Question 1

The costs to the bank of borrowing at the discount window do NOT include

Accepted Answer

A) an explicit rate of interest on the borrowings. 
B) the market value of collateral to be pledged against the loans. 
C) the negative signal the use of such borrowings sends to regulators about the insurer's financial condition. 
D) the negative signal the use of such borrowings sends to the market about the bank's financial condition. 
E) the possibility of greater regulatory scrutiny and examination. 
A) an explicit rate of interest on the borrowings. 
B) the market value of collateral to be pledged against the loans. 
C) the negative signal the use of such borrowings sends to regulators about the insurer's financial condition. 
D) the negative signal the use of such borrowings sends to the market about the bank's financial condition. 
E) the possibility of greater regulatory scrutiny and examination. D

Question 2

Brokers who break up large deposits into smaller units at different banks to ensure full coverage by deposit insurance are referred to as deposit brokers.

Accepted Answer

A) True 
 B)False  True

Question 3

As a result of loan write-offs, Bank A has to be liquidated by the regulators.The book value of the assets and liabilities of the bank is presented below (in millions of dollars).The market value of the loans has been estimated at $240 million. $$\begin{array} { | l | l | l | l | } 
\hline \text { Loans (book value) } & \$ 340 & \text { Insured Deposits } & \$ 200 \
\hline & & \text { Uninsured Deposits } & \$ 100 \
\hline & & \text { Equity } & \$ 40 \
\hline
\end{array}$$ What is the current net worth (market value) of the bank?

Accepted Answer

A) +$40 million. 
B) $0 million. 
C) -$40 million. 
D) -$60 million. 
E) -$100 million. 
A) +$40 million. 
B) $0 million. 
C) -$40 million. 
D) -$60 million. 
E) -$100 million. D

Question 4

Moral hazard encourages the FI to take less, rather than more, risk.

Accepted Answer

A) True 
 B)False

Question 5

The system of flat deposit insurance premium formerly used in the U.S.

Accepted Answer

A) enhances bank safety and soundness because it discourages bank risk taking. 
B) reduces bank safety and soundness because it encourages bank risk taking. 
C) has no impact on bank safety and soundness. 
D) places banks that are considered "too big to fail" at a disadvantage. 
E) provides unfair advantage to small community banks. 
A) enhances bank safety and soundness because it discourages bank risk taking. 
B) reduces bank safety and soundness because it encourages bank risk taking. 
C) has no impact on bank safety and soundness. 
D) places banks that are considered "too big to fail" at a disadvantage. 
E) provides unfair advantage to small community banks.

Question 6

From January 2008 to December 2009, there were a total of ____ FDIC insured bank failures, which cost the FDIC approximately ____ billion to resolve.

Accepted Answer

A) 26; $17 
B) 140; $39 
C) 166; $56 
D) 211; $69 
E) 234; $72 
A) 26; $17 
B) 140; $39 
C) 166; $56 
D) 211; $69 
E) 234; $72

Question 7

Insured depositors can be covered for much more than $250,000 at any given FI under current FDIC regulations.

Accepted Answer

A) True 
 B)False

Question 8

The National Credit Union Administration (NCUA) is an independent federal agency that insures credit union deposits.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is NOT a social welfare effect of bank runs?

Accepted Answer

A) Discipline of incompetent managers. 
B) Negatively affecting the payments function of DIs. 
C) Reduced availability of credit. 
D) Potential decrease in the money supply. 
E) Inability to perform intergenerational wealth transfers. 
A) Discipline of incompetent managers. 
B) Negatively affecting the payments function of DIs. 
C) Reduced availability of credit. 
D) Potential decrease in the money supply. 
E) Inability to perform intergenerational wealth transfers.

Question 10

The use of the option pricing model to determine the actuarially fair premium is difficult to apply in practice because the asset values and risks are difficult to determine.

Accepted Answer

A) True 
 B)False

Question 11

The following table shows the market value balance sheet of a failed bank ($ millions): $$\begin{array} { | l | l | l | l | } 
\hline \text { Assets } & 400 & \text { Insured Deposits } & \$ 200 \
\hline & & \text { Uninsured Deposits } & \$ 400 \
\hline
\end{array}$$ If the insured depositor transfer resolution method is utilized, what is the cost to the FDIC of bank failure resolution?

Accepted Answer

A) $0. 
B) -$200 million. 
C) $67 million. 
D) $133 million. 
E) $200 million. 
A) $0. 
B) -$200 million. 
C) $67 million. 
D) $133 million. 
E) $200 million.

Question 12

The Federal safety net to protect the integrity of the payments system consists of deposit insurance and social welfare.

Accepted Answer

A) True 
 B)False

Question 13

Insurance pricing based on the perceived risk of the insured is referring to actuarially fairly priced insurance.

Accepted Answer

A) True 
 B)False

Question 14

FDICIA imposed additional regulatory discipline as a substitute for increased stockholder and depositor discipline.

Accepted Answer

A) True 
 B)False

Question 15

The deposit insurance programs of the National Credit Union Administration (NCUA) is modeled after the programs offered by the FDIC.

