Question 1

How did the increase in the interest rates in the early 80s contribute to the S&L crisis?

Accepted Answer

The S&Ls suffered from an interest-rate

Question 2

Taxpayers were served poorly by thrift regulators in the 1980s. This poor performance cannot be explained by

Accepted Answer

A) regulators' desire to escape blame for poor performance,leading to a perverse strategy of "bureaucratic gambling." 
B) regulators' incentives to accede to pressures imposed by politicians,who sought to keep regulators from imposing tough regulations on institutions that were major campaign contributors. 
C) Congress's dogged determination to protect taxpayers from the unsound banking practices of managers at many of the nation's savings and loans. 
D) politicians strong incentives to act in their own interests rather than the interests of the taxpayers. 
A) regulators' desire to escape blame for poor performance,leading to a perverse strategy of "bureaucratic gambling." 
B) regulators' incentives to accede to pressures imposed by politicians,who sought to keep regulators from imposing tough regulations on institutions that were major campaign contributors. 
C) Congress's dogged determination to protect taxpayers from the unsound banking practices of managers at many of the nation's savings and loans. 
D) politicians strong incentives to act in their own interests rather than the interests of the taxpayers.

Question 3

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 4

In the ten year period 1981-1990,the rate of commercial bank failures was approximately ________ times greater than that in the period from 1934 to 1980.

Accepted Answer

A) two 
B) three 
C) five 
D) ten 
A) two 
B) three 
C) five 
D) ten

Question 5

The Dodd-Frank legislation of 2010 requires the largest banks in the United States to conduct annual

Accepted Answer

A) stress tests.to see if the banks have sufficient capital to operate under dire scenarios. 
B) stress tests to see if the banks buildings can withstand severe weather. 
C) management evaluations to see if the managers deserve bonuses. 
D) liability evaluations to make sure that they have sufficient insurance. 
A) stress tests.to see if the banks have sufficient capital to operate under dire scenarios. 
B) stress tests to see if the banks buildings can withstand severe weather. 
C) management evaluations to see if the managers deserve bonuses. 
D) liability evaluations to make sure that they have sufficient insurance.

Question 6

The ability to use the too-big-to-fail policy was curtailed by the passage of the FDICIA. To use this action today,the FDIC must get approval of a two-thirds majority of both the Board of Governors of the Federal Reserve and the directors of the FDIC and also the approval of the

Accepted Answer

A) Secretary of the Treasury. 
B) Senate Finance Committee Chairperson. 
C) President of the United States. 
D) governor of the state in which the failed bank is located. 
A) Secretary of the Treasury. 
B) Senate Finance Committee Chairperson. 
C) President of the United States. 
D) governor of the state in which the failed bank is located.

Question 7

Depositors lack of information about the quality of bank assets can lead to

Accepted Answer

A) bank panics. 
B) bank booms. 
C) sequencing. 
D) asset transformation. 
A) bank panics. 
B) bank booms. 
C) sequencing. 
D) asset transformation.

Question 8

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 9

Off-balance-sheet activities

Accepted Answer

A) generate fee income with no increase in risk. 
B) increase bank risk but do not increase income. 
C) generate fee income but increase a bank's risk. 
D) generate fee income and reduce risk. 
A) generate fee income with no increase in risk. 
B) increase bank risk but do not increase income. 
C) generate fee income but increase a bank's risk. 
D) generate fee income and reduce risk.

Question 10

FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk.

Accepted Answer

A) increased;decreased 
B) increased;increased 
C) decreased;decreased 
D) decreased;increased 
A) increased;decreased 
B) increased;increased 
C) decreased;decreased 
D) decreased;increased

Question 11

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 12

The global financial crisis pointed out the need for consumer education and protection in financial areas such as mortgage loans. In response,with the passage of the Dodd-Frank legislation,Congress created

Accepted Answer

A) the Consumer Financial Protection Bureau. 
B) the Internal Revenue Service. 
C) the Consumer Oversight Committee. 
D) the lender of last resort. 
A) the Consumer Financial Protection Bureau. 
B) the Internal Revenue Service. 
C) the Consumer Oversight Committee. 
D) the lender of last resort.

