Question 1

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 2

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 3

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 4

In the years just prior to the 2007-2009 financial crisis, mortgage loans were issued to borrowers with no income or employment.

Accepted Answer

A) True 
 B)False

Question 5

When the payoff method is used to resolve a failed bank, both large and small depositors are protected from suffering losses.

Accepted Answer

A) True 
 B)False

Question 6

The possibility that the failure of one bank can hasten the failure of other banks is called the

Accepted Answer

A) bank run effect. 
B) moral hazard effect. 
C) contagion effect. 
D) adverse selection effect. 
A) bank run effect. 
B) moral hazard effect. 
C) contagion effect. 
D) adverse selection effect.

Question 7

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

Accepted Answer

A) increase; encouraged 
B) increase; discouraged 
C) reduce; encouraged 
D) reduce; discouraged 
A) increase; encouraged 
B) increase; discouraged 
C) reduce; encouraged 
D) reduce; discouraged

Question 8

What is the asymmetric information problem and how does it contribute to our understanding of the structure of bank regulation in the United States and other countries?

Accepted Answer

The answer of What is the asymmetric information problem and...

Question 9

Which of the following is least likely to accompany financial consolidation and the development of large, complex banking organizations?

Accepted Answer

A) More financial institutions will be considered too big to fail. 
B) The government safety net will be extended to include nonbanking activities. 
C) Moral hazard problems will become less important. 
D) Banks will have greater incentives and opportunities to take on more risk. 
A) More financial institutions will be considered too big to fail. 
B) The government safety net will be extended to include nonbanking activities. 
C) Moral hazard problems will become less important. 
D) Banks will have greater incentives and opportunities to take on more risk.

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

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 12

The Depository Institutions Deregulation and Monetary Control Act of 1980

Accepted Answer

A) approved NOW accounts nationwide. 
B) restricted the use of ATS accounts. 
C) imposed interest rate ceilings on bank loans. 
D) did all of the above. 
A) approved NOW accounts nationwide. 
B) restricted the use of ATS accounts. 
C) imposed interest rate ceilings on bank loans. 
D) did all of the above.

Question 13

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 14

The "too-big-to-fail" policy reduces the adverse selection problem in bank regulation.

Accepted Answer

A) True 
 B)False

Question 15

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 16

An impact of the Garn-St. Germain Act of 1982 has been to

Accepted Answer

A) put savings and loans at a competitive disadvantage. 
B) make the banking system more competitive. 
C) give money market mutual funds a competitive advantage. 
D) do both A and B of the above. 
E) do both A and C of the above. 
A) put savings and loans at a competitive disadvantage. 
B) make the banking system more competitive. 
C) give money market mutual funds a competitive advantage. 
D) do both A and B of the above. 
E) do both A and C of the above.

Question 17

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 18

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

Accepted Answer

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

Question 19

What accounts for the problems facing China's four largest banks?

Accepted Answer

A) large loans to inefficient, state-owned enterprises 
B) closing of unprofitable branches and laying off unproductive employees 
C) selling shares in the bank overseas to raise capital 
D) all of the above 
A) large loans to inefficient, state-owned enterprises 
B) closing of unprofitable branches and laying off unproductive employees 
C) selling shares in the bank overseas to raise capital 
D) all of the above

Question 20

The too-big-to-fail policy

Accepted Answer

A) exacerbates moral hazard problems. 
B) puts large banks at a competitive disadvantage in attracting large deposits. 
C) treats large depositors of small banks inequitably when compared to depositors of large banks. 
D) does only A and C of the above. 
A) exacerbates moral hazard problems. 
B) puts large banks at a competitive disadvantage in attracting large deposits. 
C) treats large depositors of small banks inequitably when compared to depositors of large banks. 
D) does only A and C of the above.

Exam 18: Financial Regulation

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

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 Federal Deposit Insurance Corporation Improvement Act of 1991

In the years just prior to the 2007-2009 financial crisis, mortgage loans were issued to borrowers with no income or employment.

When the payoff method is used to resolve a failed bank, both large and small depositors are protected from suffering losses.

The possibility that the failure of one bank can hasten the failure of other banks is called the

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

What is the asymmetric information problem and how does it contribute to our understanding of the structure of bank regulation in the United States and other countries?

Which of the following is least likely to accompany financial consolidation and the development of large, complex banking organizations?

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

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.

The "too-big-to-fail" policy reduces the adverse selection problem in bank regulation.

Deposit insurance

An impact of the Garn-St. Germain Act of 1982 has been to

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

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

What accounts for the problems facing China's four largest banks?

The too-big-to-fail policy

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

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

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