Question 1

Deposit insurance

Accepted Answer

A) attracts risk-prone entrepreneurs to the banking industry. 
B) encourages bank managers to take on greater risks than they otherwise would. 
C) reduces the incentives of depositors to monitor the riskiness of their banks' asset portfolios. 
D) does all of the above. 
E) does only A and B of the above. 
A) attracts risk-prone entrepreneurs to the banking industry. 
B) encourages bank managers to take on greater risks than they otherwise would. 
C) reduces the incentives of depositors to monitor the riskiness of their banks' asset portfolios. 
D) does all of the above. 
E) does only A and B of the above.

Question 2

Regular bank examinations and restrictions on asset holdings indirectly help to reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry.

Accepted Answer

A) moral hazard 
B) adverse selection 
C) ex post shirking 
D) post-contractual opportunism 
A) moral hazard 
B) adverse selection 
C) ex post shirking 
D) post-contractual opportunism

Question 3

Which of the following is not true regarding the Basel 2 proposal to reform the original 1988 Basel Accord?

Accepted Answer

A) It attempts to link capital requirements more closely to actual risk by expanding the number of risk categories. 
B) It focuses on assessing the quality of risk management in banking institutions. 
C) It attempts to improve market discipline by requiring increased disclosure of pertinent information about banks. 
D) It has been well received by banks and national regulatory agencies. 
A) It attempts to link capital requirements more closely to actual risk by expanding the number of risk categories. 
B) It focuses on assessing the quality of risk management in banking institutions. 
C) It attempts to improve market discipline by requiring increased disclosure of pertinent information about banks. 
D) It has been well received by banks and national regulatory agencies.

Question 4

The Federal Deposit Insurance Corporation Improvement Act of 1991

Accepted Answer

A) instructed the FDIC to come up with risk-based deposit insurance premiums. 
B) expanded the FDIC's ability to use the "too-big-to-fail" policy. 
C) instructed the FDIC to wait longer before intervening when a bank gets into trouble. 
D) did all of the above. 
A) instructed the FDIC to come up with risk-based deposit insurance premiums. 
B) expanded the FDIC's ability to use the "too-big-to-fail" policy. 
C) instructed the FDIC to wait longer before intervening when a bank gets into trouble. 
D) did all of the above.

Question 5

To understand banking regulation in the United States, it is helpful to understand the concepts of asymmetric information, adverse selection, and moral hazard.

Accepted Answer

A) True 
 B)False

Question 6

Under the Basel plan,

Accepted Answer

A) assets and off-balance sheet activities are assigned to various categories to reflect the degree of credit risk. 
B) a bank's total capital must equal or exceed 8 percent of total risk-weighted assets. 
C) both of the above occur. 
D) none of the above occur. 
A) assets and off-balance sheet activities are assigned to various categories to reflect the degree of credit risk. 
B) a bank's total capital must equal or exceed 8 percent of total risk-weighted assets. 
C) both of the above occur. 
D) none of the above occur.

Question 7

Just prior to the 2007 financial crisis, mortgage loans known as NINJA loans were issued to borrowers. What is a NINJA loan?

Accepted Answer

A) A loan issued by a Japanese bank, thus avoiding U.S. regulation. 
B) A loan document originated by a mortgage banker named Bruce Lee. 
C) A loan issued to borrowers with no income, employment, nor assets to speak of. 
D) A loan issued with a "martial arts" clause. 
A) A loan issued by a Japanese bank, thus avoiding U.S. regulation. 
B) A loan document originated by a mortgage banker named Bruce Lee. 
C) A loan issued to borrowers with no income, employment, nor assets to speak of. 
D) A loan issued with a "martial arts" clause.

Question 8

Banks do not want to hold too much capital because

Accepted Answer

A) they do not bear fully the costs of bank failures. 
B) higher returns on equity are earned when bank capital is smaller, all else equal. 
C) higher capital levels attract the scrutiny of regulators. 
D) all of the above. 
E) only A and B of the above. 
A) they do not bear fully the costs of bank failures. 
B) higher returns on equity are earned when bank capital is smaller, all else equal. 
C) higher capital levels attract the scrutiny of regulators. 
D) all of the above. 
E) only A and B of the above.

Question 9

How have bank capital requirements changed since the banking crisis of the 1980s? Explain.

Accepted Answer

Bank capital requirements have undergone

Question 10

Moral hazard and adverse selection problems increased in prominence in the 1980s

Accepted Answer

A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. 
C) following a decrease in federal deposit insurance from $100,000 to $40,000. 
D) because of all of the above. 
E) because of only A and B of the above. 
A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. 
C) following a decrease in federal deposit insurance from $100,000 to $40,000. 
D) because of all of the above. 
E) because of only A and B of the above.

Question 11

If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.

Accepted Answer

A) payoff; large 
B) payoff; no 
C) purchase and assumption; large 
D) purchase and assumption; no 
A) payoff; large 
B) payoff; no 
C) purchase and assumption; large 
D) purchase and assumption; no

Question 12

How can we change the way the credit-rating system works to avoid the problems encountered with ratings prior to the 2007-2009 financial crisis?

