Question 1

Discuss the case for a "super-regulator" in the context of what you have learned about "regulatory competition."

Accepted Answer

Regulatory competition describes the current situation in which banks can effectively choose their regulators by choosing whether to be a state or national bank and whether or not to belong to the Federal Reserve System.If one regulator allows an activity that another prohibits, a bank's managers can threaten to switch, or argue that a competitor who answers to a more permissive regulator has an unfair advantage.This has two consequences: first, regulators force each other to innovate, improving the quality of the regulations they writing.This is a positive outcome because it ensures that regulators and banks follow current best practice.But there is also a less desirable outcome in that bank managers can "shop" for the most lenient regulator.This was compounded in the 1990s when Congress removed the functional (and geographic) barriers that one separated commercial banking from other forms of financial intermediation (and which had outlawed interstate branching).It is likely that in the future regulators and supervisors will have no choice but to combine forces, either cooperating or merging, and the creation of a "super-regulator" would have the advantage of making the process more uniform and coherent.

Question 2

What three strategies are employed by government officials to ensure that the risks created by the government safety net are contained?

Accepted Answer

Governments have developed three strategies to manage the risks created by the safety net.First, government regulation establishes a set of specific rules for bank managers to follow.Second, government supervision provides general oversight of financial institutions.And third, formal examination of banks' books by specialists provides detailed information on the firm's operation.

Question 3

Savings banks and savings and loans are regulated by a combination of agencies which includes all of the following except:

Accepted Answer

A) The Federal Reserve System. 
B) The Comptroller of the Currency. 
C) The Federal Deposit Insurance Corporation. 
D) state authorities. 
A) The Federal Reserve System. 
B) The Comptroller of the Currency. 
C) The Federal Deposit Insurance Corporation. 
D) state authorities. A

Question 4

During the financial crisis of 2007-2009 in the United States it was revealed that the function of a lender of last resort had not kept pace with the evolving financial system because:

Accepted Answer

A) financial intermediaries had grown sufficiently large so as not to need a lender of last resort. 
B) shadow banks lacked access to the financial resources available through the lender of last resort. 
C) banks were sufficiently linked to one another that the need for a lender of last resort had diminished. 
D) banks had become sufficiently diversified so as to be able to provide for their own liquidity. 
A) financial intermediaries had grown sufficiently large so as not to need a lender of last resort. 
B) shadow banks lacked access to the financial resources available through the lender of last resort. 
C) banks were sufficiently linked to one another that the need for a lender of last resort had diminished. 
D) banks had become sufficiently diversified so as to be able to provide for their own liquidity.

Question 5

The text points out that there is an inverse relationship between the fiscal cost of a bank crisis and real GDP growth.What are some of the reasons that can explain this inverse relationship?

Accepted Answer

One obvious cost is that funds that have

Question 6

What is the difference between a bank that is insolvent and one that is illiquid?

Accepted Answer

A bank that is insolvent is in a positio

Question 7

Savings banks and savings and loans are regulated by a combination of agencies which includes the:

Accepted Answer

A) Federal Reserve System. 
B) Office of the Comptroller of the Currency. 
C) Securities and Exchange Commission. 
D) Internal Revenue Service. 
A) Federal Reserve System. 
B) Office of the Comptroller of the Currency. 
C) Securities and Exchange Commission. 
D) Internal Revenue Service.

Question 8

Under the purchase-and-assumption method of dealing with a failed bank, the FDIC:

Accepted Answer

A) finds another bank to take over the insolvent bank. 
B) takes over the day to day management of the bank. 
C) sells the failed bank to the Federal Reserve. 
D) sells off the profitable loans of the failed bank in an open auction. 
A) finds another bank to take over the insolvent bank. 
B) takes over the day to day management of the bank. 
C) sells the failed bank to the Federal Reserve. 
D) sells off the profitable loans of the failed bank in an open auction.

Question 9

Governments employ three strategies to contain the risks created by government safety nets.These include each of the following, except:

Accepted Answer

A) government supervision. 
B) an excise tax on bank profits. 
C) government regulation. 
D) formal bank examination. 
A) government supervision. 
B) an excise tax on bank profits. 
C) government regulation. 
D) formal bank examination.

Question 10

Besides regulating banks, the government also regulates nondepository financial institutions, such as insurance companies.Consider a property casualty insurance company; why would the government need to regulate them?

Accepted Answer

The insurance company takes premiums fro

Question 11

The need for a lender of last resort was identified as far back as:

Accepted Answer

A) the start of the Great Depression in 1929. 
B) 1913, when the Federal Reserve was created. 
C) 1873, by British economist Walter Bagehot. 
D) 1776, by the first U.S.Secretary of the Treasury, Alexander Hamilton. 
A) the start of the Great Depression in 1929. 
B) 1913, when the Federal Reserve was created. 
C) 1873, by British economist Walter Bagehot. 
D) 1776, by the first U.S.Secretary of the Treasury, Alexander Hamilton.

Question 12

Which of the following statements is most correct?

Accepted Answer

A) Financial regulators do everything possible to encourage competition in banking. 
B) Financial regulators work to prevent monopolies but also work to prevent strong competition in banking. 
C) Financial regulators discourage competition in banking. 
D) Financial regulators prefer banks to have monopoly power in their geographic markets. 
A) Financial regulators do everything possible to encourage competition in banking. 
B) Financial regulators work to prevent monopolies but also work to prevent strong competition in banking. 
C) Financial regulators discourage competition in banking. 
D) Financial regulators prefer banks to have monopoly power in their geographic markets.

