Question 1

FIRREA imposed new restrictions on thrift activities that, in essence, re-regulated the S&L industry to the asset choices it had before 1982.

Accepted Answer

A) True 
 B)False  True

Question 2

Regulatory forbearance reduces moral hazard because an operating but insolvent S&L will take fewer risks than healthy S&Ls that can take risks and still remain solvent.

Accepted Answer

A) True 
 B)False  False

Question 3

________ view credit unions as unfair competitors due to government support they receive in the form of tax advantages.

Accepted Answer

A) Regulators 
B) The Federal Reserve 
C) Commercial banks 
D) none of the above 
A) Regulators 
B) The Federal Reserve 
C) Commercial banks 
D) none of the above C

Question 4

Which of the following reasons explain why federal regulators adopted a policy of regulatory forbearance toward insolvent financial institutions in the early 1980s?

Accepted Answer

A) The FSLIC lacked sufficient funds to cover insured deposits in the insolvent S&Ls. 
B) The regulators were reluctant to close the firms that justified their regulatory existence. 
C) The Federal Home Loan Bank Board and the FSLIC were reluctant to admit that they were in over their heads with problems. 
D) All of the above are reasons. 
E) Only A and B of the above are reasons. 
A) The FSLIC lacked sufficient funds to cover insured deposits in the insolvent S&Ls. 
B) The regulators were reluctant to close the firms that justified their regulatory existence. 
C) The Federal Home Loan Bank Board and the FSLIC were reluctant to admit that they were in over their heads with problems. 
D) All of the above are reasons. 
E) Only A and B of the above are reasons.

Question 5

The policy of regulatory forbearance

Accepted Answer

A) meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s. 
B) benefited "zombie S&Ls" at the expense of healthy S&Ls, as healthy institutions lost deposits to insolvent institutions. 
C) had the advantage of benefiting healthy S&Ls by giving them the opportunity to attract deposits that began to leave the "zombie S&Ls." 
D) did both A and B of the above. 
E) did both A and C of the above. 
A) meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s. 
B) benefited "zombie S&Ls" at the expense of healthy S&Ls, as healthy institutions lost deposits to insolvent institutions. 
C) had the advantage of benefiting healthy S&Ls by giving them the opportunity to attract deposits that began to leave the "zombie S&Ls." 
D) did both A and B of the above. 
E) did both A and C of the above.

Question 6

The policy of regulatory forbearance

Accepted Answer

A) meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s. 
B) benefited "zombie S&Ls" at the expense of healthy S&Ls, as healthy institutions lost deposits to insolvent institutions. 
C) contributed to declining profitability in the S&L industry and an increase in the number of "zombie S&Ls." 
D) did all of the above. 
E) did only A and B of the above. 
A) meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s. 
B) benefited "zombie S&Ls" at the expense of healthy S&Ls, as healthy institutions lost deposits to insolvent institutions. 
C) contributed to declining profitability in the S&L industry and an increase in the number of "zombie S&Ls." 
D) did all of the above. 
E) did only A and B of the above.

Question 7

The major provisions of the Competitive Equality in Banking Act of 1987 included

Accepted Answer

A) abolishing the Federal Home Loan Bank Board and the FSLIC. 
B) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift Supervision, a bureau within the U.S. Treasury Department. 
C) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. 
D) all of the above. 
E) none of the above. 
A) abolishing the Federal Home Loan Bank Board and the FSLIC. 
B) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift Supervision, a bureau within the U.S. Treasury Department. 
C) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. 
D) all of the above. 
E) none of the above.

Question 8

According to the text, the Competitive Equality in Banking Act of 1987

Accepted Answer

A) turned the thrift industry around by providing the necessary funds to close the "zombie S&Ls." 
B) lowered the cost of bailing out the S&Ls by quickly closing "zombie S&Ls" before they could cause other thrifts to fail. 
C) failed to provide the funds necessary to close ailing S&Ls, and actually encouraged regulators to continue to pursue regulatory forbearance. 
D) did both A and B of the above. 
A) turned the thrift industry around by providing the necessary funds to close the "zombie S&Ls." 
B) lowered the cost of bailing out the S&Ls by quickly closing "zombie S&Ls" before they could cause other thrifts to fail. 
C) failed to provide the funds necessary to close ailing S&Ls, and actually encouraged regulators to continue to pursue regulatory forbearance. 
D) did both A and B of the above.