Accepted Answer

To change the way the credit-rating syst

Question 13

Discuss the role of mark-to-market accounting during the 2007-2009 financial crisis. Did it help or hurt credit markets and bank lending?

Accepted Answer

During the 2007-2009 financial crisis, m

Question 14

What do we learn about the causes of banking crises by comparing crises throughout the world to those that have occurred in the United States?

Accepted Answer

The answer of What do we learn about the causes...

Question 15

The Depository Institutions Deregulation and Monetary Control Act of 1980

Accepted Answer

A) approved NOW accounts nationwide. 
B) imposed uniform reserve requirements. 
C) mandated the phase out of interest-rate ceilings on deposits. 
D) did all of the above. 
E) did only A and B of the above. 
A) approved NOW accounts nationwide. 
B) imposed uniform reserve requirements. 
C) mandated the phase out of interest-rate ceilings on deposits. 
D) did all of the above. 
E) did only A and B of the above.

Question 16

The chartering process is especially designed to deal with the ________ problem, and restrictions on asset holdings help to reduce the ________ problem.

Accepted Answer

A) adverse selection; adverse selection 
B) adverse selection; moral hazard 
C) moral hazard; adverse selection 
D) moral hazard; moral hazard 
A) adverse selection; adverse selection 
B) adverse selection; moral hazard 
C) moral hazard; adverse selection 
D) moral hazard; moral hazard

Question 17

Because asymmetric information problems in the banking industry are a fact of life throughout the world, bank regulation in other countries is similar to that in the United States.

Accepted Answer

A) True 
 B)False

Question 18

An SIV, or structured investment vehicle, is an off-balance-sheet entity that shields a sponsoring institution from risk. What happened to some of these SIVs when they ran into financial problems?

Accepted Answer

A) The SIV sued the sponsoring institution to pay, in full, all liabilities of the SIV. 
B) The SIV still remained off-balance-sheet, but investors did sue sponsoring institutions. 
C) Nothing! The SIV status as off-balance-sheet remained, a nice example of a financial structure that worked during the financial crisis. 
D) Troubled SIVs became an asset of the sponsoring institution -- the off-balance-sheet status was meaningless. 
A) The SIV sued the sponsoring institution to pay, in full, all liabilities of the SIV. 
B) The SIV still remained off-balance-sheet, but investors did sue sponsoring institutions. 
C) Nothing! The SIV status as off-balance-sheet remained, a nice example of a financial structure that worked during the financial crisis. 
D) Troubled SIVs became an asset of the sponsoring institution -- the off-balance-sheet status was meaningless.

Question 19

The legislation that separated commercial banking from the securities industry is known as the ________.

Accepted Answer

A) National Bank Act 
B) Federal Reserve Act 
C) Glass-Steagall Act 
D) McFadden Act 
A) National Bank Act 
B) Federal Reserve Act 
C) Glass-Steagall Act 
D) McFadden Act

Question 20

Describe the CAMELS rating system used by bank examiners.

Accepted Answer

The CAMELS rating system is a supervisor

Exam 18: Financial Regulation

Deposit insurance

Regular bank examinations and restrictions on asset holdings indirectly help to reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry.

Which of the following is not true regarding the Basel 2 proposal to reform the original 1988 Basel Accord?

The Federal Deposit Insurance Corporation Improvement Act of 1991

To understand banking regulation in the United States, it is helpful to understand the concepts of asymmetric information, adverse selection, and moral hazard.

Under the Basel plan,

Just prior to the 2007 financial crisis, mortgage loans known as NINJA loans were issued to borrowers. What is a NINJA loan?

Banks do not want to hold too much capital because

How have bank capital requirements changed since the banking crisis of the 1980s? Explain.

Moral hazard and adverse selection problems increased in prominence in the 1980s

If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.

How can we change the way the credit-rating system works to avoid the problems encountered with ratings prior to the 2007-2009 financial crisis?

Discuss the role of mark-to-market accounting during the 2007-2009 financial crisis. Did it help or hurt credit markets and bank lending?

What do we learn about the causes of banking crises by comparing crises throughout the world to those that have occurred in the United States?

The Depository Institutions Deregulation and Monetary Control Act of 1980

The chartering process is especially designed to deal with the ________ problem, and restrictions on asset holdings help to reduce the ________ problem.

Because asymmetric information problems in the banking industry are a fact of life throughout the world, bank regulation in other countries is similar to that in the United States.

An SIV, or structured investment vehicle, is an off-balance-sheet entity that shields a sponsoring institution from risk. What happened to some of these SIVs when they ran into financial problems?

The legislation that separated commercial banking from the securities industry is known as the ________.

Describe the CAMELS rating system used by bank examiners.

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

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

Savings Associations and Credit Unions

Finance Companies

Filters

If the FDIC decides that a bank is too big to fail, it will use the method, effectively ensuring that depositors will suffer losses.

The chartering process is especially designed to deal with the problem, and restrictions on asset holdings help to reduce the problem.