Question 1

The federal safety net to minimize bank failures includes all of the following EXCEPT

Accepted Answer

A) deposit insurance. 
B) reserve requirements. 
C) contagious runs. 
D) minimum capital requirements. 
E) the discount window of the Federal Reserve Bank. 
A) deposit insurance. 
B) reserve requirements. 
C) contagious runs. 
D) minimum capital requirements. 
E) the discount window of the Federal Reserve Bank.

Question 2

The Pension Benefit Guaranty Corporation (PBGC) insures pension benefits against the under-funding of pension plans by corporations.

Accepted Answer

A) True 
 B)False

Question 3

The following table shows the market value balance sheet of a failed bank ($ millions): $$\begin{array} { | l | l | l | l | } 
\hline \text { Assets } & 400 & \text { Insured Deposits } & \$ 200 \
\hline & & \text { Uninsured Deposits } & \$ 400 \
\hline
\end{array}$$ What is the market value of capital?

Accepted Answer

A) $200 million. 
B) -$200 million. 
C) $0. 
D) $400 million. 
E) $600 million. 
A) $200 million. 
B) -$200 million. 
C) $0. 
D) $400 million. 
E) $600 million.

Question 4

Requiring higher capital ratios often is proposed as method to reduce the incentive to take excessive risk because the moral-hazard risk-taking incentives are thought to decrease as the amount of net worth increases.

Accepted Answer

A) True 
 B)False

Question 5

The insolvency of the FSLIC occurred because of

Accepted Answer

A) declining real estate values. 
B) risky lending. 
C) asset liability mismatch. 
D) insider lending. 
E) All of the options. 
A) declining real estate values. 
B) risky lending. 
C) asset liability mismatch. 
D) insider lending. 
E) All of the options.

Question 6

The insured depositor transfer method of failure resolution

Accepted Answer

A) results in the closure of the failed bank. 
B) results in the merger of the failed bank into a stronger entity. 
C) keeps the failed bank operating for a short period of time. 
D) minimizes the FDIC's out of pocket costs of resolving a failed DI. 
E) forces insured depositors to bear some losses. 
A) results in the closure of the failed bank. 
B) results in the merger of the failed bank into a stronger entity. 
C) keeps the failed bank operating for a short period of time. 
D) minimizes the FDIC's out of pocket costs of resolving a failed DI. 
E) forces insured depositors to bear some losses.

Question 7

The insured depositor transfer method of least-cost bank failure resolution requires the FDIC to employ the method that imposes the highest amount of failure costs on uninsured depositors.

Accepted Answer

A) True 
 B)False

Question 8

Deposit insurance is often blamed for the deterioration in depositor discipline that allowed FIs to accept more risk in the asset selection process.

Accepted Answer

A) True 
 B)False

Question 9

The provision of deposit insurance by the FDIC is similar to having the FDIC ________ on the assets of the bank that buys the deposit insurance.

Accepted Answer

A) write a call option 
B) buy a call option 
C) write a put option 
D) having a secondary lien 
E) enter into a swap agreement 
A) write a call option 
B) buy a call option 
C) write a put option 
D) having a secondary lien 
E) enter into a swap agreement

Question 10

The required contribution from surviving insurers to protect policyholders of failed insurance companies usually is on a pro rata amount based on the relative asset size of the surviving company.

Accepted Answer

A) True 
 B)False

Question 11

In the insurance industry, state guarantee funds have a number of important differences from deposit insurance.Which of the following is NOT one of these differences?

Accepted Answer

A) No permanent guarantee fund exists for the insurance industry. 
B) They're run and administered by private insurance companies themselves. 
C) In the event of a failure, the other insurers operating in the state are levied a fee based on the premium income derived within the state. 
D) Small policy holders of the failed institution experience no delay when receiving the cash value of their policies. 
E) Pro rata contributions by the surviving institutions are often capped at 2 percent of premium income. 
A) No permanent guarantee fund exists for the insurance industry. 
B) They're run and administered by private insurance companies themselves. 
C) In the event of a failure, the other insurers operating in the state are levied a fee based on the premium income derived within the state. 
D) Small policy holders of the failed institution experience no delay when receiving the cash value of their policies. 
E) Pro rata contributions by the surviving institutions are often capped at 2 percent of premium income.

Question 12

Deposit insurance premiums or costs imposed on a DI through activity constraints rather than direct monetary charges describes implicit premiums.

Accepted Answer

A) True 
 B)False

Question 13

Under the option pricing model of deposit insurance, the cost of the insurance

Accepted Answer

A) decreases as the insured deposit base increases. 
B) decreases as the period over which the insurance coverage extends is increased. 
C) increases with the level of risk of the assets held by the DI increase. 
D) decreases with market interest rates. 
E) increase as the level of leverage used by the DI decreases. 
A) decreases as the insured deposit base increases. 
B) decreases as the period over which the insurance coverage extends is increased. 
C) increases with the level of risk of the assets held by the DI increase. 
D) decreases with market interest rates. 
E) increase as the level of leverage used by the DI decreases.

Question 14

Which of the following is not a Least-Cost Resolution (LCR) requirement under FDICIA?