Question 13

Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a

Accepted Answer

A) last-in,first-out constraint. 
B) sequential service constraint. 
C) double-coincidence of wants constraint. 
D) everyone-shares-equally constraint. 
A) last-in,first-out constraint. 
B) sequential service constraint. 
C) double-coincidence of wants constraint. 
D) everyone-shares-equally constraint.

Question 14

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 15

The Argentine banking crisis of 2001 resulted from Argentina's banks being required to

Accepted Answer

A) purchase large amounts of government debt. 
B) pay back the value of failed loans. 
C) make risky real estate loans. 
D) make loans to only state-owned businesses. 
A) purchase large amounts of government debt. 
B) pay back the value of failed loans. 
C) make risky real estate loans. 
D) make loans to only state-owned businesses.

Question 16

Savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called

Accepted Answer

A) goodwill. 
B) salvation. 
C) kindness. 
D) retribution. 
A) goodwill. 
B) salvation. 
C) kindness. 
D) retribution.

Question 17

To prevent bank runs and the consequent bank failures,the United States established the ________ in 1934 to provide deposit insurance.

Accepted Answer

A) FDIC 
B) SEC 
C) Federal Reserve 
D) ATM 
A) FDIC 
B) SEC 
C) Federal Reserve 
D) ATM

Question 18

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection,as banks with deposit insurance

Accepted Answer

A) are likely to take on greater risks than they otherwise would. 
B) are likely to be too conservative,reducing the probability of turning a profit. 
C) are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety. 
D) are placed at a competitive disadvantage in acquiring funds. 
A) are likely to take on greater risks than they otherwise would. 
B) are likely to be too conservative,reducing the probability of turning a profit. 
C) are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety. 
D) are placed at a competitive disadvantage in acquiring funds.

Question 19

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 20

One of the problems experienced by the savings and loan industry during the 1980s was

Accepted Answer

A) managers lack of expertise to manage risk in new lines of business. 
B) heavy regulations in the new areas open to S&Ls. 
C) slow growth in lending. 
D) close monitoring by the FSLIC. 
A) managers lack of expertise to manage risk in new lines of business. 
B) heavy regulations in the new areas open to S&Ls. 
C) slow growth in lending. 
D) close monitoring by the FSLIC.

Exam 10: Economic Analysis of Financial Regulation

How did the increase in the interest rates in the early 80s contribute to the S&L crisis?

Taxpayers were served poorly by thrift regulators in the 1980s. This poor performance cannot be explained by

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

In the ten year period 1981-1990,the rate of commercial bank failures was approximately ________ times greater than that in the period from 1934 to 1980.

The Dodd-Frank legislation of 2010 requires the largest banks in the United States to conduct annual

The ability to use the too-big-to-fail policy was curtailed by the passage of the FDICIA. To use this action today,the FDIC must get approval of a two-thirds majority of both the Board of Governors of the Federal Reserve and the directors of the FDIC and also the approval of the

Depositors lack of information about the quality of bank assets can lead to

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

Off-balance-sheet activities

FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk.

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

The global financial crisis pointed out the need for consumer education and protection in financial areas such as mortgage loans. In response,with the passage of the Dodd-Frank legislation,Congress created

Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a

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

The Argentine banking crisis of 2001 resulted from Argentina's banks being required to

Savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called

To prevent bank runs and the consequent bank failures,the United States established the ________ in 1934 to provide deposit insurance.

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection,as banks with deposit insurance

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

One of the problems experienced by the savings and loan industry during the 1980s was

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of 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

Banking and the Management of Financial Institutions

Banking Industry: Structure and Competition

Financial Crises

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

Financial Crises in Emerging Market Economies

The ISLM Model

Filters

FDICIA incentives for banks to hold capital and incentives to take on excessive risk.