Question 1

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the

Accepted Answer

A) moral hazard problem. 
B) adverse selection problem. 
C) assigned risk problem. 
D) ill queue problem. 
A) moral hazard problem. 
B) adverse selection problem. 
C) assigned risk problem. 
D) ill queue problem.

Question 2

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 3

Describe the CAMELS rating system used by bank examiners.

Accepted Answer

The CAMELS rating system is a supervisor

Question 4

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 5

One problem of the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.

Accepted Answer

A) reduces; moral hazard by big banks. 
B) increases; moral hazard by big banks. 
C) reduces; adverse selection by big banks. 
D) increases; adverse selection by big banks. 
A) reduces; moral hazard by big banks. 
B) increases; moral hazard by big banks. 
C) reduces; adverse selection by big banks. 
D) increases; adverse selection by big banks.

Question 6

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 7

Although the FDIC was created to prevent bank failures, its existence encourages banks to

Accepted Answer

A) take too much risk. 
B) hold too much capital. 
C) open too many branches. 
D) buy too much stock. 
A) take too much risk. 
B) hold too much capital. 
C) open too many branches. 
D) buy too much stock.

Question 8

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 more 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 more 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 9

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 10

The Federal Deposit Insurance Corporation Improvement Act of 1991

Accepted Answer

A) reduced the scope of deposit insurance in several ways. 
B) limited the FDIC's ability to use the "too-big-to-fail" policy. 
C) requires the FDIC to intervene earlier when a bank gets into trouble. 
D) did all of the above. 
A) reduced the scope of deposit insurance in several ways. 
B) limited the FDIC's ability to use the "too-big-to-fail" policy. 
C) requires the FDIC to intervene earlier when a bank gets into trouble. 
D) did all of the above.

Question 11

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 12

Discuss some of the problems of Basel 2 that the 2007-2009 financial crisis revealed.

Accepted Answer

The 2007-2009 financial crisis revealed

Question 13

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 14

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations 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 15

"Truth in lending" was mandated under the Consumer Protection Act of 1969 and requires all lenders to reveal the annual percentage rate, or APR, on loans.

Accepted Answer

A) True 
 B)False

Question 16

Why does the safety net created by deposit insurance increase the adverse selection and moral hazard problems in banking? How do bank regulations attempt to overcome these problems?

Accepted Answer

The safety net created by deposit insura

Question 17

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 18

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 19

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 20

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

Accepted Answer

Bank capital requirements have undergone

Exam 18: Financial Regulation

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the

Under the Basel plan,

Describe the CAMELS rating system used by bank examiners.

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

One problem of the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.

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

Although the FDIC was created to prevent bank failures, its existence encourages banks to

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

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

The Federal Deposit Insurance Corporation Improvement Act of 1991

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

Discuss some of the problems of Basel 2 that the 2007-2009 financial crisis revealed.

The Federal Deposit Insurance Corporation Improvement Act of 1991

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem.

"Truth in lending" was mandated under the Consumer Protection Act of 1969 and requires all lenders to reveal the annual percentage rate, or APR, on loans.

Why does the safety net created by deposit insurance increase the adverse selection and moral hazard problems in banking? How do bank regulations attempt to overcome these problems?

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

The Depository Institutions Deregulation and Monetary Control Act of 1980

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

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

One problem of the too-big-to-fail policy is that it the incentives for by big banks.

The chartering process is especially designed to deal with the problem, and regular bank examinations help to reduce the problem.

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