Question 1

One reason a bank's officer may be reluctant to write off a past-due loan is that it will:

Accepted Answer

A) increase the bank's liabilities. 
B) decrease the bank's assets and capital. 
C) increase the bank's liabilities and assets, requiring more capital to be held. 
D) make the bank's accounts less transparent. 
A) increase the bank's liabilities. 
B) decrease the bank's assets and capital. 
C) increase the bank's liabilities and assets, requiring more capital to be held. 
D) make the bank's accounts less transparent.

Question 2

Why do bank runs usually have people rushing to their bank instead of waiting for the lines to taper off so they do not have to wait so long?

Accepted Answer

Banks promise to satisfy depositors' wit

Question 3

Which of the following is not a positive effect of the Basel Accord?

Accepted Answer

A) It forced regulators to change the way they thought about bank capital. 
B) It promoted a more uniform international system. 
C) It provided a framework that less developed countries could use to improve the regulation of their banks. 
D) It provided a system to differentiate between bonds based on their systemic risk. 
A) It forced regulators to change the way they thought about bank capital. 
B) It promoted a more uniform international system. 
C) It provided a framework that less developed countries could use to improve the regulation of their banks. 
D) It provided a system to differentiate between bonds based on their systemic risk.

Question 4

On November 20, 1985, the Bank of New York needed to use the lender of last resort function due to:

Accepted Answer

A) a run on the bank started by a rumor that the president of the bank embezzled tens of millions of dollars from the bank. 
B) a computer error caused the bank's records to wipe out the balances of all of its customers. 
C) a rumor that the bank was about to be taken over by FDIC due to insolvency. 
D) a computer error that made it impossible for the bank to keep track of its Treasury bond trades. 
A) a run on the bank started by a rumor that the president of the bank embezzled tens of millions of dollars from the bank. 
B) a computer error caused the bank's records to wipe out the balances of all of its customers. 
C) a rumor that the bank was about to be taken over by FDIC due to insolvency. 
D) a computer error that made it impossible for the bank to keep track of its Treasury bond trades.

Question 5

A bank supervisor examines the bank's portfolio of loans to see if the loans are being repaid in a timely manner.In terms of the acronym CAMELS, this would be part of rating the bank's:

Accepted Answer

A) asset quality. 
B) losses. 
C) management. 
D) earnings. 
A) asset quality. 
B) losses. 
C) management. 
D) earnings.

Question 6

The best way for a government to stop the failure of one bank from turning into a bank panic is to:

Accepted Answer

A) make sure solvent institutions can meet the withdrawal demands of depositors. 
B) declare a bank holiday until solvent banks can acquire adequate liquidity. 
C) limit the withdrawals of depositors. 
D) provide zero-interest rate loans to all banks regardless of net worth. 
A) make sure solvent institutions can meet the withdrawal demands of depositors. 
B) declare a bank holiday until solvent banks can acquire adequate liquidity. 
C) limit the withdrawals of depositors. 
D) provide zero-interest rate loans to all banks regardless of net worth.

Question 7

The original Basel Accord was:

Accepted Answer

A) the basic set of guidelines the Federal Reserve applies in regulating domestic banks. 
B) a set of guidelines for basic capital requirements for internationally active banks. 
C) an agreement between state and federal regulators to try to have one standard set of guidelines for all banks. 
D) a set of guidelines applied only to international banks operating with U.S.boundaries. 
A) the basic set of guidelines the Federal Reserve applies in regulating domestic banks. 
B) a set of guidelines for basic capital requirements for internationally active banks. 
C) an agreement between state and federal regulators to try to have one standard set of guidelines for all banks. 
D) a set of guidelines applied only to international banks operating with U.S.boundaries.

Question 8

You are the head of finance for a very large corporation located in a relatively small town.At a local chamber of commerce meeting, the president of the local bank asks you why you keep the corporation's bank accounts in a very large mid-western bank and not in his local bank.From a risk reduction perspective, how could you answer his question?

Accepted Answer

You might employ the concept of too-big-

Question 9

The creation of the Federal Reserve in 1913:

Accepted Answer

A) provided the opportunity for lender of last resort but not the guarantee that it would be used. 
B) guaranteed the Federal Reserve would always act as lender of last resort. 
C) eliminated bank panics in the U.S. 
D) was in response to the Great Depression in the U.S. 
A) provided the opportunity for lender of last resort but not the guarantee that it would be used. 
B) guaranteed the Federal Reserve would always act as lender of last resort. 
C) eliminated bank panics in the U.S. 
D) was in response to the Great Depression in the U.S.

Question 10

Empirical evidence points to the fact that financial crises:

Accepted Answer

A) are newsworthy but have no impact on economic growth. 
B) have a negative impact on economic growth only for the year of the crisis. 
C) have a negative impact on economic growth for years. 
D) can have a positive impact on economic growth as weak borrowers are weeded out. 
A) are newsworthy but have no impact on economic growth. 
B) have a negative impact on economic growth only for the year of the crisis. 
C) have a negative impact on economic growth for years. 
D) can have a positive impact on economic growth as weak borrowers are weeded out.

Question 11

The moral hazard problem caused by government safety nets:

Accepted Answer

A) is greater for larger banks. 
B) is greater for smaller banks. 
C) is pretty constant across banks of all sizes. 
D) only exists for banks with high leverage ratios. 
A) is greater for larger banks. 
B) is greater for smaller banks. 
C) is pretty constant across banks of all sizes. 
D) only exists for banks with high leverage ratios.

