Question 1

The too-big-to-fail policy

Accepted Answer

A) reduces moral hazard problems. 
B) puts large banks at a competitive disadvantage in attracting large deposits. 
C) treats large depositors of small banks inequitably when compared to depositors of large banks. 
D) allows small banks to take on more risk than large banks. 
A) reduces moral hazard problems. 
B) puts large banks at a competitive disadvantage in attracting large deposits. 
C) treats large depositors of small banks inequitably when compared to depositors of large banks. 
D) allows small banks to take on more risk than large banks.

Question 2

An important factor in producing the global financial crisis was

Accepted Answer

A) lax consumer protection regulation. 
B) onerous rules placed on mortgage originators. 
C) weak incentives for mortgage brokers to use complicated mortgage products. 
D) strong incentives for the mortgage brokers to verify income information. 
A) lax consumer protection regulation. 
B) onerous rules placed on mortgage originators. 
C) weak incentives for mortgage brokers to use complicated mortgage products. 
D) strong incentives for the mortgage brokers to verify income information.

Question 3

The chartering process is similar to ________ potential borrowers and the restriction of risk assets by regulators is similar to ________ in private financial markets.

Accepted Answer

A) screening;restrictive covenants 
B) screening;branching restrictions 
C) identifying;branching restrictions 
D) identifying;credit rationing 
A) screening;restrictive covenants 
B) screening;branching restrictions 
C) identifying;branching restrictions 
D) identifying;credit rationing

Question 4

The directive of prompt corrective action means that

Accepted Answer

A) the FDIC will intervene earlier and more vigorously when a bank gets into trouble. 
B) the banks must take actions quickly to resolve reserve disputes. 
C) bank failures cannot occur. 
D) there must be an immediate response to an increase in interest rates. 
A) the FDIC will intervene earlier and more vigorously when a bank gets into trouble. 
B) the banks must take actions quickly to resolve reserve disputes. 
C) bank failures cannot occur. 
D) there must be an immediate response to an increase in interest rates.

Question 5

The ________ that required separation of commercial and investment banking was repealed in 1999.

Accepted Answer

A) the Federal Reserve Act. 
B) the Glass-Steagall Act. 
C) the Bank Holding Company Act. 
D) the Monetary Control Act. 
A) the Federal Reserve Act. 
B) the Glass-Steagall Act. 
C) the Bank Holding Company Act. 
D) the Monetary Control Act.

Question 6

The bailout of the savings and loan industry was much delayed and,therefore,much more costly to taxpayers because

Accepted Answer

A) of regulators' initial attempts to downplay the seriousness of problems within the thrift industry. 
B) politicians listened to the taxpayers rather than the S&L lobbyists. 
C) Congress did not wait long enough for many of the problems in the thrift industry to correct themselves. 
D) regulators could not be fired,therefore,they didn't care if they did a good job or not. 
A) of regulators' initial attempts to downplay the seriousness of problems within the thrift industry. 
B) politicians listened to the taxpayers rather than the S&L lobbyists. 
C) Congress did not wait long enough for many of the problems in the thrift industry to correct themselves. 
D) regulators could not be fired,therefore,they didn't care if they did a good job or not.

Question 7

The current supervisory practice toward risk management

Accepted Answer

A) focuses on the quality of a bank's balance sheet. 
B) determines whether capital requirements have been met. 
C) evaluates the soundness of a bank's risk-management process. 
D) focuses on eliminating all risk. 
A) focuses on the quality of a bank's balance sheet. 
B) determines whether capital requirements have been met. 
C) evaluates the soundness of a bank's risk-management process. 
D) focuses on eliminating all risk.

Question 8

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is

Accepted Answer

A) that the FDIC guarantees all deposits when it uses the "payoff" method. 
B) that the FDIC guarantees all deposits when it uses the "purchase and assumption" method. 
C) that the FDIC is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. 
D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions. 
A) that the FDIC guarantees all deposits when it uses the "payoff" method. 
B) that the FDIC guarantees all deposits when it uses the "purchase and assumption" method. 
C) that the FDIC is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. 
D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions.

Question 9

Federal deposit insurance covers deposits up to $250,000,but as part of a doctrine called "too-big-to-fail" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC 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

If the FDIC 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 11

Consumer protection legislation includes legislation to

Accepted Answer

A) reduce discrimination in credit markets. 
B) require banks to make loans to everyone who applies. 
C) reduce the amount of interest that bank's can charge on loans. 
D) require banks to make periodic reports to the Better Business Bureau. 
A) reduce discrimination in credit markets. 
B) require banks to make loans to everyone who applies. 
C) reduce the amount of interest that bank's can charge on loans. 
D) require banks to make periodic reports to the Better Business Bureau.

Question 12

The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.

