Question 1

One way for bank regulators to assure depositors that a bank is not taking on too much risk is to require the bank to

Accepted Answer

A) diversify its loan portfolio. 
B) reduce its equity capital. 
C) reduce the size of its loan portfolio. 
D) do both A and B of the above. 
E) do both B and C of the above. 
A) diversify its loan portfolio. 
B) reduce its equity capital. 
C) reduce the size of its loan portfolio. 
D) do both A and B of the above. 
E) do both B and C of the above.

Question 2

Regulators attempt to reduce the riskiness of banks' asset portfolios by

Accepted Answer

A) limiting the amount of loans in particular categories or to individual borrowers. 
B) prohibiting banks from holding risky assets such as common stocks. 
C) establishing a minimum interest rate floor that banks can earn on certain assets. 
D) doing all of the above. 
E) doing only A and B of the above. 
A) limiting the amount of loans in particular categories or to individual borrowers. 
B) prohibiting banks from holding risky assets such as common stocks. 
C) establishing a minimum interest rate floor that banks can earn on certain assets. 
D) doing all of the above. 
E) doing only A and B of the above.

Question 3

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely.

Accepted Answer

A) small; fewer 
B) small; greater 
C) large; fewer 
D) large; greater 
A) small; fewer 
B) small; greater 
C) large; fewer 
D) large; greater

Question 4

What role did the credit-rating agencies play leading up to the start of the financial crisis in 2007?

Accepted Answer

A) Inaccurate ratings provided by credit-rating agencies helped promote risk taking throughout the financial system. 
B) The credit-rating agencies were the first to see signs of trouble, and they developed more stringent standards as the housing bubble evolved. 
C) Solid ratings provided by credit-rating agencies helped limit risk taking throughout the financial system. 
D) The credit-rating agencies were largely uninvolved with the financial crisis. 
A) Inaccurate ratings provided by credit-rating agencies helped promote risk taking throughout the financial system. 
B) The credit-rating agencies were the first to see signs of trouble, and they developed more stringent standards as the housing bubble evolved. 
C) Solid ratings provided by credit-rating agencies helped limit risk taking throughout the financial system. 
D) The credit-rating agencies were largely uninvolved with the financial crisis.

Question 5

Which of the following categories is not part of the Dodd-Frank legislation of 2010?

Accepted Answer

A) capital requirements 
B) consumer protection 
C) "Volcker Rule" 
D) derivatives 
A) capital requirements 
B) consumer protection 
C) "Volcker Rule" 
D) derivatives

Question 6

The Dodd-Frank legislation of 2010 finally resolved the status of GSEs such as Freddie Mac.

Accepted Answer

A) True 
 B)False

Question 7

The Federal Deposit Insurance Corporation Improvement Act of 1991

Accepted Answer

A) reduced the scope of deposit insurance in several ways. 
B) eliminated restrictions on nationwide banking. 
C) allowed well-capitalized banks to do some securities underwriting. 
D) did only A and B of the above. 
E) did only A and C of the above. 
A) reduced the scope of deposit insurance in several ways. 
B) eliminated restrictions on nationwide banking. 
C) allowed well-capitalized banks to do some securities underwriting. 
D) did only A and B of the above. 
E) did only A and C of the above.

Question 8

The Federal Deposit Insurance Corporation Improvement Act of 1991

Accepted Answer

A) increased the FDIC's ability to borrow from the Treasury to deal with failed banks. 
B) reduced the scope of deposit insurance in several ways. 
C) eliminated governmentally administered deposit insurance. 
D) did only A and B of the above. 
A) increased the FDIC's ability to borrow from the Treasury to deal with failed banks. 
B) reduced the scope of deposit insurance in several ways. 
C) eliminated governmentally administered deposit insurance. 
D) did only A and B of the above.

Question 9

In an effort to control the use of derivatives by financial institutions, the Dodd-Frank legislation of 2010 requires ________.

Accepted Answer

A) standardized derivatives products 
B) over-the-counter trading (instead of exchange trading)of derivatives products 
C) an increase in counterparty risk 
D) all of the above 
A) standardized derivatives products 
B) over-the-counter trading (instead of exchange trading)of derivatives products 
C) an increase in counterparty risk 
D) all of the above

Question 10

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC

Accepted Answer

A) guarantees all deposits, not just those under the $250,000 limit, when it uses the "payoff" method. 
B) guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method. 
C) is less likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. 
D) does both A and B of the above. 
E) does both B and C of the above. 
A) guarantees all deposits, not just those under the $250,000 limit, when it uses the "payoff" method. 
B) guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method. 
C) is less likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. 
D) does both A and B of the above. 
E) does both B and C of the above.