Accepted Answer

A) True 
 B)False

Question 16

The 1993 Depositor Protection legislation gives equal claim to the value of liquidated assets less the amount of insured deposits to foreign uninsured depositors, domestic uninsured depositors, and the FDIC.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following contributed the least to the collapse of the FSLIC/FDIC deposit insurance funds?

Accepted Answer

A) An increase in interest rate volatility. 
B) Enhanced investment powers granted to thrifts. 
C) Fraudulent behavior induced by the greed of the decade of the 80s. 
D) Fraudulent behavior induced by ineffective regulatory incentives. 
E) The extension of deposit insurance to uninsured depositors. 
A) An increase in interest rate volatility. 
B) Enhanced investment powers granted to thrifts. 
C) Fraudulent behavior induced by the greed of the decade of the 80s. 
D) Fraudulent behavior induced by ineffective regulatory incentives. 
E) The extension of deposit insurance to uninsured depositors.

Question 18

As a result of loan write-offs, Bank A has to be liquidated by the regulators.The book value of the assets and liabilities of the bank is presented below (in millions of dollars).The market value of the loans has been estimated at $240 million. $$\begin{array} { | l | l | l | l | } 
\hline \text { Loans (book value) } & \$ 340 & \text { Insured Deposits } & \$ 200 \
\hline & & \text { Uninsured Deposits } & \$ 100 \
\hline & & \text { Equity } & \$ 40 \
\hline
\end{array}$$ What is the cost to the uninsured depositors if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure?

Accepted Answer

A) $0. 
B) $20 million. 
C) $30 million. 
D) $40 million. 
E) $60 million. 
A) $0. 
B) $20 million. 
C) $30 million. 
D) $40 million. 
E) $60 million.

Question 19

Which of the following refers to mandatory actions that have to be taken by regulators as a DI's capital ratio falls.

Accepted Answer

A) Capital forbearance. 
B) Prompt corrective action. 
C) Risk-based deposit insurance. 
D) Too-big-to-fail. 
E) Regulatory oversight. 
A) Capital forbearance. 
B) Prompt corrective action. 
C) Risk-based deposit insurance. 
D) Too-big-to-fail. 
E) Regulatory oversight.

Question 20

The contagion effect

Accepted Answer

A) stems from the positive correlation in FI returns. 
B) results when interest rate risk increases credit risk and liquidity risk exposures. 
C) occurs when liquidity risk problems at bad banks damages well-run banks. 
D) occurs when a computer virus infects the computerized electronics payments systems Fedwire and CHIPS. 
E) is completely eliminated by government provided deposit insurance against bank runs. 
A) stems from the positive correlation in FI returns. 
B) results when interest rate risk increases credit risk and liquidity risk exposures. 
C) occurs when liquidity risk problems at bad banks damages well-run banks. 
D) occurs when a computer virus infects the computerized electronics payments systems Fedwire and CHIPS. 
E) is completely eliminated by government provided deposit insurance against bank runs.

Exam 20: Deposit Insurance and Other Liability Guarantees

The costs to the bank of borrowing at the discount window do NOT include

Brokers who break up large deposits into smaller units at different banks to ensure full coverage by deposit insurance are referred to as deposit brokers.

Moral hazard encourages the FI to take less, rather than more, risk.

The system of flat deposit insurance premium formerly used in the U.S.

From January 2008 to December 2009, there were a total of ____ FDIC insured bank failures, which cost the FDIC approximately ____ billion to resolve.

Insured depositors can be covered for much more than $250,000 at any given FI under current FDIC regulations.

The National Credit Union Administration (NCUA) is an independent federal agency that insures credit union deposits.

Which of the following is NOT a social welfare effect of bank runs?

The use of the option pricing model to determine the actuarially fair premium is difficult to apply in practice because the asset values and risks are difficult to determine.

The following table shows the market value balance sheet of a failed bank ($ millions): Assets 400 Insured Deposits \ 200 Uninsured Deposits \ 400 If the insured depositor transfer resolution method is utilized, what is the cost to the FDIC of bank failure resolution?

The Federal safety net to protect the integrity of the payments system consists of deposit insurance and social welfare.

Insurance pricing based on the perceived risk of the insured is referring to actuarially fairly priced insurance.

FDICIA imposed additional regulatory discipline as a substitute for increased stockholder and depositor discipline.

The deposit insurance programs of the National Credit Union Administration (NCUA) is modeled after the programs offered by the FDIC.

The 1993 Depositor Protection legislation gives equal claim to the value of liquidated assets less the amount of insured deposits to foreign uninsured depositors, domestic uninsured depositors, and the FDIC.

Which of the following contributed the least to the collapse of the FSLIC/FDIC deposit insurance funds?

Which of the following refers to mandatory actions that have to be taken by regulators as a DI's capital ratio falls.

The contagion effect

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters

From January 2008 to December 2009, there were a total of FDIC insured bank failures, which cost the FDIC approximately billion to resolve.