Question 1

Although the FDIC was created to prevent bank failures,its existence encourages banks to

Accepted Answer

A) take too much risk. 
B) hold too much capital. 
C) open too many branches. 
D) buy too much stock. 
A) take too much risk. 
B) hold too much capital. 
C) open too many branches. 
D) buy too much stock.

Question 2

The contagion effect refers to the fact that

Accepted Answer

A) deposit insurance has eliminated the problem of bank failures. 
B) bank runs involve only sound banks. 
C) bank runs involve only insolvent banks. 
D) the failure of one bank can hasten the failure of other banks. 
A) deposit insurance has eliminated the problem of bank failures. 
B) bank runs involve only sound banks. 
C) bank runs involve only insolvent banks. 
D) the failure of one bank can hasten the failure of other banks.

Question 3

An important factor in producing the subprime mortgage crisis was

Accepted Answer

A) lax consumer protection regulation. 
B) onerous rules placed on mortgage originators. 
C) weak incentives for mortgage brokers to use complicated mortgage products. 
D) strong incentives for the mortgage brokers to verify income information. 
A) lax consumer protection regulation. 
B) onerous rules placed on mortgage originators. 
C) weak incentives for mortgage brokers to use complicated mortgage products. 
D) strong incentives for the mortgage brokers to verify income information.

Question 4

The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S.in the 1980s.

Accepted Answer

A) regulatory forbearance 
B) policy antagonism 
C) regulatory ignorance 
D) policy renewal 
A) regulatory forbearance 
B) policy antagonism 
C) regulatory ignorance 
D) policy renewal

Question 5

Which of the following is not a reason financial regulation and supervision is difficult in real life?

Accepted Answer

A) Financial institutions have strong incentives to avoid existing regulations. 
B) Unintended consequences may happen if details in the regulations are not precise. 
C) Regulated firms lobby politicians to lean on regulators to ease the rules. 
D) Financial institutions are not required to follow the rules. 
A) Financial institutions have strong incentives to avoid existing regulations. 
B) Unintended consequences may happen if details in the regulations are not precise. 
C) Regulated firms lobby politicians to lean on regulators to ease the rules. 
D) Financial institutions are not required to follow the rules.

Question 6

To be considered well capitalized,a bank's leverage ratio must exceed ________.

Accepted Answer

A) 10% 
B) 8% 
C) 5% 
D) 3% 
A) 10% 
B) 8% 
C) 5% 
D) 3%

Question 7

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 8

The S&L Crisis can be analyzed as a principal-agent problem.The agents in this case,the ________,did not have the same incentive to minimize cost to the economy as the principals,the ________.

Accepted Answer

A) politicians/regulators; taxpayers 
B) taxpayers; politician/regulators 
C) taxpayers; bank managers 
D) bank managers; politicians/regulators 
A) politicians/regulators; taxpayers 
B) taxpayers; politician/regulators 
C) taxpayers; bank managers 
D) bank managers; politicians/regulators

Question 9

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 10

During the 1960s,1970s,and early 1980s,traditional bank profitability declined because of

Accepted Answer

A) financial innovation that increased competition from new financial institutions. 
B) a decrease in interest rates to fight the inflation problem. 
C) a decrease in deposit insurance. 
D) increased regulation that prohibited banks from making risky real estate loans. 
A) financial innovation that increased competition from new financial institutions. 
B) a decrease in interest rates to fight the inflation problem. 
C) a decrease in deposit insurance. 
D) increased regulation that prohibited banks from making risky real estate loans.

Question 11

When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them,they were pursuing a policy of ________.

Accepted Answer

A) regulatory forbearance 
B) regulatory kindness 
C) ostrich reasoning 
D) ignorance reasoning 
A) regulatory forbearance 
B) regulatory kindness 
C) ostrich reasoning 
D) ignorance reasoning

Question 12

Regulations that reduced competition between banks included

Accepted Answer

A) branching restrictions. 
B) bank reserve requirements. 
C) the dual system of granting bank charters. 
D) interest-rate ceilings. 
A) branching restrictions. 
B) bank reserve requirements. 
C) the dual system of granting bank charters. 
D) interest-rate ceilings.

Question 13

Because banks engage in regulatory arbitrage,the Basel Accord on risk-based capital requirements may result in

Accepted Answer

A) reduced risk taking by banks. 
B) reduced supervision of banks by regulators. 
C) increased fraudulent behavior by banks. 
D) increased risk taking by banks. 
A) reduced risk taking by banks. 
B) reduced supervision of banks by regulators. 
C) increased fraudulent behavior by banks. 
D) increased risk taking by banks.

Question 14

The current supervisory practice toward risk management

Accepted Answer

A) focuses on the quality of a bank's balance sheet. 
B) determines whether capital requirements have been met. 
C) evaluates the soundness of a bank's risk-management process. 
D) focuses on eliminating all risk. 
A) focuses on the quality of a bank's balance sheet. 
B) determines whether capital requirements have been met. 
C) evaluates the soundness of a bank's risk-management process. 
D) focuses on eliminating all risk.

Question 15

Banks engage in regulatory arbitrage by

Accepted Answer

A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. 
B) keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. 
C) hiding risky assets from regulators. 
D) buying risky assets from arbitragers. 
A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. 
B) keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. 
C) hiding risky assets from regulators. 
D) buying risky assets from arbitragers.

Question 16

The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets.

Accepted Answer

A) 10% 
B) 8% 
C) 5% 
D) 3% 
A) 10% 
B) 8% 
C) 5% 
D) 3%

Question 17

In May 1991,the FDIC announced that it would sell the government's final 26% stake in Continental Illinois,ending government ownership of the bank that it had rescued in 1984.The FDIC took control of the bank,rather than liquidate it,because it believed that Continental Illinois

Accepted Answer

A) was a good investment opportunity for the government. 
B) could be the Chicago branch of a new governmentally-owned interstate banking system. 
C) was too big to fail. 
D) would become the center of the new midwest region central bank system. 
A) was a good investment opportunity for the government. 
B) could be the Chicago branch of a new governmentally-owned interstate banking system. 
C) was too big to fail. 
D) would become the center of the new midwest region central bank system.

Question 18

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 19

FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk.

Accepted Answer

A) increased; decreased 
B) increased; increased 
C) decreased; decreased 
D) decreased; increased 
A) increased; decreased 
B) increased; increased 
C) decreased; decreased 
D) decreased; increased

Question 20

Regulators attempt to reduce the riskiness of banks' asset portfolios by

Accepted Answer

A) limiting the amount of loans in particular categories or to individual borrowers. 
B) encouraging banks to hold risky assets such as common stocks. 
C) establishing a minimum interest rate floor that banks can earn on certain assets. 
D) requiring collateral for all loans. 
A) limiting the amount of loans in particular categories or to individual borrowers. 
B) encouraging banks to hold risky assets such as common stocks. 
C) establishing a minimum interest rate floor that banks can earn on certain assets. 
D) requiring collateral for all loans.

Exam 11: Economic Analysis of Financial Regulation

Although the FDIC was created to prevent bank failures,its existence encourages banks to

The contagion effect refers to the fact that

An important factor in producing the subprime mortgage crisis was

The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S.in the 1980s.

Which of the following is not a reason financial regulation and supervision is difficult in real life?

To be considered well capitalized,a bank's leverage ratio must exceed ________.

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

The S&L Crisis can be analyzed as a principal-agent problem.The agents in this case,the ________,did not have the same incentive to minimize cost to the economy as the principals,the ________.

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

During the 1960s,1970s,and early 1980s,traditional bank profitability declined because of

When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them,they were pursuing a policy of ________.

Regulations that reduced competition between banks included

Because banks engage in regulatory arbitrage,the Basel Accord on risk-based capital requirements may result in

The current supervisory practice toward risk management

Banks engage in regulatory arbitrage by

The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets.

In May 1991,the FDIC announced that it would sell the government's final 26% stake in Continental Illinois,ending government ownership of the bank that it had rescued in 1984.The FDIC took control of the bank,rather than liquidate it,because it believed that Continental Illinois

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

FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk.

Regulators attempt to reduce the riskiness of banks' asset portfolios by

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

The S&L Crisis can be analyzed as a principal-agent problem.The agents in this case,the ,did not have the same incentive to minimize cost to the economy as the principals,the .

FDICIA incentives for banks to hold capital and incentives to take on excessive risk.