Question 1

If the government did not offer the too-big-to-fail safety net:

Accepted Answer

A) Large banks would be more disciplined by the potential loss of large corporate accounts 
B) The moral hazard problem of insuring large banks would increase 
C) The moral hazard problem of insuring large banks would not be affected 
D) The FDIC deposit insurance limits would have to be raised 
A) Large banks would be more disciplined by the potential loss of large corporate accounts 
B) The moral hazard problem of insuring large banks would increase 
C) The moral hazard problem of insuring large banks would not be affected 
D) The FDIC deposit insurance limits would have to be raised

Question 2

Which of the following is not a pillar of the new (1998) Basel Accord?

Accepted Answer

A) A revised set of minimum capital requirements 
B) Supervisory review of bank balance sheets 
C) Increased reliance on market discipline to encourage sound risk management practices 
D) Uniform international laws for bank regulation 
A) A revised set of minimum capital requirements 
B) Supervisory review of bank balance sheets 
C) Increased reliance on market discipline to encourage sound risk management practices 
D) Uniform international laws for bank regulation

Question 3

Since the 1920's, the ratio of assets to capital has almost tripled for commercial banks.Many economists believe this is the direct result of:

Accepted Answer

A) Lower quality management in banks 
B) The increase in branch banking 
C) Allowing banks to offer non-bank services 
D) Government provided deposit insurance 
A) Lower quality management in banks 
B) The increase in branch banking 
C) Allowing banks to offer non-bank services 
D) Government provided deposit insurance

Question 4

The CAMELS criteria to evaluate the health of banks by supervisors is not made public.Make a case for one making this information public and a case for keeping it private.

Accepted Answer

The case for making it public would be t

Question 5

You get married and, in doing some basic financial planning, your spouse suggests that the two of you open separate accounts so that if your total deposits exceed $250,000, your funds will be protected by FDIC.How would you respond to the suggestion?

Accepted Answer

You could respond by saying that it isn'

Question 6

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

Accepted Answer

If deposit insurance limits were reduced

Question 7

You have savings accounts at two separately FDIC insured banks.At one of the banks your account has a balance of $200,000.At the other bank the account balance is $60,000.If both banks fail, you will receive:

Accepted Answer

A) $250,000 
B) $60,000 
C) $260,000 
D) $200,000 
A) $250,000 
B) $60,000 
C) $260,000 
D) $200,000

Question 8

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 9

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) Mean the bank will have to answer to an additional regulator 
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) Mean the bank will have to answer to an additional regulator

Question 10

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 11

Which of the following regulates commercial banks as well as savings banks and savings and loans?

Accepted Answer

A) The Federal Reserve System 
B) The Federal Deposit Insurance Corporation 
C) The Office of the Comptroller of the Currency 
D) The Internal Revenue Service 
A) The Federal Reserve System 
B) The Federal Deposit Insurance Corporation 
C) The Office of the Comptroller of the Currency 
D) The Internal Revenue Service

Question 12

Following the consolidation that resulted from the 2007-2009 financial crisis in the US, the 4 largest commercial banks share of total deposits was:

Accepted Answer

A) 75% 
B) 50% 
C) 40% 
D) 25% 
A) 75% 
B) 50% 
C) 40% 
D) 25%

Question 13

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 14

A moral hazard situation arises in the lender of last resort function because:

Accepted Answer

A) A central bank finds it difficult to distinguish illiquid from insolvent banks 
B) A central bank usually will only make a loan to a bank after it becomes insolvent 
C) A central bank usually undervalues the assets of a bank in a crisis 
D) The central bank is the first place a bank facing a crisis will turn 
A) A central bank finds it difficult to distinguish illiquid from insolvent banks 
B) A central bank usually will only make a loan to a bank after it becomes insolvent 
C) A central bank usually undervalues the assets of a bank in a crisis 
D) The central bank is the first place a bank facing a crisis will turn

Question 15

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 16

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 17

The CAMELS ratings are:

Accepted Answer

A) Made public monthly to the financial markets so people can judge the relative quality of banks 
B) Published once a quarter in banking journals issued by the Federal Reserve 
C) Included in the annual report of publicly owned banks 
D) Not made public 
A) Made public monthly to the financial markets so people can judge the relative quality of banks 
B) Published once a quarter in banking journals issued by the Federal Reserve 
C) Included in the annual report of publicly owned banks 
D) Not made public

Question 18

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 created a 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 default risk 
A) It forced regulators to change the way they thought about bank capital 
B) It created a 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 default risk

Question 19

When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by:

Accepted Answer

A) Taking over the lender of last resort function and assigning this function to the U.S.Treasury 
B) Ordering the printing of tens of billions of dollars of additional currency 
C) Creating the FDIC and offering deposit insurance 
D) Declaring a bank holiday and closing banks for 30 days 
A) Taking over the lender of last resort function and assigning this function to the U.S.Treasury 
B) Ordering the printing of tens of billions of dollars of additional currency 
C) Creating the FDIC and offering deposit insurance 
D) Declaring a bank holiday and closing banks for 30 days

Question 20

The payoff method used by the FDIC to address the insolvency of a bank is when the FDIC:

Accepted Answer

A) Pays the owners of the bank for the losses they would otherwise face 
B) Pays off all depositors the balances in their accounts so no depositor suffers a loss, though the owners of the bank may suffer losses 
C) Pays off the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses 
D) Takes all of the assets of the bank, sells them pays off the liabilities of the bank in full and then replenishes their fund with any remaining balance 
A) Pays the owners of the bank for the losses they would otherwise face 
B) Pays off all depositors the balances in their accounts so no depositor suffers a loss, though the owners of the bank may suffer losses 
C) Pays off the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses 
D) Takes all of the assets of the bank, sells them pays off the liabilities of the bank in full and then replenishes their fund with any remaining balance

Exam 14: Regulating the Financial System

If the government did not offer the too-big-to-fail safety net:

Which of the following is not a pillar of the new (1998) Basel Accord?

Since the 1920's, the ratio of assets to capital has almost tripled for commercial banks.Many economists believe this is the direct result of:

The CAMELS criteria to evaluate the health of banks by supervisors is not made public.Make a case for one making this information public and a case for keeping it private.

You get married and, in doing some basic financial planning, your spouse suggests that the two of you open separate accounts so that if your total deposits exceed $250,000, your funds will be protected by FDIC.How would you respond to the suggestion?

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

You have savings accounts at two separately FDIC insured banks.At one of the banks your account has a balance of $200,000.At the other bank the account balance is $60,000.If both banks fail, you will receive:

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

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

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

Which of the following regulates commercial banks as well as savings banks and savings and loans?

Following the consolidation that resulted from the 2007-2009 financial crisis in the US, the 4 largest commercial banks share of total deposits was:

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

A moral hazard situation arises in the lender of last resort function because:

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

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

The CAMELS ratings are:

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

When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by:

The payoff method used by the FDIC to address the insolvency of a bank is when the FDIC:

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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