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 because risk-loving individuals might view the banking system as a wonderful opportunity to use other peoples' funds knowing that those funds are protected. The moral hazard problem comes about because depositors will not impose discipline on the banks since their funds are protected and the banks knowing this will be tempted to take on more risk than they would otherwise.

Question 2

If the CDIC 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 D

Question 3

The ________ allowed chartered banks to own investment banking subsidiaries.

Accepted Answer

A) Bank of Canada Act 
B) Financial Institutions and Deposit Insurance System Amendment Act 
C) Bank Holding Company Act 
D) Monetary Control Act 
A) Bank of Canada Act 
B) Financial Institutions and Deposit Insurance System Amendment Act 
C) Bank Holding Company Act 
D) Monetary Control Act B

Question 4

According to CDIC risk profiles, ________.

Accepted Answer

A) group 1 is the best and group 4 is the worst 
B) group 4 is the best and group 1 is the worst 
C) all banks are considered to be similar 
D) there is no way to distinguish between them 
A) group 1 is the best and group 4 is the worst 
B) group 4 is the best and group 1 is the worst 
C) all banks are considered to be similar 
D) there is no way to distinguish between them

Question 5

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

Question 6

In the mid-1980s, how many chartered banks failed in Canada?

Accepted Answer

A) Two 
B) Three 
C) Five 
D) Ten 
A) Two 
B) Three 
C) Five 
D) Ten

Question 7

Describe how the CDIC premiums have evolved over the past years.

Accepted Answer

CDIC premiums were fixed and unrelated t

Question 8

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 9

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 10

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 11

An analysis of the political economy of the savings and loan crisis helps one to understand ________.

Accepted Answer

A) why politicians aided the efforts of thrift regulators, raising regulatory appropriations and encouraging closing of insolvent thrifts 
B) why thrift regulators were so quick to inform Congress of the problems that existed in the thrift industry 
C) why thrift regulators willingly acceded to pressures placed upon them by members of Congress 
D) why politicians listened so closely to the taxpayers they represented 
A) why politicians aided the efforts of thrift regulators, raising regulatory appropriations and encouraging closing of insolvent thrifts 
B) why thrift regulators were so quick to inform Congress of the problems that existed in the thrift industry 
C) why thrift regulators willingly acceded to pressures placed upon them by members of Congress 
D) why politicians listened so closely to the taxpayers they represented

Question 12

When depositors lack of information about the quality of bank assets it 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 13

Banking crises have occurred throughout the world. What similarities do we find when we look at the different countries?

Accepted Answer

Financial deregulation with inadequate s

Question 14

The leverage ratio is the ratio of a bank's ________.

Accepted Answer

A) assets divided by its liabilities 
B) income divided by its assets 
C) capital divided by its total assets 
D) capital divided by its total liabilities 
A) assets divided by its liabilities 
B) income divided by its assets 
C) capital divided by its total assets 
D) capital divided by its total liabilities

Question 15

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 16

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 17

Under the Basel Accord, assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________.

Accepted Answer

A) 2; adverse selection 
B) 2; credit risk 
C) 4; adverse selection 
D) 4; credit risk 
A) 2; adverse selection 
B) 2; credit risk 
C) 4; adverse selection 
D) 4; credit risk

Question 18

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

Accepted Answer

A) that the CDIC guarantees all deposits when it uses the "payoff" method 
B) that the CDIC guarantees all deposits when it uses the "purchase and assumption" method 
C) that the CDIC 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 CDIC 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 CDIC guarantees all deposits when it uses the "payoff" method 
B) that the CDIC guarantees all deposits when it uses the "purchase and assumption" method 
C) that the CDIC 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 CDIC 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 19

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 20

Sometimes regulators refrain from putting insolvent banks out of business. This is also known as ________.

Accepted Answer

A) a decrease in deposit insurance 
B) a decrease in interest rates to fight the inflation problem 
C) regulatory forbearance 
D) increased regulation that prohibited banks from making risky loans 
A) a decrease in deposit insurance 
B) a decrease in interest rates to fight the inflation problem 
C) regulatory forbearance 
D) increased regulation that prohibited banks from making risky loans

Exam 10: Economic Analysis of Financial Regulation

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

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

The ________ allowed chartered banks to own investment banking subsidiaries.

According to CDIC risk profiles, ________.

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.

In the mid-1980s, how many chartered banks failed in Canada?

Describe how the CDIC premiums have evolved over the past years.

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

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

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

An analysis of the political economy of the savings and loan crisis helps one to understand ________.

When depositors lack of information about the quality of bank assets it can lead to ________.

Banking crises have occurred throughout the world. What similarities do we find when we look at the different countries?

The leverage ratio is the ratio of a bank's ________.

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

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

Under the Basel Accord, assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________.

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

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

Sometimes regulators refrain from putting insolvent banks out of business. This is also known as ________.

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

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

Financial Crises in Emerging Markets

The ISLM Model

Non-Bank Finance

Filters

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

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

Under the Basel Accord, assets and off-balance sheet activities were sorted according to categories with each category assigned a different weight to reflect the amount of .