that a regulator would allow to increase or decrease and why?

The first test of the Federal Reserve as lender of last resort occurred with the:

The FDIC used to charge all banks the same rate for insurance on deposits. From what you have learned, what problems did this create for not only the FDIC but for well-run banks?

The purpose of the government's safety net for banks is to do each of the following, except:

Does the lender of last resort function guarantee an end to bank runs? Explain.

Why might there be a trade-off between a bank's profitability and its safety?

One negative consequence of regulatory competition is:

The best way for a government to stop the failure of one bank from turning into a bank panic is to:

The government provides deposit insurance; this insurance protects:

If the lender of last resort function of the government is to be effective in working to minimize a crisis, it must be:

Savings banks and savings and loans are regulated by a combination of agencies which includes the:

The fact that banks can be either nationally or state chartered creates:

You hold an FDIC insured savings account at your neighborhood bank. Your current balance is $275,000. If the bank fails you will receive:

Bank mergers require government approval because banking officials want to make sure that:

Regulators and supervisors of banks are challenged by all of the following, except:

Since the 1920's, the ratio of assets to capital has almost tripled for commercial banks. Many economists believe this is the direct result of:

A bank supervisor examines the bank's portfolio of loans to see if the loans are being repaid in a timely manner. In terms of the acronym CAMELS, this would be part of rating the bank's:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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