Question 1

When risk-taking is not actuarially fairly priced into deposit insurance premiums

Accepted Answer

A) depositors are required to pay the shortfall in funds collected. 
B) there is an increase in the incentives for owners of DIs to take additional risk. 
C) deposit insurance premiums are more costly than economically justified. 
D) depositors will be unprotected should the DI become insolvent and fail. 
A) depositors are required to pay the shortfall in funds collected. 
B) there is an increase in the incentives for owners of DIs to take additional risk. 
C) deposit insurance premiums are more costly than economically justified. 
D) depositors will be unprotected should the DI become insolvent and fail.

Question 2

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 cost to the insured depositors if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure?

Accepted Answer

A) $0. 
B) $100 million 
C) $30 million. 
D) $40 million. 
A) $0. 
B) $100 million 
C) $30 million. 
D) $40 million.

Question 3

The Financial Institutions Reform,Recovery,and Enforcement Act (FIRREA)restructured the savings association deposit insurance fund and transferred its management to the FDIC.

Accepted Answer

A) True 
 B)False

Question 4

State guaranty funds for insurance companies are sponsored by state insurance regulators rather than by a federal agency such as the FDIC.

Accepted Answer

A) True 
 B)False

Question 5

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 the FDIC of bank failure resolution?

Accepted Answer

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

Question 6

The least cost resolution strategy of FDICIA requires failure resolution alternatives for all banks to be evaluated on a

Accepted Answer

A) historical cost basis. 
B) opportunity cost basis. 
C) market value basis. 
D) present value basis. 
A) historical cost basis. 
B) opportunity cost basis. 
C) market value basis. 
D) present value basis.

Question 7

Which of the following refers to mandatory actions that have to be taken by regulators as a DI's capital ratio falls?

Accepted Answer

A) Capital forbearance. 
B) Prompt corrective action. 
C) Risk-based deposit insurance. 
D) Too-big-to-fail. 
A) Capital forbearance. 
B) Prompt corrective action. 
C) Risk-based deposit insurance. 
D) Too-big-to-fail.

Question 8

Critics of the current FDIC insurance programs often argue that only uninsured depositors have any incentive to discipline riskier banks.

Accepted Answer

A) True 
 B)False

Question 9

If regulators provide more protection against bank runs,the incidence of moral hazard is likely to increase.

Accepted Answer

A) True 
 B)False

Question 10

Why are credit unions less affected by financial crises experienced by other thrifts such as savings associations?

Accepted Answer

A) They hold almost 30 percent of their assets in government securities. 
B) They hold relatively high amounts of residential mortgages. 
C) Less than 10 percent of their assets are in small consumer loans. 
D) They are more diversified than other DIs. 
A) They hold almost 30 percent of their assets in government securities. 
B) They hold relatively high amounts of residential mortgages. 
C) Less than 10 percent of their assets are in small consumer loans. 
D) They are more diversified than other DIs.

Question 11

Currently in the U.S. ,deposit insurance premiums increase with the amount of risk of the institution.

Accepted Answer

A) True 
 B)False

Question 12

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 cost to the uninsured depositors if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure?

Accepted Answer

A) $0. 
B) $20 million. 
C) $30 million. 
D) $40 million. 
E) $60 million. 
A) $0. 
B) $20 million. 
C) $30 million. 
D) $40 million. 
E) $60 million.

Question 13

The prompt corrective action program of the FDIC Improvement Act allows a bank or thrift to be placed into receivership when the book value of capital to assets falls below 2 percent.

Accepted Answer

A) True 
 B)False

Question 14

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 insured depositors of bank failure resolution?

Accepted Answer

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

Question 15

Which of the following considerations was not imposed by FDICIA in an attempt to increase regulatory discipline?

Accepted Answer

A) The act required improved accounting standards for banks. 
B) The act forbids the use of brokered deposits. 
C) The act required an annual on-site examination of every bank. 
D) The act gave private accountants a greater role in monitoring a bank's performance. 
A) The act required improved accounting standards for banks. 
B) The act forbids the use of brokered deposits. 
C) The act required an annual on-site examination of every bank. 
D) The act gave private accountants a greater role in monitoring a bank's performance.

Question 16

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 cost to the FDIC if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure?

Accepted Answer

A) $0. 
B) $20 million. 
C) $30 million. 
D) $40 million. 
A) $0. 
B) $20 million. 
C) $30 million. 
D) $40 million.

Question 17

The average cost to the FDIC of each bank failure during the decade of the 1980s was larger than the total cost of all bank failures during the period 1933-79.

Accepted Answer

A) True 
 B)False

Question 18

The deficit realized by the PBGC in 1992 was a result of risk-taking by fund administrators.

Accepted Answer

A) True 
 B)False

Question 19

The FDIC deposit insurance program is also available to credit unions.

Accepted Answer

A) True 
 B)False

Question 20

Moral hazard at FIs may

Accepted Answer

A) result when actions and consequences are separated. 
B) occur when interest rates are very high and volatile. 
C) occur when commodity prices are very high and volatile. 
D) be a consequence of strict regulatory supervision. 
A) result when actions and consequences are separated. 
B) occur when interest rates are very high and volatile. 
C) occur when commodity prices are very high and volatile. 
D) be a consequence of strict regulatory supervision.

Exam 19: Deposit Insurance and Other Liability Guarantees

When risk-taking is not actuarially fairly priced into deposit insurance premiums

The Financial Institutions Reform,Recovery,and Enforcement Act (FIRREA)restructured the savings association deposit insurance fund and transferred its management to the FDIC.

State guaranty funds for insurance companies are sponsored by state insurance regulators rather than by a federal agency such as the FDIC.

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 the FDIC of bank failure resolution?

The least cost resolution strategy of FDICIA requires failure resolution alternatives for all banks to be evaluated on a

Which of the following refers to mandatory actions that have to be taken by regulators as a DI's capital ratio falls?

Critics of the current FDIC insurance programs often argue that only uninsured depositors have any incentive to discipline riskier banks.

If regulators provide more protection against bank runs,the incidence of moral hazard is likely to increase.

Why are credit unions less affected by financial crises experienced by other thrifts such as savings associations?

Currently in the U.S. ,deposit insurance premiums increase with the amount of risk of the institution.

The prompt corrective action program of the FDIC Improvement Act allows a bank or thrift to be placed into receivership when the book value of capital to assets falls below 2 percent.

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 insured depositors of bank failure resolution?

Which of the following considerations was not imposed by FDICIA in an attempt to increase regulatory discipline?

The average cost to the FDIC of each bank failure during the decade of the 1980s was larger than the total cost of all bank failures during the period 1933-79.

The deficit realized by the PBGC in 1992 was a result of risk-taking by fund administrators.

The FDIC deposit insurance program is also available to credit unions.

Moral hazard at FIs may

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