Question 1

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. 
E) The act produced prompt corrective action capital zones based on observable rules rather than discretion of examiners. 
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. 
E) The act produced prompt corrective action capital zones based on observable rules rather than discretion of examiners.

Question 2

A major cause of the FSLIC insolvency in the 1980s was the dramatic rise in interest rates in 1979-82 that created extensive duration mismatches of assets and liabilities in the savings and loan industry.

Accepted Answer

A) True 
 B)False

Question 3

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

Question 4

Subordinate debt (SD) has been proposed as a means of increasing the degree of overall market discipline at a depository institution. Which of the following objectives is considered to be achievable when attempting to increase market discipline?

Accepted Answer

A) Issuing SD might increase the size of the DI's capital cushion. 
B) The expected cost of issuing SD should decrease as the risk of the DI increased. 
C) Mandatory SD would reduce transparency at DIs. 
D) SD would further emphasize the use of capital forbearance. 
E) Secondary market yields on the SD would be inversely related to an increase in the risk of the DI. 
A) Issuing SD might increase the size of the DI's capital cushion. 
B) The expected cost of issuing SD should decrease as the risk of the DI increased. 
C) Mandatory SD would reduce transparency at DIs. 
D) SD would further emphasize the use of capital forbearance. 
E) Secondary market yields on the SD would be inversely related to an increase in the risk of the DI.

Question 5

The insolvency of the FSLIC occurred because of

Accepted Answer

A) declining real estate values. 
B) risky lending. 
C) asset liability mismatch. 
D) insider lending. 
E) All of the above. 
A) declining real estate values. 
B) risky lending. 
C) asset liability mismatch. 
D) insider lending. 
E) All of the above.

Question 6

Statistical credit scoring models have been suggested for use in measuring the risk of DIs for the purpose of assigning deposit insurance premiums.

Accepted Answer

A) True 
 B)False

Question 7

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 8

The "too big to fail" policy doctrine prevalent through the 1980s and most of the 1990s is remised on the separation of small depositors who would receive deposit insurance and large depositors who would not receive the benefits of deposit insurance.

Accepted Answer

A) True 
 B)False

Question 9

Bank risk taking can be controlled by increasing

Accepted Answer

A) stockholder discipline by charging stockholders a surcharge. 
B) stockholder discipline by setting risk adjusted deposit insurance premiums. 
C) depositor discipline by increasing the ceiling for deposit insurance coverage. 
D) regulatory discipline by increasing the budgets of the regulatory agencies. 
E) depositor discipline by expanding the doctrine of "too big to fail." 
A) stockholder discipline by charging stockholders a surcharge. 
B) stockholder discipline by setting risk adjusted deposit insurance premiums. 
C) depositor discipline by increasing the ceiling for deposit insurance coverage. 
D) regulatory discipline by increasing the budgets of the regulatory agencies. 
E) depositor discipline by expanding the doctrine of "too big to fail."

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. 
E) Their customers have no other options for their banking needs. 
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. 
E) Their customers have no other options for their banking needs.

Question 11

The employment of deposit brokers allows individual depositors to receive deposit insurance coverage on total asset balances well in excess of $250,000 at any given bank.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

Insured depositors can be covered for more than $250,000 at any given FI under current FDIC regulations.

Accepted Answer

A) True 
 B)False

Question 15

Deposit insurance contracts can be structured to reduce moral hazard behavior by

Accepted Answer

A) increasing depositor discipline. 
B) increasing stockholder discipline. 
C) increasing regulator discipline. 
D) reducing owner incentives to take risks. 
E) All of the above. 
A) increasing depositor discipline. 
B) increasing stockholder discipline. 
C) increasing regulator discipline. 
D) reducing owner incentives to take risks. 
E) All of the above.

Question 16

Explicit deposit insurance premiums applied by regulators can involve restricting and more closely monitoring the risky activities of banks.

Accepted Answer

A) True 
 B)False

Question 17

During the financial crisis of 2008-2009, deposit balances at DIs increased.

Accepted Answer

A) True 
 B)False

Question 18

How can the regulators reduce the effects of moral hazard in the absence of depositor discipline?

Accepted Answer

A) By allowing DIs to undertake high-risk high-return asset investments. 
B) By basing deposit insurance premiums on a DI's deposit size. 
C) By charging explicit deposit insurance premiums and implicit premiums on DIs. 
D) By exhibiting excessive capital forbearance. 
E) By implementing prompt corrective action capital zones based on rules rather than discretion. 
A) By allowing DIs to undertake high-risk high-return asset investments. 
B) By basing deposit insurance premiums on a DI's deposit size. 
C) By charging explicit deposit insurance premiums and implicit premiums on DIs. 
D) By exhibiting excessive capital forbearance. 
E) By implementing prompt corrective action capital zones based on rules rather than discretion.

Question 19

The Pension Benefit Guaranty Corporation (PBGC) insures pension benefits against the under-funding of pension plans by corporations.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 19: Deposit Insurance and Other Liability Guarantees

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

A major cause of the FSLIC insolvency in the 1980s was the dramatic rise in interest rates in 1979-82 that created extensive duration mismatches of assets and liabilities in the savings and loan industry.

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

Subordinate debt (SD) has been proposed as a means of increasing the degree of overall market discipline at a depository institution. Which of the following objectives is considered to be achievable when attempting to increase market discipline?

The insolvency of the FSLIC occurred because of

Statistical credit scoring models have been suggested for use in measuring the risk of DIs for the purpose of assigning deposit insurance premiums.

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

The "too big to fail" policy doctrine prevalent through the 1980s and most of the 1990s is remised on the separation of small depositors who would receive deposit insurance and large depositors who would not receive the benefits of deposit insurance.

Bank risk taking can be controlled by increasing

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

The employment of deposit brokers allows individual depositors to receive deposit insurance coverage on total asset balances well in excess of $250,000 at any given bank.

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

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

Insured depositors can be covered for more than $250,000 at any given FI under current FDIC regulations.

Deposit insurance contracts can be structured to reduce moral hazard behavior by

Explicit deposit insurance premiums applied by regulators can involve restricting and more closely monitoring the risky activities of banks.

During the financial crisis of 2008-2009, deposit balances at DIs increased.

How can the regulators reduce the effects of moral hazard in the absence of depositor discipline?

The Pension Benefit Guaranty Corporation (PBGC) insures pension benefits against the under-funding of pension plans by corporations.

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.

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