Question 1

During the 1980s,a high proportion of brokered deposits at a DI became an early warning signal of its risk for failure.

Accepted Answer

A) True 
 B)False

Question 2

Deposit insurance is often blamed for the deterioration in depositor discipline that allowed FIs to accept more risk in the asset selection process.

Accepted Answer

A) True 
 B)False

Question 3

The policy of capital forbearance practiced by the FSLIC in the late 1980s allowed many commercial banks to remain open even in the face of continuing losses and insolvency.

Accepted Answer

A) True 
 B)False

Question 4

As a result of loan write-offs,Bank A has to be liquidated by the regulators.The book value of the assets and liabilities of the bank is presented below (in millions of dollars).The market value of the loans has been estimated at $240 million. $\begin{array}{lll}
  \text { Loans(book value)  } & \text {340 Insured Deposits }&  \$200\
& \text { Urinsured Deposits} & \$100\
& \text { Equity} &  \$ 40\
\end{array}$
 
 What is the current net worth (market value)of the bank?

Accepted Answer

A) +$40 million. 
B) $0 million. 
C) -$40 million. 
D) -$60 million. 
A) +$40 million. 
B) $0 million. 
C) -$40 million. 
D) -$60 million.

Question 5

The number of bank failures in the period of 1933-79 was less than the number of failures from 1980-1989.

Accepted Answer

A) True 
 B)False

Question 6

The Federal safety net to protect the integrity of the payments system consists of deposit insurance and social welfare.

Accepted Answer

A) True 
 B)False

Question 7

The federal safety net to minimize bank failures includes all of the following EXCEPT

Accepted Answer

A) deposit insurance. 
B) reserve requirements. 
C) contagious runs. 
D) minimum capital requirements. 
A) deposit insurance. 
B) reserve requirements. 
C) contagious runs. 
D) minimum capital requirements.

Question 8

To address the decreasing balance of the FDIC deposit insurance fund during the financial crisis of 2007-2008

Accepted Answer

A) deposit insurance programs were suspended for a period of three months. 
B) the FDIC increased individual depositor insurance coverage from $100,000 to $250,000. 
C) the FDIC announced that it would no longer honor deposit insurance coverage of some failing DIs. 
D) two special assessments were levied on institutions participating in the FDIC insurance programs. 
A) deposit insurance programs were suspended for a period of three months. 
B) the FDIC increased individual depositor insurance coverage from $100,000 to $250,000. 
C) the FDIC announced that it would no longer honor deposit insurance coverage of some failing DIs. 
D) two special assessments were levied on institutions participating in the FDIC insurance programs.

Question 9

How is the cost of a systemic risk exemption to the least-cost resolution of bank failures shared among banks?

Accepted Answer

A) It is shared equally among all other insured banks. 
B) Additional deposit insurance premiums are imposed on FIs based on their size as measured by their total deposits and borrowed funds excluding subordinated debt. 
C) Additional deposit insurance premiums are imposed on FI based on their size as measured by their total deposits and borrowed funds including subordinated debt. 
D) It is shared equally among all other insured banks based on the profits earned by the FI during the year. 
A) It is shared equally among all other insured banks. 
B) Additional deposit insurance premiums are imposed on FIs based on their size as measured by their total deposits and borrowed funds excluding subordinated debt. 
C) Additional deposit insurance premiums are imposed on FI based on their size as measured by their total deposits and borrowed funds including subordinated debt. 
D) It is shared equally among all other insured banks based on the profits earned by the FI during the year.

Question 10

The following table shows the market value balance sheet of a failed bank ($ millions): 
$\begin{array}{lccc}
  \text { Assets  } & \text {400 Insured Deposits }&  \$200\
& \text { Urinsured Deposits} & \$400
\end{array}$
 
 If the insured depositor transfer resolution method is utilized,what is the cost to uninsured depositors of bank failure resolution?

Accepted Answer

A) $0. 
B) -$200 million. 
C) $67 million. 
D) $133 million. 
E) $200 million. 
A) $0. 
B) -$200 million. 
C) $67 million. 
D) $133 million. 
E) $200 million.

Question 11

Moral hazard encourages the FI to take less,rather than more,risk.

Accepted Answer

A) True 
 B)False

Question 12

The 1993 Depositor Protection legislation gives equal claim to the value of liquidated assets less the amount of insured deposits to foreign uninsured depositors,domestic uninsured depositors,and the FDIC.

Accepted Answer

A) True 
 B)False

Question 13

As a result of the Financial Institutions Reform,Recovery,and Enforcement Act (FIRREA),the deposit insurance fund for the savings and loan industry has been combined with the deposit insurance fund for the commercial banking industry.

