Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

FDICIA imposed additional regulatory discipline as a substitute for increased stockholder and depositor discipline.

Accepted Answer

A) True 
 B)False

Question 3

Contagious runs on bank deposits are directed at FIs, whether they are failing or healthy.

Accepted Answer

A) True 
 B)False

Question 4

The changes implemented by the Fed in January 2003 to its discount window lending

Accepted Answer

A) decreased the cost of borrowing. 
B) eased the terms of borrowing. 
C) terms of borrowing became less flexible. 
D) resulted in reduction of outstanding discount loan volumes. 
E) None of the above. 
A) decreased the cost of borrowing. 
B) eased the terms of borrowing. 
C) terms of borrowing became less flexible. 
D) resulted in reduction of outstanding discount loan volumes. 
E) None of the above.

Question 5

What is the benefit of a regulatory guarantee or insurance program for liability holders of FIs?

Accepted Answer

A) It decreases the likelihood contagious runs. 
B) It increases concerns about the asset quality of FI. 
C) It increases concerns about solvency of an FI. 
D) It provides incentives to liability holders to engage in runs. 
E) It provides preference to those who are first in line to withdraw funds over those last in line. 
A) It decreases the likelihood contagious runs. 
B) It increases concerns about the asset quality of FI. 
C) It increases concerns about solvency of an FI. 
D) It provides incentives to liability holders to engage in runs. 
E) It provides preference to those who are first in line to withdraw funds over those last in line.

Question 6

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 7

The use of subordinated debt as a replacement for common stock has been proposed as a method of increasing stockholder discipline.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is not a Least-Cost Resolution (LCR) requirement under FDICIA?

Accepted Answer

A) Consider and evaluate all possible resolution alternatives by computing and comparing their costs on a present value basis, using realistic discount rates. 
B) Place a bank or thrift into receivership as soon as its capital falls below some positive book value level. 
C) Document the evaluation and the assumption on which it is based. 
D) Retain documentation for at least five years. 
E) Select the least costly alternative based on the evaluation. 
A) Consider and evaluate all possible resolution alternatives by computing and comparing their costs on a present value basis, using realistic discount rates. 
B) Place a bank or thrift into receivership as soon as its capital falls below some positive book value level. 
C) Document the evaluation and the assumption on which it is based. 
D) Retain documentation for at least five years. 
E) Select the least costly alternative based on the evaluation.

Question 9

After nearly failing, the FDIC's Bank Insurance Fund (BIF) achieved record levels of reserves during the 1990s.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following contributed the least to the collapse of the FSLIC/FDIC deposit insurance funds?

Accepted Answer

A) An increase in interest rate volatility. 
B) Enhanced investment powers granted to thrifts. 
C) Fraudulent behavior induced by the greed of the decade of the 80s. 
D) Fraudulent behavior induced by ineffective regulatory incentives. 
E) The extension of deposit insurance to uninsured depositors. 
A) An increase in interest rate volatility. 
B) Enhanced investment powers granted to thrifts. 
C) Fraudulent behavior induced by the greed of the decade of the 80s. 
D) Fraudulent behavior induced by ineffective regulatory incentives. 
E) The extension of deposit insurance to uninsured depositors.

Question 11

Risk-based capital supports risk-based deposit insurance premiums by increasing the cost risk taking for DI stockholders.

Accepted Answer

A) True 
 B)False

Question 12

The improved financial health of the FDIC during the 1990s resulted in a considerable reduction in deposit insurance premiums.

Accepted Answer

A) True 
 B)False

Question 13

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. 
E) the U.S.Treasury had to take over management of the FDIC. 
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. 
E) the U.S.Treasury had to take over management of the FDIC.

Question 14

During the 1980s, which of the following was NOT a change in the financial environment that had an inverse impact on U.S. banks and thrifts?

Accepted Answer

A) The effects of significant interest rate changes. 
B) The failure of the FSLIC. 
C) The deterioration of real estate prices. 
D) The collapse of the energy industry. 
E) Significant deterioration in the agricultural economy. 
A) The effects of significant interest rate changes. 
B) The failure of the FSLIC. 
C) The deterioration of real estate prices. 
D) The collapse of the energy industry. 
E) Significant deterioration in the agricultural economy.

