Question 1

Many states had their own insurance fund to protect depositors.One 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 D

Question 2

Governments supervise banks mainly to do each of the following, except:

Accepted Answer

A) Reduce the potential cost to taxpayers of bank failures 
B) Be sure the banks are following the regulations set out by banking laws 
C) Reduce the moral hazard risk 
D) Eliminate all risk faced by investors 
A) Reduce the potential cost to taxpayers of bank failures 
B) Be sure the banks are following the regulations set out by banking laws 
C) Reduce the moral hazard risk 
D) Eliminate all risk faced by investors D

Question 3

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 D

Question 4

One of the unique problems that banks face is:

Accepted Answer

A) They hold liquid assets to meet illiquid liabilities 
B) They hold illiquid assets to meet liquid liabilities 
C) They hold liquid assets to meet liquid liabilities 
D) Both their assets and their liabilities are illiquid 
A) They hold liquid assets to meet illiquid liabilities 
B) They hold illiquid assets to meet liquid liabilities 
C) They hold liquid assets to meet liquid liabilities 
D) Both their assets and their liabilities are illiquid

Question 5

If your stockbroker gives you bad advice and you lose your investment:

Accepted Answer

A) The government will reimburse you similar to reimbursing depositors if a bank fails 
B) The government will not reimburse you for the loss; you are not protected from bad advice by your stockbroker 
C) These losses would be covered under FDIC 
D) Your investment would only be covered if the stockbroker was employed by a bank 
A) The government will reimburse you similar to reimbursing depositors if a bank fails 
B) The government will not reimburse you for the loss; you are not protected from bad advice by your stockbroker 
C) These losses would be covered under FDIC 
D) Your investment would only be covered if the stockbroker was employed by a bank

Question 6

The acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes the following, except:

Accepted Answer

A) Asset quality 
B) Losses 
C) Management 
D) Earnings 
A) Asset quality 
B) Losses 
C) Management 
D) Earnings

Question 7

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 8

The first test of the Federal Reserve as lender of last resort occurred with the:

Accepted Answer

A) Attack on Pearl Harbor by the Japanese 
B) Widespread failures of Savings and Loans in the 1980's 
C) Introduction of flexible exchange rates in the U.S.in 1971 
D) Stock market crash in 1929 
A) Attack on Pearl Harbor by the Japanese 
B) Widespread failures of Savings and Loans in the 1980's 
C) Introduction of flexible exchange rates in the U.S.in 1971 
D) Stock market crash in 1929

Question 9

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 10

What was the primary motivation behind the creation of the 1988 Basel Accord?

Accepted Answer

Globalization, in the sense that foreign

Question 11

The government's providing of deposit insurance and functioning as the lender of last resort has significantly:

Accepted Answer

A) Decreased the incentive for bank managers to take on risk 
B) Increased the amount of regulation of banks required, but has had no effect on bank's incentive to take on risk 
C) Increased the incentive for banks to take on risk, but has had no effect on the amount of regulation of banks required 
D) Increased the amount of regulation of banks required and increased the incentive for banks to take on risk 
A) Decreased the incentive for bank managers to take on risk 
B) Increased the amount of regulation of banks required, but has had no effect on bank's incentive to take on risk 
C) Increased the incentive for banks to take on risk, but has had no effect on the amount of regulation of banks required 
D) Increased the amount of regulation of banks required and increased the incentive for banks to take on risk

Question 12

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 13

What is the link between the safety net provided by the government to the financial industry and the relatively heavy regulation of the same industry by the government?

Accepted Answer

The link is that the safety net provided

Question 14

Bank panics have often begun as a result of:

Accepted Answer

A) Rumors only 
B) Real economic events only 
C) Both rumors and real economic events 
D) Neither rumors nor economic events 
A) Rumors only 
B) Real economic events only 
C) Both rumors and real economic events 
D) Neither rumors nor economic events

Question 15

How do banks potentially make economic downturns more severe and how do economic downturns contribute to the increased failure of banks?

Accepted Answer

When an economy begins to slow some peop

Question 16

Does the lender of last resort function guarantee an end to bank runs? Explain.

Accepted Answer

The Great Depression is evidence to the

Question 17

The government's too-big-to-fail policy applies to:

Accepted Answer

A) Certain highly populated states where a bank run impacts a large percent of the total population 
B) Large banks whose failure would certainly start a widespread panic in the financial system 
C) Large corporate payroll accounts held by some banks where many people would lose their income 
D) Banks that have branches in more than two states 
A) Certain highly populated states where a bank run impacts a large percent of the total population 
B) Large banks whose failure would certainly start a widespread panic in the financial system 
C) Large corporate payroll accounts held by some banks where many people would lose their income 
D) Banks that have branches in more than two states

Question 18

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 19

Commercial banks are regulated by a combination of agencies including each of the following, except:

Accepted Answer

A) The Federal Reserve 
B) The Office of Thrift Supervision 
C) State authorities 
D) The Federal Deposit Insurance Corporation 
A) The Federal Reserve 
B) The Office of Thrift Supervision 
C) State authorities 
D) The Federal Deposit Insurance Corporation

Question 20

Financial regulators set capital requirements for banks.One characteristic about these requirements is:

Accepted Answer

A) Every bank will have to hold the same level 
B) The riskier the asset holdings of a bank, the more capital it will be required to have 
C) The more branches a bank has, the more capital it must have 
D) The amount of capital required is inverse to the amount of assets the bank owns 
A) Every bank will have to hold the same level 
B) The riskier the asset holdings of a bank, the more capital it will be required to have 
C) The more branches a bank has, the more capital it must have 
D) The amount of capital required is inverse to the amount of assets the bank owns

Exam 14: Regulating the Financial System

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

Governments supervise banks mainly to do each of the following, except:

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

One of the unique problems that banks face is:

If your stockbroker gives you bad advice and you lose your investment:

The acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes the following, except:

The creation of the Federal Reserve in 1913:

The first test of the Federal Reserve as lender of last resort occurred with the:

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

What was the primary motivation behind the creation of the 1988 Basel Accord?

The government's providing of deposit insurance and functioning as the lender of last resort has significantly:

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:

What is the link between the safety net provided by the government to the financial industry and the relatively heavy regulation of the same industry by the government?

Bank panics have often begun as a result of:

How do banks potentially make economic downturns more severe and how do economic downturns contribute to the increased failure of banks?

Does the lender of last resort function guarantee an end to bank runs? Explain.

The government's too-big-to-fail policy applies to:

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

Commercial banks are regulated by a combination of agencies including each of the following, except:

Financial regulators set capital requirements for banks.One characteristic about these requirements is:

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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