Question 9

Which of the following are reasons that explain why regulators pursued a policy of regulatory forbearance toward thrifts in the early 1980s?

Accepted Answer

A) Regulators knew that the FSLIC did not have sufficient funds to close insolvent S&Ls and pay off their depositors. 
B) Regulators were probably too close to the people they were supposed to be regulating to close down thrifts and put them out of business. 
C) Regulators preferred to sweep the problems that thrifts were suffering under the rug in the hope that they would go away as the economy improved. 
D) All of the above explain regulatory forbearance. 
E) Only A and B of the above explain regulatory forbearance. 
A) Regulators knew that the FSLIC did not have sufficient funds to close insolvent S&Ls and pay off their depositors. 
B) Regulators were probably too close to the people they were supposed to be regulating to close down thrifts and put them out of business. 
C) Regulators preferred to sweep the problems that thrifts were suffering under the rug in the hope that they would go away as the economy improved. 
D) All of the above explain regulatory forbearance. 
E) Only A and B of the above explain regulatory forbearance.

Question 10

The political economy of the S&L crisis shows that the principal-agent problem occurs in politics. In this instance, the agent-regulators did not act to protect the principal-taxpayers because

Accepted Answer

A) regulators wanted to escape blame, hoping the situation would improve before others discovered the problem. 
B) regulators responded to pressure to pursue regulatory forbearance from politicians who had accepted campaign donations from owners of S&Ls. 
C) Congress was unwilling to allocate the necessary funds regulators needed to close insolvent S&Ls. 
D) all of the above. 
E) only A and B of the above. 
A) regulators wanted to escape blame, hoping the situation would improve before others discovered the problem. 
B) regulators responded to pressure to pursue regulatory forbearance from politicians who had accepted campaign donations from owners of S&Ls. 
C) Congress was unwilling to allocate the necessary funds regulators needed to close insolvent S&Ls. 
D) all of the above. 
E) only A and B of the above.

Question 11

Thrifts

Accepted Answer

A) fueled the home-building boom from 1934-1978. 
B) suffered in the 1970s as inflation rose above deposit interest rate ceilings. 
C) have grown in importance in attracting deposits relative to commercial banks since 1980. 
D) are all of the above. 
E) are only A and B of the above. 
A) fueled the home-building boom from 1934-1978. 
B) suffered in the 1970s as inflation rose above deposit interest rate ceilings. 
C) have grown in importance in attracting deposits relative to commercial banks since 1980. 
D) are all of the above. 
E) are only A and B of the above.

Question 12

To act in the taxpayer's interest and lower costs to the deposit insurance agency, regulators must

Accepted Answer

A) set tight restrictions on holding assets that are too risky. 
B) impose high capital requirements. 
C) not adopt a stance of regulatory forbearance. 
D) do all of the above. 
A) set tight restrictions on holding assets that are too risky. 
B) impose high capital requirements. 
C) not adopt a stance of regulatory forbearance. 
D) do all of the above.

Question 13

In the early 1990s, to replenish the reserves of the Savings Association Insurance Fund, insurance premiums for S&Ls were increased from ________ cents per $100 of deposits to ________ cents and can rise as high as 32.5 cents.

