Question 1

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 2

A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.

Accepted Answer

A)  more; more 
B)  more; less 
C)  less; more 
D)  less; less 
A)  more; more 
B)  more; less 
C)  less; more 
D)  less; less

Question 3

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 4

Higher capital requirements will reduce the problems incurred when troubled ________ which had been off-balance sheet activities come back on the balance sheet.

Accepted Answer

A)  structured investment vehicles (SIVs) 
B)  negotiable CDs 
C)  Eurodollars 
D)  Federal funds 
A)  structured investment vehicles (SIVs) 
B)  negotiable CDs 
C)  Eurodollars 
D)  Federal funds

Question 5

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 6

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 7

Microprudential supervision focuses on the safety and soundness of

Accepted Answer

A)  individual financial institutions. 
B)  the financial system as a whole. 
C)  the shadow banking system. 
D)  government credit agencies. 
A)  individual financial institutions. 
B)  the financial system as a whole. 
C)  the shadow banking system. 
D)  government credit agencies.

Question 8

Deposit insurance has not worked well in countries with

Accepted Answer

A)  a weak institutional environment. 
B)  strong supervision and regulation. 
C)  a tradition of the rule of law. 
D)  few opportunities for corruption. 
A)  a weak institutional environment. 
B)  strong supervision and regulation. 
C)  a tradition of the rule of law. 
D)  few opportunities for corruption.

Question 9

The Federal Deposit Insurance Corporation Improvement Act of 1991

Accepted Answer

A)  increased the FDIC's ability to borrow from the Treasury to deal with failed banks. 
B)  increased the FDIC's ability to use the too-big-to-fail doctrine. 
C)  eliminated governmentally-administered deposit insurance. 
D)  eliminated restrictions on nationwide banking. 
A)  increased the FDIC's ability to borrow from the Treasury to deal with failed banks. 
B)  increased the FDIC's ability to use the too-big-to-fail doctrine. 
C)  eliminated governmentally-administered deposit insurance. 
D)  eliminated restrictions on nationwide banking.

Question 10

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 11

Which of the following is not a reason financial regulation and supervision is difficult in real life?

Accepted Answer

A)  Financial institutions have strong incentives to avoid existing regulations. 
B)  Unintended consequences may happen if details in the regulations are not precise. 
C)  Regulated firms lobby politicians to lean on regulators to ease the rules. 
D)  Financial institutions are not required to follow the rules. 
A)  Financial institutions have strong incentives to avoid existing regulations. 
B)  Unintended consequences may happen if details in the regulations are not precise. 
C)  Regulated firms lobby politicians to lean on regulators to ease the rules. 
D)  Financial institutions are not required to follow the rules.

Question 12

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 13

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 14

Moral hazard is an important concern of insurance arrangements because the existence of insurance

Accepted Answer

A)  provides increased incentives for risk taking. 
B)  is a hindrance to efficient risk taking. 
C)  causes the private cost of the insured activity to increase. 
D)  creates an adverse selection problem but no moral hazard problem. 
A)  provides increased incentives for risk taking. 
B)  is a hindrance to efficient risk taking. 
C)  causes the private cost of the insured activity to increase. 
D)  creates an adverse selection problem but no moral hazard problem.

Question 15

The federal agencies that examine banks include

Accepted Answer

A)  the Federal Reserve System. 
B)  the Internal Revenue Service. 
C)  the SEC. 
D)  the U.S. Treasury. 
A)  the Federal Reserve System. 
B)  the Internal Revenue Service. 
C)  the SEC. 
D)  the U.S. Treasury.

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

Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following except

Accepted Answer

A)  they had insufficient funds to close all of the insolvent S&Ls. 
B)  they were friends with the S&L owners. 
C)  they hoped the problem would go away. 
D)  they did not have the authority to close the insolvent S&Ls. 
A)  they had insufficient funds to close all of the insolvent S&Ls. 
B)  they were friends with the S&L owners. 
C)  they hoped the problem would go away. 
D)  they did not have the authority to close the insolvent S&Ls.

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

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

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.

Exam 11: Economic Analysis of Financial Regulation

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

A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.

Overseeing who operates banks and how they are operated is called

Higher capital requirements will reduce the problems incurred when troubled ________ which had been off-balance sheet activities come back on the balance sheet.

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

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

Microprudential supervision focuses on the safety and soundness of

Deposit insurance has not worked well in countries with

The Federal Deposit Insurance Corporation Improvement Act of 1991

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

Which of the following is not a reason financial regulation and supervision is difficult in real life?

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

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

Moral hazard is an important concern of insurance arrangements because the existence of insurance

The federal agencies that examine banks include

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

Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following except

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

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

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

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding 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

Financial Crises

Banking and the Management of Financial Institutions

Banking Industry: Structure and Competition

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

The ISLM Model

Filters

A well-capitalized financial institution has to lose if it fails and thus is likely to pursue risky activities.

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