Question 1

Why are banks restricted in the assets that they can own? For example, why do you think banks are prohibited from owning common stock?

Accepted Answer

There are a few reasons for this; one, m

Question 2

The supervision of banks includes:

Accepted Answer

A) requiring bank officers to attend classes on an annual basis. 
B) on-site examinations of the bank. 
C) extensive background checks of all bank officers. 
D) requiring banks to file monthly reports on their revenues, expenses and profits. 
A) requiring bank officers to attend classes on an annual basis. 
B) on-site examinations of the bank. 
C) extensive background checks of all bank officers. 
D) requiring banks to file monthly reports on their revenues, expenses and profits.

Question 3

Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because:

Accepted Answer

A) customers will not want to obtain loans from this bank. 
B) equity investors will not be able to sell the bank's stock. 
C) regulators will scrutinize the bank heavily looking for something wrong. 
D) depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have sufficient liquid assets on hand. 
A) customers will not want to obtain loans from this bank. 
B) equity investors will not be able to sell the bank's stock. 
C) regulators will scrutinize the bank heavily looking for something wrong. 
D) depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have sufficient liquid assets on hand.

Question 4

Discuss the ramifications of the FDIC reducing deposit insurance limits to $25,000.

Accepted Answer

If deposit insurance limits were reduced

Question 5

Identify at least two problems a borrower would face if banks were not required to disclose the information that they are currently required to make available.

Accepted Answer

One problem that quickly comes to mind w

Question 6

We saw in the text that regulations, specifically deposit insurance and the Basel Accord (of 1988), can create moral hazard.Explain.

Accepted Answer

Deposit insurance creates moral hazard f

Question 7

The government provides deposit insurance; this insurance protects:

Accepted Answer

A) large corporate deposit accounts, but only the amounts that exceed the $250,000 deductible. 
B) depositors for up to $250,000 should a bank fail. 
C) the deposits of banks in their Federal Reserve accounts. 
D) the deposits that people have, but only for federally chartered banks. 
A) large corporate deposit accounts, but only the amounts that exceed the $250,000 deductible. 
B) depositors for up to $250,000 should a bank fail. 
C) the deposits of banks in their Federal Reserve accounts. 
D) the deposits that people have, but only for federally chartered banks.

Question 8

How does the lender of last resort potentially create a moral hazard problem?

Accepted Answer

The lender of last resort function provi

Question 9

One reason customers do not care about the quality of their bank's assets is:

Accepted Answer

A) most people cannot distinguish an asset from a liability. 
B) the quality of a bank's assets changes almost daily. 
C) they assume the bank only has high quality assets. 
D) with deposit insurance, there isn't any real reason to care; their deposits are protected even if the bank fails. 
A) most people cannot distinguish an asset from a liability. 
B) the quality of a bank's assets changes almost daily. 
C) they assume the bank only has high quality assets. 
D) with deposit insurance, there isn't any real reason to care; their deposits are protected even if the bank fails.

Question 10

Why might there be a trade-off between a bank's profitability and its safety?

Accepted Answer

The assets that tend to bring the bank t

Question 11

Explain why depository institutions receive a disproportionate amount of attention from government regulators (compared to most other industries).

Accepted Answer

Depository institutions receive this att

Question 12

Under the purchase-and-assumption method, the FDIC usually finds it:

Accepted Answer

A) can sell the failed bank for more than the bank is actually worth. 
B) can sell the bank at a price equaling the value of the failed banks assets. 
C) has to sell the bank at a negative price since the bank is insolvent. 
D) cannot sell the bank and almost always has to revert to the payoff method for dealing with a failed bank. 
A) can sell the failed bank for more than the bank is actually worth. 
B) can sell the bank at a price equaling the value of the failed banks assets. 
C) has to sell the bank at a negative price since the bank is insolvent. 
D) cannot sell the bank and almost always has to revert to the payoff method for dealing with a failed bank.

Question 13

Considering the methods available to the FDIC for dealing with a failed bank, the depositors of the failed bank should:

Accepted Answer

A) be indifferent between the two since it really does not matter to them which method is used. 
B) prefer the purchase and assumption method since the deposits over $250,000 will also be protected. 
C) prefer the payoff method because they will have access to their funds earlier. 
D) prefer the payoff method since a lot less paperwork is involved for the depositor. 
A) be indifferent between the two since it really does not matter to them which method is used. 
B) prefer the purchase and assumption method since the deposits over $250,000 will also be protected. 
C) prefer the payoff method because they will have access to their funds earlier. 
D) prefer the payoff method since a lot less paperwork is involved for the depositor.

