Question 1

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 
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 A

Question 2

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 A

Question 3

Describe the four ways in which financial regulation may be heading given the current global financial crisis.In what way is new financial regulation constrained?

Accepted Answer

The four directions include increasing capital requirements,changing compensation to reflect the "good health" of financial institutions and imposing regulations to restrict conflict of interests at credit rating agencies.Too many strict regulations will restrict the financial industry and reduce economic growth.

Question 4

Banking regulation suffers from the principal-agent problem.Describe how this problem relates to regulators and politicians.

Accepted Answer

Taxpayers are the principals,and regulat

Question 5

Regulations designed to provide information to the marketplace so that investors can make informed decisions are called ________.

Accepted Answer

A)  disclosure requirements 
B)  efficient market requirements 
C)  asset restrictions 
D)  capital requirements 
A)  disclosure requirements 
B)  efficient market requirements 
C)  asset restrictions 
D)  capital requirements

Question 6

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 7

The CDIC does not insure ________.

Accepted Answer

A)  savings and chequing accounts 
B)  term deposits with a maturity of less than 5 years 
C)  money orders and drafts 
D)  mutual funds 
A)  savings and chequing accounts 
B)  term deposits with a maturity of less than 5 years 
C)  money orders and drafts 
D)  mutual funds

Question 8

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 9

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 10

The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S.in the 1980s.

Accepted Answer

A)  regulatory forbearance 
B)  policy antagonism 
C)  regulatory ignorance 
D)  policy renewal 
A)  regulatory forbearance 
B)  policy antagonism 
C)  regulatory ignorance 
D)  policy renewal

Question 11

The 2011 premium rate (as a percentage of insured deposits)for member institutions in risk category 3 was ________.

Accepted Answer

A)  1/36 of 1 percent 
B)  1/18 of 1 percent 
C)  1/9 of 1 percent 
D)  2/9 of 1 percent 
A)  1/36 of 1 percent 
B)  1/18 of 1 percent 
C)  1/9 of 1 percent 
D)  2/9 of 1 percent

Question 12

The 2011 premium rate (as a percentage of insured deposits)for member institutions in risk category 4 was ________.

Accepted Answer

A)  1/36 of 1 percent 
B)  1/18 of 1 percent 
C)  1/9 of 1 percent 
D)  2/9 of 1 percent 
A)  1/36 of 1 percent 
B)  1/18 of 1 percent 
C)  1/9 of 1 percent 
D)  2/9 of 1 percent

Question 13

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 14

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 15

Because of asymmetric information,the failure of one bank can lead to runs on other banks.This is the ________.

Accepted Answer

A)  too-big-to-fail effect 
B)  moral hazard problem 
C)  adverse selection problem 
D)  contagion effect 
A)  too-big-to-fail effect 
B)  moral hazard problem 
C)  adverse selection problem 
D)  contagion effect

Question 16

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 17

The Differential Premiums By-law came into effect for the premium year beginning ________.

Accepted Answer

A)  May 1, 1999 
B)  January 1, 1999 
C)  May 31, 1999 
D)  December 31, 1999 
A)  May 1, 1999 
B)  January 1, 1999 
C)  May 31, 1999 
D)  December 31, 1999

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

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 20

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

Exam 10: Economic Analysis of Financial Regulation

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

Consumer protection legislation includes legislation to ________.

Describe the four ways in which financial regulation may be heading given the current global financial crisis.In what way is new financial regulation constrained?

Banking regulation suffers from the principal-agent problem.Describe how this problem relates to regulators and politicians.

Regulations designed to provide information to the marketplace so that investors can make informed decisions are called ________.

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 ________.

The CDIC does not insure ________.

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

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

The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S.in the 1980s.

The 2011 premium rate (as a percentage of insured deposits)for member institutions in risk category 3 was ________.

The 2011 premium rate (as a percentage of insured deposits)for member institutions in risk category 4 was ________.

The evidence from banking crises in other countries indicates that ________.

Competition between banks ________.

Because of asymmetric information,the failure of one bank can lead to runs on other banks.This is the ________.

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 Differential Premiums By-law came into effect for the premium year beginning ________.

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

Deposit insurance has not worked well in countries with ________.

Banks engage in regulatory arbitrage by ________.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour 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 Industry: Structure and Competition

Nonbank Finance

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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

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