Question 1

Moral hazard and adverse selection problems increased in prominence in the 1980s

Accepted Answer

A) as deregulation required savings and loans and mutual savings banks to be more cautious. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets,thereby widening the scope for risk taking. 
C) following a decrease in federal deposit insurance from $100,000 to $40,000. 
D) as interest rates were sharply decreased to bring down inflation. 
A) as deregulation required savings and loans and mutual savings banks to be more cautious. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets,thereby widening the scope for risk taking. 
C) following a decrease in federal deposit insurance from $100,000 to $40,000. 
D) as interest rates were sharply decreased to bring down inflation.

Question 2

The FDIC must take steps to close down banks whose equity capital is less than ________ of assets.

Accepted Answer

A) 4% 
B) 3% 
C) 2% 
D) 1% 
A) 4% 
B) 3% 
C) 2% 
D) 1%

Question 3

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 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

Competition between banks

Accepted Answer

A) encourages greater risk taking. 
B) encourages conservative bank management. 
C) increases bank profitability. 
D) eliminates the need for government regulation. 
A) encourages greater risk taking. 
B) encourages conservative bank management. 
C) increases bank profitability. 
D) eliminates the need for government regulation.

Question 6

To be considered well capitalized,a bank's leverage ratio must exceed

Accepted Answer

A) 10%. 
B) 8%. 
C) 5%. 
D) 3%. 
A) 10%. 
B) 8%. 
C) 5%. 
D) 3%.

Question 7

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 8

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 9

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 10

The collapse of the Bank of Credit and Commerce International,BCCI,showed the difficulty of international banking regulation.BCCI operated in more than ________ countries and was supervised by the small country of ________.

Accepted Answer

A) 70,Luxembourg 
B) 100,Monaco 
C) 70,Monaco 
D) 100,Luxembourg 
A) 70,Luxembourg 
B) 100,Monaco 
C) 70,Monaco 
D) 100,Luxembourg

Question 11

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 12

During times of financial crisis,mark-to-market accounting

Accepted Answer

A) requires that a financial firms' assets be marked down in value which can worsen the lending crisis. 
B) leads to an increase in the financial firms' balance sheets since they can now get assets at bargain prices. 
C) leads to an increase in financial firms' lending. 
D) results in financial firms' assets increasing in value. 
A) requires that a financial firms' assets be marked down in value which can worsen the lending crisis. 
B) leads to an increase in the financial firms' balance sheets since they can now get assets at bargain prices. 
C) leads to an increase in financial firms' lending. 
D) results in financial firms' assets increasing in value.

Question 13

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 14

The major provisions of the Competitive Equality Banking Act of 1987 include

Accepted Answer

A) expanding the responsibilities of the FDIC,which is now the sole administrator of the federal deposit insurance system. 
B) the establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. 
C) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance. 
D) prompt corrective action when a bank gets in trouble. 
A) expanding the responsibilities of the FDIC,which is now the sole administrator of the federal deposit insurance system. 
B) the establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. 
C) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance. 
D) prompt corrective action when a bank gets in trouble.

Question 15

A common element in all of the banking crisis episodes in different countries is

Accepted Answer

A) the existence of a government safety net. 
B) deposit insurance. 
C) increased regulation. 
D) lack of competition. 
A) the existence of a government safety net. 
B) deposit insurance. 
C) increased regulation. 
D) lack of competition.

Question 16

FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to

Accepted Answer

A) 8%. 
B) 5%. 
C) 10%. 
D) 25% 
A) 8%. 
B) 5%. 
C) 10%. 
D) 25%

Question 17

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 18

When comparing the banking crisis in the United States to the crises in Latin America,cost to the taxpayers of the government bailouts was

Accepted Answer

A) higher in Latin American than in the United States. 
B) higher in the United States than in Latin America. 
C) about the same in both Latin America and the United States. 
D) positive in Latin America but negative in the United States. 
A) higher in Latin American than in the United States. 
B) higher in the United States than in Latin America. 
C) about the same in both Latin America and the United States. 
D) positive in Latin America but negative in the United States.

Question 19

As in the United States,an important factor in the banking crises in Latin America was the

Accepted Answer

A) financial liberalization that occurred in the 1980s. 
B) decline in real interest rates that occurred in the 1980s. 
C) high inflation that occurred in the 1980s. 
D) sluggish economic growth that occurred in the 1980s. 
A) financial liberalization that occurred in the 1980s. 
B) decline in real interest rates that occurred in the 1980s. 
C) high inflation that occurred in the 1980s. 
D) sluggish economic growth that occurred in the 1980s.

Question 20

Regulations that reduced competition between banks included

Accepted Answer

A) branching restrictions. 
B) bank reserve requirements. 
C) the dual system of granting bank charters. 
D) interest-rate ceilings. 
A) branching restrictions. 
B) bank reserve requirements. 
C) the dual system of granting bank charters. 
D) interest-rate ceilings.

Exam 10: Economic Analysis of Financial Regulation

Moral hazard and adverse selection problems increased in prominence in the 1980s

The FDIC must take steps to close down banks whose equity capital is less than ________ of assets.

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

The directive of prompt corrective action means that

Competition between banks

To be considered well capitalized,a bank's leverage ratio must exceed

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

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

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

The collapse of the Bank of Credit and Commerce International,BCCI,showed the difficulty of international banking regulation.BCCI operated in more than ________ countries and was supervised by the small country of ________.

The current supervisory practice toward risk management

During times of financial crisis,mark-to-market accounting

The too-big-to-fail policy

The major provisions of the Competitive Equality Banking Act of 1987 include

A common element in all of the banking crisis episodes in different countries is

FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to

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

When comparing the banking crisis in the United States to the crises in Latin America,cost to the taxpayers of the government bailouts was

As in the United States,an important factor in the banking crises in Latin America was the

Regulations that reduced competition between banks included

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

The collapse of the Bank of Credit and Commerce International,BCCI,showed the difficulty of international banking regulation.BCCI operated in more than countries and was supervised by the small country of .

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