Question 15

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 16

Requiring higher capital ratios often is proposed as method to reduce the incentive to take excessive risk because the moral-hazard risk-taking incentives are thought to decrease as the amount of net worth increases.

Accepted Answer

A) True 
 B)False

Question 17

The costs to the bank of borrowing at the discount window do NOT include

Accepted Answer

A) an explicit rate of interest on the borrowings. 
B) the market value of collateral to be pledged against the loans. 
C) the negative signal the use of such borrowings sends to regulators about the insurer's financial condition. 
D) the negative signal the use of such borrowings sends to the market about the bank's financial condition. 
E) the possibility of greater regulatory scrutiny and examination. 
A) an explicit rate of interest on the borrowings. 
B) the market value of collateral to be pledged against the loans. 
C) the negative signal the use of such borrowings sends to regulators about the insurer's financial condition. 
D) the negative signal the use of such borrowings sends to the market about the bank's financial condition. 
E) the possibility of greater regulatory scrutiny and examination.

Question 18

The FIRREA prohibited all insured financial institutions from accepting brokered deposits or paying interest rates that are significantly higher than existing market rates.

Accepted Answer

A) True 
 B)False

Question 19

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. 
E) the discount window of the Federal Reserve Bank. 
A) deposit insurance. 
B) reserve requirements. 
C) contagious runs. 
D) minimum capital requirements. 
E) the discount window of the Federal Reserve Bank.

Question 20

Access to the discount window of the Federal Reserve is unlikely to deter bank runs because

Accepted Answer

A) discount loans are meant to provide temporary liquidity for inherently solvent banks. 
B) borrowing is not automatic, that is, banks gain access only on a "need to borrow" basis. 
C) a bank needs high-quality liquid assets to pledge as collateral. 
D) discount window advances to undercapitalized banks that eventually fail requires the Federal Reserve to compensate the FDIC for incremental losses caused by keeping the bank open for an additional period of time. 
E) All of the above. 
A) discount loans are meant to provide temporary liquidity for inherently solvent banks. 
B) borrowing is not automatic, that is, banks gain access only on a "need to borrow" basis. 
C) a bank needs high-quality liquid assets to pledge as collateral. 
D) discount window advances to undercapitalized banks that eventually fail requires the Federal Reserve to compensate the FDIC for incremental losses caused by keeping the bank open for an additional period of time. 
E) All of the above.

Exam 19: Deposit Insurance and Other Liability Guarantees

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

FDICIA imposed additional regulatory discipline as a substitute for increased stockholder and depositor discipline.

Contagious runs on bank deposits are directed at FIs, whether they are failing or healthy.

The changes implemented by the Fed in January 2003 to its discount window lending

What is the benefit of a regulatory guarantee or insurance program for liability holders of FIs?

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

The use of subordinated debt as a replacement for common stock has been proposed as a method of increasing stockholder discipline.

Which of the following is not a Least-Cost Resolution (LCR) requirement under FDICIA?

After nearly failing, the FDIC's Bank Insurance Fund (BIF) achieved record levels of reserves during the 1990s.

Which of the following contributed the least to the collapse of the FSLIC/FDIC deposit insurance funds?

Risk-based capital supports risk-based deposit insurance premiums by increasing the cost risk taking for DI stockholders.

The improved financial health of the FDIC during the 1990s resulted in a considerable reduction in deposit insurance premiums.

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

During the 1980s, which of the following was NOT a change in the financial environment that had an inverse impact on U.S. banks and thrifts?

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.

Requiring higher capital ratios often is proposed as method to reduce the incentive to take excessive risk because the moral-hazard risk-taking incentives are thought to decrease as the amount of net worth increases.

The costs to the bank of borrowing at the discount window do NOT include

The FIRREA prohibited all insured financial institutions from accepting brokered deposits or paying interest rates that are significantly higher than existing market rates.

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

Access to the discount window of the Federal Reserve is unlikely to deter bank runs because

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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