Question 13

You have savings accounts at two separately FDIC insured banks.At one of the banks your account has a balance of $200,000.At the other bank the account balance is $60,000.You find out the banks are going to merge.If you are concerned about the possibility of the new bank failing, you should:

Accepted Answer

A) do nothing; you are still insured up $250,000 per account. 
B) consider moving $10,000 to another account at the same bank. 
C) consider moving $10,000 to another account at a different bank. 
D) do nothing; as an individual you are only insured up $250,000 no matter where the accounts are. 
A) do nothing; you are still insured up $250,000 per account. 
B) consider moving $10,000 to another account at the same bank. 
C) consider moving $10,000 to another account at a different bank. 
D) do nothing; as an individual you are only insured up $250,000 no matter where the accounts are.

Question 14

What is meant by the problem of time consistency in the conduct of financial system policy?

Accepted Answer

In good times, governments and central b

Question 15

One reason that financial regulations restrict the assets that banks can own is to:

Accepted Answer

A) combat the moral hazard that government safety nets provide. 
B) limit the growth rate of banks. 
C) prevent banks from being too profitable. 
D) keep banks from spending lavishly on perks for executives. 
A) combat the moral hazard that government safety nets provide. 
B) limit the growth rate of banks. 
C) prevent banks from being too profitable. 
D) keep banks from spending lavishly on perks for executives.

Question 16

In the United Kingdom, regulation of the financial system is concentrated in two agencies.They are:

Accepted Answer

A) The Federal Deposit Insurance Conglomerate and the Bank of England. 
B) The Financial Conduct Authority and the Bank of England. 
C) The Financial Conduct Authority and English Banking Authority. 
D) The Bank of England and the U.K.Treasury. 
A) The Federal Deposit Insurance Conglomerate and the Bank of England. 
B) The Financial Conduct Authority and the Bank of England. 
C) The Financial Conduct Authority and English Banking Authority. 
D) The Bank of England and the U.K.Treasury.

Question 17

Explain why the ratio of assets to capital increased dramatically for commercial banks from the 1920s to the present.

Accepted Answer

The answer to this question is simply de

Question 18

If we lived in an economy where interest rates were highly volatile, would you expect the maximum asset to capital ratio that a regulator would allow to increase or decrease and why?

Accepted Answer

An environment where interest rates are

Question 19

Which of the following is not an important addition made to the Basel Accords by Basel III in 2010?

Accepted Answer

A) It supplements capital requirements based on risk-weighted assets with restrictions on leverage. 
B) It introduces three buffers over and above capital requirements itself. 
C) It adds a liquidity requirement that compels banks to hold a quantity of high-quality liquid assets. 
D) It ends the too-big-to-fail problem. 
A) It supplements capital requirements based on risk-weighted assets with restrictions on leverage. 
B) It introduces three buffers over and above capital requirements itself. 
C) It adds a liquidity requirement that compels banks to hold a quantity of high-quality liquid assets. 
D) It ends the too-big-to-fail problem.

Question 20

Prior to the financial crisis of 2007-2009 banks did all but which of the following to bulk up their profit:

Accepted Answer

A) bought or sponsored hedge funds. 
B) traded securities for customers. 
C) purchased equities for their own account. 
D) colluded to fix benchmark interest rates. 
A) bought or sponsored hedge funds. 
B) traded securities for customers. 
C) purchased equities for their own account. 
D) colluded to fix benchmark interest rates.

Exam 14: Regulating the Financial System

Discuss the case for a "super-regulator" in the context of what you have learned about "regulatory competition."

What three strategies are employed by government officials to ensure that the risks created by the government safety net are contained?

Savings banks and savings and loans are regulated by a combination of agencies which includes all of the following except:

During the financial crisis of 2007-2009 in the United States it was revealed that the function of a lender of last resort had not kept pace with the evolving financial system because:

The text points out that there is an inverse relationship between the fiscal cost of a bank crisis and real GDP growth.What are some of the reasons that can explain this inverse relationship?

What is the difference between a bank that is insolvent and one that is illiquid?

Savings banks and savings and loans are regulated by a combination of agencies which includes the:

Under the purchase-and-assumption method of dealing with a failed bank, the FDIC:

Governments employ three strategies to contain the risks created by government safety nets.These include each of the following, except:

Besides regulating banks, the government also regulates nondepository financial institutions, such as insurance companies.Consider a property casualty insurance company; why would the government need to regulate them?

The need for a lender of last resort was identified as far back as:

Which of the following statements is most correct?

You have savings accounts at two separately FDIC insured banks.At one of the banks your account has a balance of $200,000.At the other bank the account balance is $60,000.You find out the banks are going to merge.If you are concerned about the possibility of the new bank failing, you should:

What is meant by the problem of time consistency in the conduct of financial system policy?

One reason that financial regulations restrict the assets that banks can own is to:

In the United Kingdom, regulation of the financial system is concentrated in two agencies.They are:

Explain why the ratio of assets to capital increased dramatically for commercial banks from the 1920s to the present.

If we lived in an economy where interest rates were highly volatile, would you expect the maximum asset to capital ratio that a regulator would allow to increase or decrease and why?

Which of the following is not an important addition made to the Basel Accords by Basel III in 2010?

Prior to the financial crisis of 2007-2009 banks did all but which of the following to bulk up their profit:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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