Accepted Answer

A) 12.5; 17.5 
B) 17.5; 20.5 
C) 20.8; 23.0 
D) 23.0; 27.8 
A) 12.5; 17.5 
B) 17.5; 20.5 
C) 20.8; 23.0 
D) 23.0; 27.8

Question 14

Examiners from the Federal Home Loan Bank Board of San Francisco recommended that Lincoln Savings and Loan be seized when they discovered that

Accepted Answer

A) officials at the thrift had attempted to mislead them. 
B) it had exceeded the 10 percent limit on equity investments by $600 million. 
C) its owner, Charles Keating, had been convicted of embezzlement ten years before he purchased the thrift. 
D) all of the above occurred. 
E) only A and B of the above occurred. 
A) officials at the thrift had attempted to mislead them. 
B) it had exceeded the 10 percent limit on equity investments by $600 million. 
C) its owner, Charles Keating, had been convicted of embezzlement ten years before he purchased the thrift. 
D) all of the above occurred. 
E) only A and B of the above occurred.

Question 15

Since 1980, the number of credit unions has ________.

Accepted Answer

A) declined substantially 
B) remained steady 
C) increased substantially 
D) increased slightly 
A) declined substantially 
B) remained steady 
C) increased substantially 
D) increased slightly

Question 16

Explain how the Lincoln Savings and Loan scandal is an application of the principal-agent problem.

Accepted Answer

The Lincoln Savings and Loan scandal is

Question 17

The smallest average-sized depository institution is ________.

Accepted Answer

A) credit unions 
B) savings and loan associations 
C) commercial banks 
D) money market mutual funds 
A) credit unions 
B) savings and loan associations 
C) commercial banks 
D) money market mutual funds

Question 18

The capital of financial institutions is often measured by the ________ ratio.

Accepted Answer

A) current 
B) net worth 
C) asset turnover 
D) liquidity 
A) current 
B) net worth 
C) asset turnover 
D) liquidity

Question 19

Explain why thrift regulators engaged in regulatory forbearance in the 1980s.

Accepted Answer

In the 1980s, thrift regulators engaged

Question 20

Savings banks

Accepted Answer

A) were first established in Scotland and England. 
B) were established to encourage saving by the poor. 
C) were very conservative with their funds, placing most of them in commercial banks. 
D) are all of the above. 
E) are only A and B of the above. 
A) were first established in Scotland and England. 
B) were established to encourage saving by the poor. 
C) were very conservative with their funds, placing most of them in commercial banks. 
D) are all of the above. 
E) are only A and B of the above.

Exam 25: Savings Associations and Credit Unions

FIRREA imposed new restrictions on thrift activities that, in essence, re-regulated the S&L industry to the asset choices it had before 1982.

Regulatory forbearance reduces moral hazard because an operating but insolvent S&L will take fewer risks than healthy S&Ls that can take risks and still remain solvent.

________ view credit unions as unfair competitors due to government support they receive in the form of tax advantages.

Which of the following reasons explain why federal regulators adopted a policy of regulatory forbearance toward insolvent financial institutions in the early 1980s?

The policy of regulatory forbearance

The policy of regulatory forbearance

The major provisions of the Competitive Equality in Banking Act of 1987 included

According to the text, the Competitive Equality in Banking Act of 1987

Which of the following are reasons that explain why regulators pursued a policy of regulatory forbearance toward thrifts in the early 1980s?

The political economy of the S&L crisis shows that the principal-agent problem occurs in politics. In this instance, the agent-regulators did not act to protect the principal-taxpayers because

Thrifts

To act in the taxpayer's interest and lower costs to the deposit insurance agency, regulators must

In the early 1990s, to replenish the reserves of the Savings Association Insurance Fund, insurance premiums for S&Ls were increased from ________ cents per $100 of deposits to ________ cents and can rise as high as 32.5 cents.

Examiners from the Federal Home Loan Bank Board of San Francisco recommended that Lincoln Savings and Loan be seized when they discovered that

Since 1980, the number of credit unions has ________.

Explain how the Lincoln Savings and Loan scandal is an application of the principal-agent problem.

The smallest average-sized depository institution is ________.

The capital of financial institutions is often measured by the ________ ratio.

Explain why thrift regulators engaged in regulatory forbearance in the 1980s.

Savings banks

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Finance Companies

Filters

In the early 1990s, to replenish the reserves of the Savings Association Insurance Fund, insurance premiums for S&Ls were increased from cents per $100 of deposits to cents and can rise as high as 32.5 cents.