Question 1

The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry.

Accepted Answer

A) an adverse selection 
B) a moral hazard 
C) a lemons 
D) a revenue 
A) an adverse selection 
B) a moral hazard 
C) a lemons 
D) a revenue A

Question 2

Moral hazard and adverse selection problems increased in prominence in the 1980s

Accepted Answer

A) as deregulation required savings and loans and mutual savings banks to be more cautious. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets,thereby widening the scope for risk taking. 
C) following a decrease in federal deposit insurance from $100,000 to $40,000. 
D) as interest rates were sharply decreased to bring down inflation. 
A) as deregulation required savings and loans and mutual savings banks to be more cautious. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets,thereby widening the scope for risk taking. 
C) following a decrease in federal deposit insurance from $100,000 to $40,000. 
D) as interest rates were sharply decreased to bring down inflation. B

Question 3

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 supervision can lead to increased moral hazard as banks take on more risk.Although deposit insurance was not necessarily a major factor in every country's bank crisis,there was always some kind of government safety net.The presence of the government safety net also leads to increased risk-taking from the banks.

Question 4

All of the following would reduce the agency problems of the originate-to-distribute model except

Accepted Answer

A) encouraging more complex mortgage products. 
B) more stringent licensing requirements. 
C) clearer disclosure of mortgage terms. 
D) discouraging borrowers from "getting in over their head." 
A) encouraging more complex mortgage products. 
B) more stringent licensing requirements. 
C) clearer disclosure of mortgage terms. 
D) discouraging borrowers from "getting in over their head."

Question 5

China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas.

Accepted Answer

A) state 
B) domestic investor 
C) depositor 
D) domestic corporate 
A) state 
B) domestic investor 
C) depositor 
D) domestic corporate

Question 6

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 7

A common element in all of the banking crisis episodes in different countries is

Accepted Answer

A) the existence of a government safety net. 
B) deposit insurance. 
C) increased regulation. 
D) lack of competition. 
A) the existence of a government safety net. 
B) deposit insurance. 
C) increased regulation. 
D) lack of competition.

Question 8

The Federal Deposit Insurance Corporation Improvement Act of 1991

Accepted Answer

A) increased the FDIC's ability to borrow from the Treasury to deal with failed banks. 
B) increased the FDIC's ability to use the too-big-to-fail doctrine. 
C) eliminated governmentally-administered deposit insurance. 
D) eliminated restrictions on nationwide banking. 
A) increased the FDIC's ability to borrow from the Treasury to deal with failed banks. 
B) increased the FDIC's ability to use the too-big-to-fail doctrine. 
C) eliminated governmentally-administered deposit insurance. 
D) eliminated restrictions on nationwide banking.

Question 9

In the ten year period 1981-1990,1202 commercial banks were closed,with a peak of 206 failures in 1989.This rate of failures was approximately ________ times greater than that in the period from 1934 to 1980.

Accepted Answer

A) two 
B) three 
C) five 
D) ten 
A) two 
B) three 
C) five 
D) ten

Question 10

As in the United States,an important factor in the banking crises in Norway,Sweden,and Finland 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 11

Who has regulatory responsibility when a bank operates branches in many countries?

Accepted Answer

A) It is not always clear. 
B) The WTO. 
C) The U.S.Federal Reserve System. 
D) The first country to submit an application. 
A) It is not always clear. 
B) The WTO. 
C) The U.S.Federal Reserve System. 
D) The first country to submit an application.

Question 12

Overseeing who operates banks and how they are operated is called ________.

Accepted Answer

A) prudential supervision 
B) hazard insurance 
C) regulatory interference 
D) loan loss reserves 
A) prudential supervision 
B) hazard insurance 
C) regulatory interference 
D) loan loss reserves

Question 13

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 14

Agreements such as the ________ are attempts to standardize international banking regulations.

Accepted Answer

A) Basel Accord 
B) UN Bank Accord 
C) GATT Accord 
D) WTO Accord 
A) Basel Accord 
B) UN Bank Accord 
C) GATT Accord 
D) WTO Accord

Question 15

When one party to a transaction has incentives to engage in activities detrimental to the other party,there exists a problem of

Accepted Answer

A) moral hazard. 
B) split incentives. 
C) ex ante shirking. 
D) pre-contractual opportunism. 
A) moral hazard. 
B) split incentives. 
C) ex ante shirking. 
D) pre-contractual opportunism.

Question 16

A bank failure is less likely to occur when

Accepted Answer

A) a bank holds less U.S.government securities. 
B) a bank suffers large deposit outflows. 
C) a bank holds fewer excess reserves. 
D) a bank has more bank capital. 
A) a bank holds less U.S.government securities. 
B) a bank suffers large deposit outflows. 
C) a bank holds fewer excess reserves. 
D) a bank has more bank capital.

Question 17

During times of financial crisis,mark-to-market accounting

Accepted Answer

A) requires that a financial firms' assets be marked down in value which can worsen the lending crisis. 
B) leads to an increase in the financial firms' balance sheets since they can now get assets at bargain prices. 
C) leads to an increase in financial firms' lending. 
D) results in financial firms' assets increasing in value. 
A) requires that a financial firms' assets be marked down in value which can worsen the lending crisis. 
B) leads to an increase in the financial firms' balance sheets since they can now get assets at bargain prices. 
C) leads to an increase in financial firms' lending. 
D) results in financial firms' assets increasing in value.

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

Savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called

Accepted Answer

A) goodwill. 
B) salvation. 
C) kindness. 
D) retribution. 
A) goodwill. 
B) salvation. 
C) kindness. 
D) retribution.

Question 20

The inaccurate ratings provided by credit-rating agencies

Accepted Answer

A) meant that investors did not have the information they needed to make informed choices about their investments. 
B) were irrelevant since no one pays any attention to them anyway. 
C) meant that investors actually took on less risk. 
D) will not be a problem when determining capital requirements under Basel 2.. 
A) meant that investors did not have the information they needed to make informed choices about their investments. 
B) were irrelevant since no one pays any attention to them anyway. 
C) meant that investors actually took on less risk. 
D) will not be a problem when determining capital requirements under Basel 2..

Exam 11: Economic Analysis of Financial Regulation

The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry.

Moral hazard and adverse selection problems increased in prominence in the 1980s

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

All of the following would reduce the agency problems of the originate-to-distribute model except

China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas.

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 ________.

A common element in all of the banking crisis episodes in different countries is

The Federal Deposit Insurance Corporation Improvement Act of 1991

In the ten year period 1981-1990,1202 commercial banks were closed,with a peak of 206 failures in 1989.This rate of failures was approximately ________ times greater than that in the period from 1934 to 1980.

As in the United States,an important factor in the banking crises in Norway,Sweden,and Finland was the

Who has regulatory responsibility when a bank operates branches in many countries?

Overseeing who operates banks and how they are operated is called ________.

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.

Agreements such as the ________ are attempts to standardize international banking regulations.

When one party to a transaction has incentives to engage in activities detrimental to the other party,there exists a problem of

A bank failure is less likely to occur when

During times of financial crisis,mark-to-market accounting

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

Savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called

The inaccurate ratings provided by credit-rating agencies

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior 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 and the Subprime Meltdown

Banking and the Management of Financial Institutions

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools for Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

The Demand for Money

The Islm Model

Monetary and Fiscal Policy in the ISLM Model

Aggregate Demand and Supply Analysis

Transmission Mechanisms of Monetary Policy: The Evidence

Money and Inflation

Rational Expectations: Implications for Policy

Filters

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 .