Accepted Answer

A) regulatory forbearance;moral hazard 
B) regulatory forbearance;adverse hazard 
C) regulatory agnosticism;moral hazard 
D) regulatory agnosticism;adverse hazard 
A) regulatory forbearance;moral hazard 
B) regulatory forbearance;adverse hazard 
C) regulatory agnosticism;moral hazard 
D) regulatory agnosticism;adverse hazard

Question 13

Agreements such as the ________ are attempts to standardize international banking regulations.

Accepted Answer

A) Basel Accord 
B) UN Bank Accord 
C) GATT Accord 
D) WTO Accord 
A) Basel Accord 
B) UN Bank Accord 
C) GATT Accord 
D) WTO Accord

Question 14

In the early stages of the 1980s banking crisis,financial institutions were especially harmed by

Accepted Answer

A) declining interest rates from late 1979 until 1981. 
B) the severe recession in 1981-82. 
C) the disinflation from mid 1980 to early 1983. 
D) the increase in energy prices in the early 80s. 
A) declining interest rates from late 1979 until 1981. 
B) the severe recession in 1981-82. 
C) the disinflation from mid 1980 to early 1983. 
D) the increase in energy prices in the early 80s.

Question 15

Because banks engage in regulatory arbitrage,the Basel Accord on risk-based capital requirements may result in

Accepted Answer

A) reduced risk taking by banks. 
B) reduced supervision of banks by regulators. 
C) increased fraudulent behavior by banks. 
D) increased risk taking by banks. 
A) reduced risk taking by banks. 
B) reduced supervision of banks by regulators. 
C) increased fraudulent behavior by banks. 
D) increased risk taking by banks.

Question 16

The Resolution Trust Corporation was created by the FIRREA in order to

Accepted Answer

A) manage and resolve insolvent S&Ls. 
B) build up trust in government regulation. 
C) regulate the S&L industry. 
D) purchase large amounts of government debt. 
A) manage and resolve insolvent S&Ls. 
B) build up trust in government regulation. 
C) regulate the S&L industry. 
D) purchase large amounts of government debt.

Question 17

"Bureaucratic gambling" refers to

Accepted Answer

A) the strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of thrift regulators. 
B) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. 
C) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. 
D) the risk that regulators took in going to Congress to ask for additional funds. 
A) the strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of thrift regulators. 
B) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. 
C) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. 
D) the risk that regulators took in going to Congress to ask for additional funds.

Question 18

The evidence from banking crises in other countries indicates that

Accepted Answer

A) deposit insurance is to blame in each country. 
B) a government safety net for depositors need not increase moral hazard. 
C) regulatory forbearance never leads to problems. 
D) deregulation combined with poor regulatory supervision raises moral hazard incentives. 
A) deposit insurance is to blame in each country. 
B) a government safety net for depositors need not increase moral hazard. 
C) regulatory forbearance never leads to problems. 
D) deregulation combined with poor regulatory supervision raises moral hazard incentives.

Question 19

Prior to the 1980s,S&Ls and mutual savings banks were restricted almost entirely to

Accepted Answer

A) commercial real estate loans. 
B) home mortgages. 
C) education loans. 
D) vacation loans. 
A) commercial real estate loans. 
B) home mortgages. 
C) education loans. 
D) vacation loans.

Question 20

Increased size of financial institutions resulting from financial consolidation increases the ________ problem,because there are now more large institutions whose failure would expose the financial system to systemic risk.

Accepted Answer

A) too-big-to-fail 
B) asset transformation 
C) transactions costs 
D) economies of scale 
A) too-big-to-fail 
B) asset transformation 
C) transactions costs 
D) economies of scale

Exam 10: Economic Analysis of Financial Regulation

The too-big-to-fail policy

An important factor in producing the global financial crisis was

The chartering process is similar to ________ potential borrowers and the restriction of risk assets by regulators is similar to ________ in private financial markets.

The directive of prompt corrective action means that

The ________ that required separation of commercial and investment banking was repealed in 1999.

The bailout of the savings and loan industry was much delayed and,therefore,much more costly to taxpayers because

The current supervisory practice toward risk management

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is

Federal deposit insurance covers deposits up to $250,000,but as part of a doctrine called "too-big-to-fail" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this,it uses the

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

Consumer protection legislation includes legislation to

The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.

Agreements such as the ________ are attempts to standardize international banking regulations.

In the early stages of the 1980s banking crisis,financial institutions were especially harmed by

Because banks engage in regulatory arbitrage,the Basel Accord on risk-based capital requirements may result in

The Resolution Trust Corporation was created by the FIRREA in order to

"Bureaucratic gambling" refers to

The evidence from banking crises in other countries indicates that

Prior to the 1980s,S&Ls and mutual savings banks were restricted almost entirely to

Increased size of financial institutions resulting from financial consolidation increases the ________ problem,because there are now more large institutions whose failure would expose the financial system to systemic risk.

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

The chartering process is similar to potential borrowers and the restriction of risk assets by regulators is similar to in private financial markets.

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

The policy of exacerbated problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.