Question 11

Of the following assets, the one which has the highest capital requirement under the Basel Accord is

Accepted Answer

A) municipal bonds. 
B) residential mortgages. 
C) commercial paper. 
D) securities issued by industrialized countries' governments. 
A) municipal bonds. 
B) residential mortgages. 
C) commercial paper. 
D) securities issued by industrialized countries' governments.

Question 12

If the FDIC uses the purchase and assumption method to handle a failed bank,

Accepted Answer

A) all deposits will suffer losses. 
B) small deposits will be paid in full but deposits over the insurance limit will not. 
C) all deposits will be paid in full. 
D) none of the above will occur. 
A) all deposits will suffer losses. 
B) small deposits will be paid in full but deposits over the insurance limit will not. 
C) all deposits will be paid in full. 
D) none of the above will occur.

Question 13

Once a bank has been chartered, it is required to file periodic call reports that reveal the bank's assets and liabilities, income, ownership, and other details.

Accepted Answer

A) True 
 B)False

Question 14

When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of

Accepted Answer

A) moral hazard. 
B) split incentives. 
C) ex ante shirking. 
D) precontractual opportunism. 
A) moral hazard. 
B) split incentives. 
C) ex ante shirking. 
D) precontractual opportunism.

Question 15

Ways in which bank regulations reduce the adverse selection and moral hazard problems in banking include

Accepted Answer

A) a chartering process designed to prevent crooks from getting control of a bank. 
B) restrictions that prevent banks from acquiring certain risky assets, such as common stocks. 
C) high bank capital requirements to increase the cost of bank failure to the owners. 
D) all of the above. 
E) only A and B of the above. 
A) a chartering process designed to prevent crooks from getting control of a bank. 
B) restrictions that prevent banks from acquiring certain risky assets, such as common stocks. 
C) high bank capital requirements to increase the cost of bank failure to the owners. 
D) all of the above. 
E) only A and B of the above.

Question 16

Prior to the 2007-2009 financial crisis, inaccurate ratings provided by credit rating agencies helped promote risk taking throughout the financial system.

Accepted Answer

A) True 
 B)False

Question 17

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 an increase in federal deposit insurance from $40,000 to $100,000. 
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 an increase in federal deposit insurance from $40,000 to $100,000. 
D) because of all of the above. 
E) because of only A and B of the above.

Question 18

Probably the most important feature of FDICIA is its prompt corrective action provisions which require the FDIC to intervene earlier and more vigorously when a bank gets into trouble.

Accepted Answer

A) True 
 B)False

Question 19

How has bank regulation in the United States changed since the late 1980s? What accounts for these changes?

Accepted Answer

Bank regulation in the United States has

Question 20

Why is international financial regulation becoming more important in recent years?

Accepted Answer

The answer of Why is international financial regulation becoming more...

Exam 18: Financial Regulation

One way for bank regulators to assure depositors that a bank is not taking on too much risk is to require the bank to

Regulators attempt to reduce the riskiness of banks' asset portfolios by

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely.

What role did the credit-rating agencies play leading up to the start of the financial crisis in 2007?

Which of the following categories is not part of the Dodd-Frank legislation of 2010?

The Dodd-Frank legislation of 2010 finally resolved the status of GSEs such as Freddie Mac.

The Federal Deposit Insurance Corporation Improvement Act of 1991

The Federal Deposit Insurance Corporation Improvement Act of 1991

In an effort to control the use of derivatives by financial institutions, the Dodd-Frank legislation of 2010 requires ________.

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC

Of the following assets, the one which has the highest capital requirement under the Basel Accord is

If the FDIC uses the purchase and assumption method to handle a failed bank,

Once a bank has been chartered, it is required to file periodic call reports that reveal the bank's assets and liabilities, income, ownership, and other details.

When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of

Ways in which bank regulations reduce the adverse selection and moral hazard problems in banking include

Prior to the 2007-2009 financial crisis, inaccurate ratings provided by credit rating agencies helped promote risk taking throughout the financial system.

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

Probably the most important feature of FDICIA is its prompt corrective action provisions which require the FDIC to intervene earlier and more vigorously when a bank gets into trouble.

How has bank regulation in the United States changed since the late 1980s? What accounts for these changes?

Why is international financial regulation becoming more important in recent years?

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

The result of the too-big-to-fail policy is that banks will take on risks, making bank failures more likely.