Accepted Answer

A) True 
 B)False

Question 14

The adverse effects of a contagious run include the restrictions on the ability of individuals to transfer wealth through time and a negative impact on the level or rate of savings.

Accepted Answer

A) True 
 B)False

Question 15

Since its inception,the FDIC deposit insurance fund has never fallen to a negative balance.

Accepted Answer

A) True 
 B)False

Question 16

The system of flat deposit insurance premium formerly used in the U.S.

Accepted Answer

A) enhances bank safety and soundness because it discourages bank risk taking. 
B) reduces bank safety and soundness because it encourages bank risk taking. 
C) has no impact on bank safety and soundness. 
D) places banks that are considered "too big to fail" at a disadvantage. 
A) enhances bank safety and soundness because it discourages bank risk taking. 
B) reduces bank safety and soundness because it encourages bank risk taking. 
C) has no impact on bank safety and soundness. 
D) places banks that are considered "too big to fail" at a disadvantage.

Question 17

The ability of the FDIC to place a bank into receivership even though the book value of capital remains positive is an attempt to institute increased stockholder discipline.

Accepted Answer

A) True 
 B)False

Question 18

The provision of deposit insurance by the FDIC is similar to having the FDIC ________ on the assets of the bank that buys the deposit insurance.

Accepted Answer

A) write a call option 
B) buy a call option 
C) write a put option 
D) having a secondary lien 
A) write a call option 
B) buy a call option 
C) write a put option 
D) having a secondary lien

Question 19

Under the option pricing model of deposit insurance,the cost of the insurance

Accepted Answer

A) decreases as the insured deposit base increases. 
B) decreases as the period over which the insurance coverage extends is increased. 
C) increases with the level of risk of the assets held by the DI increase. 
D) decreases with market interest rates. 
A) decreases as the insured deposit base increases. 
B) decreases as the period over which the insurance coverage extends is increased. 
C) increases with the level of risk of the assets held by the DI increase. 
D) decreases with market interest rates.

Question 20

The initial risk-based deposit insurance program implemented on January 1,1993 was based on capital adequacy and supervisory judgments involving asset quality,loan underwriting standards and other operating risks.

Accepted Answer

A) True 
 B)False

Exam 19: Deposit Insurance and Other Liability Guarantees

During the 1980s,a high proportion of brokered deposits at a DI became an early warning signal of its risk for failure.

Deposit insurance is often blamed for the deterioration in depositor discipline that allowed FIs to accept more risk in the asset selection process.

The policy of capital forbearance practiced by the FSLIC in the late 1980s allowed many commercial banks to remain open even in the face of continuing losses and insolvency.

The number of bank failures in the period of 1933-79 was less than the number of failures from 1980-1989.

The Federal safety net to protect the integrity of the payments system consists of deposit insurance and social welfare.

The federal safety net to minimize bank failures includes all of the following EXCEPT

To address the decreasing balance of the FDIC deposit insurance fund during the financial crisis of 2007-2008

How is the cost of a systemic risk exemption to the least-cost resolution of bank failures shared among banks?

The following table shows the market value balance sheet of a failed bank ($ millions): Assets 400 Insured Deposits \2 00 Urinsured Deposits \4 00 If the insured depositor transfer resolution method is utilized,what is the cost to uninsured depositors of bank failure resolution?

Moral hazard encourages the FI to take less,rather than more,risk.

The 1993 Depositor Protection legislation gives equal claim to the value of liquidated assets less the amount of insured deposits to foreign uninsured depositors,domestic uninsured depositors,and the FDIC.

As a result of the Financial Institutions Reform,Recovery,and Enforcement Act (FIRREA),the deposit insurance fund for the savings and loan industry has been combined with the deposit insurance fund for the commercial banking industry.

The adverse effects of a contagious run include the restrictions on the ability of individuals to transfer wealth through time and a negative impact on the level or rate of savings.

Since its inception,the FDIC deposit insurance fund has never fallen to a negative balance.

The system of flat deposit insurance premium formerly used in the U.S.

The ability of the FDIC to place a bank into receivership even though the book value of capital remains positive is an attempt to institute increased stockholder discipline.

The provision of deposit insurance by the FDIC is similar to having the FDIC ________ on the assets of the bank that buys the deposit insurance.

Under the option pricing model of deposit insurance,the cost of the insurance

The initial risk-based deposit insurance program implemented on January 1,1993 was based on capital adequacy and supervisory judgments involving asset quality,loan underwriting standards and other operating risks.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters