Question 1

The government safety net creates both an adverse selection problem and a moral hazard problem.Explain.

Accepted Answer

The adverse selection problem occurs bec

Question 2

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 3

That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by

Accepted Answer

A) Congress's unwillingness to allocate the necessary funds to thrift regulators. 
B) regulators' reluctance to find the specific problem thrifts that they knew existed. 
C) slower growth in lending meant that less regulation was needed. 
D) Congress's unwillingness to listen to campaign contributors. 
A) Congress's unwillingness to allocate the necessary funds to thrift regulators. 
B) regulators' reluctance to find the specific problem thrifts that they knew existed. 
C) slower growth in lending meant that less regulation was needed. 
D) Congress's unwillingness to listen to campaign contributors.

Question 4

Deposit insurance is only one type of government safety net.All of the following are types of government support for troubled financial institutions EXCEPT

Accepted Answer

A) forgiving tax debt. 
B) lending from the central bank. 
C) lending directly from the government's treasury department. 
D) nationalizing and guaranteeing that all creditors will be repaid their loans in full. 
A) forgiving tax debt. 
B) lending from the central bank. 
C) lending directly from the government's treasury department. 
D) nationalizing and guaranteeing that all creditors will be repaid their loans in full.

Question 5

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 6

Banks engage in regulatory arbitrage by

Accepted Answer

A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. 
B) keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. 
C) hiding risky assets from regulators. 
D) buying risky assets from arbitragers. 
A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. 
B) keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. 
C) hiding risky assets from regulators. 
D) buying risky assets from arbitragers.

Question 7

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 8

The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry.

Accepted Answer

A) an adverse selection 
B) a moral hazard 
C) a lemons 
D) a revenue 
A) an adverse selection 
B) a moral hazard 
C) a lemons 
D) a revenue

Question 9

The Depository Institutions Deregulation and Monetary Control Act of 1980

Accepted Answer

A) separated investment banks and commercial banks. 
B) restricted the use of ATS accounts. 
C) imposed restrictive usury ceilings on large agricultural loans. 
D) increased deposit insurance from $40,000 to $100,000. 
A) separated investment banks and commercial banks. 
B) restricted the use of ATS accounts. 
C) imposed restrictive usury ceilings on large agricultural loans. 
D) increased deposit insurance from $40,000 to $100,000.

Question 10

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 11

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 12

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 13

Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government

Accepted Answer

A) regulation. 
B) ownership. 
C) recall. 
D) forbearance. 
A) regulation. 
B) ownership. 
C) recall. 
D) forbearance.

Question 14

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 15

A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.

Accepted Answer

A) increases;moral hazard 
B) decreases;moral hazard 
C) decreases;adverse selection 
D) increases;adverse selection 
A) increases;moral hazard 
B) decreases;moral hazard 
C) decreases;adverse selection 
D) increases;adverse selection

Question 16

Overseeing who operates banks and how they are operated is called

Accepted Answer

A) prudential supervision. 
B) hazard insurance. 
C) regulatory interference. 
D) loan loss reserves. 
A) prudential supervision. 
B) hazard insurance. 
C) regulatory interference. 
D) loan loss reserves.

Question 17

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 18

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 19

The fact that banks operate on a "sequential service constraint" means that

Accepted Answer

A) all depositors share equally in the bank's funds during a crisis. 
B) depositors arriving last are just as likely to receive their funds as those arriving first. 
C) depositors arriving first have the best chance of withdrawing their funds. 
D) banks randomly select the depositors who will receive all of their funds. 
A) all depositors share equally in the bank's funds during a crisis. 
B) depositors arriving last are just as likely to receive their funds as those arriving first. 
C) depositors arriving first have the best chance of withdrawing their funds. 
D) banks randomly select the depositors who will receive all of their funds.

Question 20

Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because,given fewer opportunities to take on risk,risk-prone entrepreneurs will be discouraged from entering the banking industry.

Accepted Answer

A) moral hazard 
B) adverse selection 
C) ex post shirking 
D) post-contractual opportunism 
A) moral hazard 
B) adverse selection 
C) ex post shirking 
D) post-contractual opportunism

Exam 10: Economic Analysis of Financial Regulation

The government safety net creates both an adverse selection problem and a moral hazard problem.Explain.

Off-balance-sheet activities

That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by

Deposit insurance is only one type of government safety net.All of the following are types of government support for troubled financial institutions EXCEPT

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

Banks engage in regulatory arbitrage by

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

The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry.

The Depository Institutions Deregulation and Monetary Control Act of 1980

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

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

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

Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government

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

A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.

Overseeing who operates banks and how they are operated is called

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

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

The fact that banks operate on a "sequential service constraint" means that

Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because,given fewer opportunities to take on risk,risk-prone entrepreneurs will be discouraged from entering the banking industry.

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

Web 1:financial Crises in Emerging Market Economies

Web 2:the Islm Model

Web 3:nonbank Finance

Web 4:financial Derivatives

Web 5:conflicts of Interest in the Financial Services Industry

Filters

A problem with the too-big-to-fail policy is that it the incentives for by big banks.