Question 12

The federal government is concerned about the health of the banking system for many reasons, the most important of which may be:

Accepted Answer

A) banks are where government bonds are traded. 
B) a significant number of people are employed in the banking industry. 
C) many people earn the majority of their income from interest on bank deposits. 
D) banks are of great importance in enabling the economy to operate efficiently. 
A) banks are where government bonds are traded. 
B) a significant number of people are employed in the banking industry. 
C) many people earn the majority of their income from interest on bank deposits. 
D) banks are of great importance in enabling the economy to operate efficiently.

Question 13

Many states had their own insurance fund to protect depositors.The critical problem with these state funds is:

Accepted Answer

A) they are monopolies in their own state and extract extremely high prices for the insurance they provide. 
B) they are highly inefficient they cannot achieve the economies of scale a federal fund can achieve. 
C) they do not have regulators as knowledgeable as the regulators at FDIC. 
D) no state fund is large enough to withstand a run on all of the banks it insures. 
A) they are monopolies in their own state and extract extremely high prices for the insurance they provide. 
B) they are highly inefficient they cannot achieve the economies of scale a federal fund can achieve. 
C) they do not have regulators as knowledgeable as the regulators at FDIC. 
D) no state fund is large enough to withstand a run on all of the banks it insures.

Question 14

If the lender of last resort function of the government is to be effective in working to minimize a crisis, it must be:

Accepted Answer

A) reserved only for those banks that are most deserving. 
B) used on a limited basis. 
C) credible, with banks knowing they can get loans quickly. 
D) only available during economic downturns. 
A) reserved only for those banks that are most deserving. 
B) used on a limited basis. 
C) credible, with banks knowing they can get loans quickly. 
D) only available during economic downturns.

Question 15

One negative consequence of regulatory competition is:

Accepted Answer

A) it is expensive. 
B) financial institutions are over regulated at a cost to customers. 
C) financial institutions often seek out the most lenient regulator. 
D) it minimizes competition. 
A) it is expensive. 
B) financial institutions are over regulated at a cost to customers. 
C) financial institutions often seek out the most lenient regulator. 
D) it minimizes competition.

Question 16

Recession can cause widespread bank crises for all of the following reasons except:

Accepted Answer

A) there is less business investment as banks make fewer loans. 
B) borrowers' default rates increase. 
C) bank capital increases. 
D) the negative effect on banks' balance sheets. 
A) there is less business investment as banks make fewer loans. 
B) borrowers' default rates increase. 
C) bank capital increases. 
D) the negative effect on banks' balance sheets.

Question 17

The inter-bank loans that appear on banks' balance sheets represent what proportion of bank capital?

Accepted Answer

A) Nearly ten percent 
B) Almost three-fourths 
C) About one-third 
D) Less than one percent 
A) Nearly ten percent 
B) Almost three-fourths 
C) About one-third 
D) Less than one percent

Question 18

The existence of a lender of last resort creates moral hazard for bank managers because:

Accepted Answer

A) they have an incentive to take too much risk in their operations. 
B) officials are likely to undervalue the bank's portfolio of assets. 
C) they are less likely to apply for a direct loan from the central bank. 
D) banks seek loans from the central bank only after exploring other options. 
A) they have an incentive to take too much risk in their operations. 
B) officials are likely to undervalue the bank's portfolio of assets. 
C) they are less likely to apply for a direct loan from the central bank. 
D) banks seek loans from the central bank only after exploring other options.

Question 19

A long-standing goal of financial regulators has been to:

Accepted Answer

A) prevent banks from growing too big and powerful. 
B) minimize the competition that banks face. 
C) encourage banks to grow as large as possible. 
D) discourage small rural banks. 
A) prevent banks from growing too big and powerful. 
B) minimize the competition that banks face. 
C) encourage banks to grow as large as possible. 
D) discourage small rural banks.

Question 20

Deposit insurance only seems to be viable at the federal level.This is likely due to the fact that:

Accepted Answer

A) state funds are less informed about the solvency of national banks. 
B) a run on the banks within a state will always spread countrywide. 
C) the U.S.Treasury backs the FDIC and can therefore withstand virtually any crisis. 
D) the cost of state insurance is prohibitively high. 
A) state funds are less informed about the solvency of national banks. 
B) a run on the banks within a state will always spread countrywide. 
C) the U.S.Treasury backs the FDIC and can therefore withstand virtually any crisis. 
D) the cost of state insurance is prohibitively high.

Exam 14: Regulating the Financial System

One reason a bank's officer may be reluctant to write off a past-due loan is that it will:

Why do bank runs usually have people rushing to their bank instead of waiting for the lines to taper off so they do not have to wait so long?

Which of the following is not a positive effect of the Basel Accord?

On November 20, 1985, the Bank of New York needed to use the lender of last resort function due to:

A bank supervisor examines the bank's portfolio of loans to see if the loans are being repaid in a timely manner.In terms of the acronym CAMELS, this would be part of rating the bank's:

The best way for a government to stop the failure of one bank from turning into a bank panic is to:

The original Basel Accord was:

The creation of the Federal Reserve in 1913:

Empirical evidence points to the fact that financial crises:

The moral hazard problem caused by government safety nets:

The federal government is concerned about the health of the banking system for many reasons, the most important of which may be:

Many states had their own insurance fund to protect depositors.The critical problem with these state funds is:

If the lender of last resort function of the government is to be effective in working to minimize a crisis, it must be:

One negative consequence of regulatory competition is:

Recession can cause widespread bank crises for all of the following reasons except:

The inter-bank loans that appear on banks' balance sheets represent what proportion of bank capital?

The existence of a lender of last resort creates moral hazard for bank managers because:

A long-standing goal of financial regulators has been to:

Deposit insurance only seems to be viable at the federal level.This is likely due to the fact that:

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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