Question 14

Define the components of the CAMELS criteria and explain how a CAMELS rating is calculated.

Accepted Answer

The CAMELS criteria are: Capital adequac

Question 15

The government's role of lender of last resort is directed to:

Accepted Answer

A) large manufacturing firms that employ thousands of people. 
B) depositors; this is role the government plays when they insure depositors' balances in banks that fail. 
C) developing countries that are trying to build their financial systems. 
D) banks that experience sudden deposit outflows. 
A) large manufacturing firms that employ thousands of people. 
B) depositors; this is role the government plays when they insure depositors' balances in banks that fail. 
C) developing countries that are trying to build their financial systems. 
D) banks that experience sudden deposit outflows.

Question 16

Bank failures tend to occur most often during periods of:

Accepted Answer

A) stock market run ups when, like many companies, banks tend to be overvalued. 
B) high inflation when the fixed rate loans of many banks cause their real returns to decrease. 
C) recessions when many borrowers have a difficult time repaying loans and lending activity slows. 
D) wars and other civil unrest. 
A) stock market run ups when, like many companies, banks tend to be overvalued. 
B) high inflation when the fixed rate loans of many banks cause their real returns to decrease. 
C) recessions when many borrowers have a difficult time repaying loans and lending activity slows. 
D) wars and other civil unrest.

Question 17

When healthy banks fail due to widespread bank panics, those who are likely to be hurt are:

Accepted Answer

A) government regulators. 
B) households and small businesses. 
C) the FDIC. 
D) the Federal Reserve. 
A) government regulators. 
B) households and small businesses. 
C) the FDIC. 
D) the Federal Reserve.

Question 18

You have two savings accounts at an FDIC insured bank.You have $225,000 in one account and $40,000 in the other.If the bank fails, you will receive:

Accepted Answer

A) $225,000. 
B) $40,000. 
C) $115,000. 
D) $250,000. 
A) $225,000. 
B) $40,000. 
C) $115,000. 
D) $250,000.

Question 19

Banks can effectively choose their regulators by deciding whether to:

Accepted Answer

A) be a private or public corporation. 
B) be a member of the Federal Reserve or not. 
C) purchase FDIC insurance or to forego the coverage. 
D) be chartered at the national or state level. 
A) be a private or public corporation. 
B) be a member of the Federal Reserve or not. 
C) purchase FDIC insurance or to forego the coverage. 
D) be chartered at the national or state level.

Question 20

You have a retirement account in a bank that has failed.The balance in your account is $330,000.Does it make a difference to you if FDIC uses the payoff method or the purchase-and-assumption method for resolving this insolvency? Explain.

Accepted Answer

It does make a difference.Under the payo

Exam 14: Regulating the Financial System

Why are banks restricted in the assets that they can own? For example, why do you think banks are prohibited from owning common stock?

The supervision of banks includes:

Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because:

Discuss the ramifications of the FDIC reducing deposit insurance limits to $25,000.

Identify at least two problems a borrower would face if banks were not required to disclose the information that they are currently required to make available.

We saw in the text that regulations, specifically deposit insurance and the Basel Accord (of 1988), can create moral hazard.Explain.

The government provides deposit insurance; this insurance protects:

How does the lender of last resort potentially create a moral hazard problem?

One reason customers do not care about the quality of their bank's assets is:

Why might there be a trade-off between a bank's profitability and its safety?

Explain why depository institutions receive a disproportionate amount of attention from government regulators (compared to most other industries).

Under the purchase-and-assumption method, the FDIC usually finds it:

Considering the methods available to the FDIC for dealing with a failed bank, the depositors of the failed bank should:

Define the components of the CAMELS criteria and explain how a CAMELS rating is calculated.

The government's role of lender of last resort is directed to:

Bank failures tend to occur most often during periods of:

When healthy banks fail due to widespread bank panics, those who are likely to be hurt are:

You have two savings accounts at an FDIC insured bank.You have $225,000 in one account and $40,000 in the other.If the bank fails, you will receive:

Banks can effectively choose their regulators by deciding whether to:

You have a retirement account in a bank that has failed.The balance in your account is $330,000.Does it make a difference to you if FDIC uses the payoff method or the purchase-and-assumption method for resolving this insolvency? Explain.

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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