Accepted Answer

A) Consider and evaluate all possible resolution alternatives by computing and comparing their costs on a present value basis, using realistic discount rates. 
B) Place a bank or thrift into receivership as soon as its capital falls below some positive book value level. 
C) Document the evaluation and the assumption on which it is based. 
D) Retain documentation for at least five years. 
E) Select the least costly alternative based on the evaluation. 
A) Consider and evaluate all possible resolution alternatives by computing and comparing their costs on a present value basis, using realistic discount rates. 
B) Place a bank or thrift into receivership as soon as its capital falls below some positive book value level. 
C) Document the evaluation and the assumption on which it is based. 
D) Retain documentation for at least five years. 
E) Select the least costly alternative based on the evaluation.

Question 15

The deficit realized by the PBGC in 1992 was a result of risk-taking by fund administrators.

Accepted Answer

A) True 
 B)False

Question 16

As if January 1, 1994, the FDIC now has to base premiums on which of the following?

Accepted Answer

A) different categories and concentrations of assets. 
B) different categories and concentrations of liabilities-insured, uninsured, contingent, and noncontingent. 
C) other factors that affect the probability of loss. 
D) the deposit insurer's revenue needs. 
E) all of the above. 
A) different categories and concentrations of assets. 
B) different categories and concentrations of liabilities-insured, uninsured, contingent, and noncontingent. 
C) other factors that affect the probability of loss. 
D) the deposit insurer's revenue needs. 
E) all of the above.

Question 17

Under the OPM, the FDIC charges the insurer a premium to insure the insurer's deposits and if the insurer does well and the market value of the insurer's assets is greater than the depositis, the net worth is positive and can continue in this manner.

Accepted Answer

A) True 
 B)False

Question 18

Which the following statements about the Pension Benefit Guarantee Corporation (PBGC) is FALSE?

Accepted Answer

A) The establishment of the PBGC insured pension benefits against the underfunding of plans by corporations. 
B) Since its inception in 1974, the PBGC has never operated at a surplus. 
C) The PBGC now operates on a risk-based premium plan where riskier (underfunded) pension plans pay higher premiums than less risky (fully funded) pension funds. 
D) The PBGC has little regulatory power over the pension funds it insures. 
E) The PBGC believes that although it currently has a deficit, it has sufficient funds because the obligations are paid over the beneficiary's lifetimes. 
A) The establishment of the PBGC insured pension benefits against the underfunding of plans by corporations. 
B) Since its inception in 1974, the PBGC has never operated at a surplus. 
C) The PBGC now operates on a risk-based premium plan where riskier (underfunded) pension plans pay higher premiums than less risky (fully funded) pension funds. 
D) The PBGC has little regulatory power over the pension funds it insures. 
E) The PBGC believes that although it currently has a deficit, it has sufficient funds because the obligations are paid over the beneficiary's lifetimes.

Question 19

The employment of deposit brokers allows individual depositors to receive deposit insurance coverage on total asset balances well in excess of $250,000 at any given bank.

Accepted Answer

A) True 
 B)False

Question 20

Banks that are viewed by regulators as being too big to be closed and liquidated without imposing a systemic risk to the banking and financial system are referred to is large and in charge banks.

Accepted Answer

A) True 
 B)False

Exam 20: Deposit Insurance and Other Liability Guarantees

The federal safety net to minimize bank failures includes all of the following EXCEPT

The Pension Benefit Guaranty Corporation (PBGC) insures pension benefits against the under-funding of pension plans by corporations.

The following table shows the market value balance sheet of a failed bank ($ millions): Assets 400 Insured Deposits \ 200 Uninsured Deposits \ 400 What is the market value of capital?

Requiring higher capital ratios often is proposed as method to reduce the incentive to take excessive risk because the moral-hazard risk-taking incentives are thought to decrease as the amount of net worth increases.

The insolvency of the FSLIC occurred because of

The insured depositor transfer method of failure resolution

The insured depositor transfer method of least-cost bank failure resolution requires the FDIC to employ the method that imposes the highest amount of failure costs on uninsured depositors.

Deposit insurance is often blamed for the deterioration in depositor discipline that allowed FIs to accept more risk in the asset selection process.

The provision of deposit insurance by the FDIC is similar to having the FDIC ________ on the assets of the bank that buys the deposit insurance.

The required contribution from surviving insurers to protect policyholders of failed insurance companies usually is on a pro rata amount based on the relative asset size of the surviving company.

In the insurance industry, state guarantee funds have a number of important differences from deposit insurance.Which of the following is NOT one of these differences?

Deposit insurance premiums or costs imposed on a DI through activity constraints rather than direct monetary charges describes implicit premiums.

Under the option pricing model of deposit insurance, the cost of the insurance

Which of the following is not a Least-Cost Resolution (LCR) requirement under FDICIA?

The deficit realized by the PBGC in 1992 was a result of risk-taking by fund administrators.

As if January 1, 1994, the FDIC now has to base premiums on which of the following?

Under the OPM, the FDIC charges the insurer a premium to insure the insurer's deposits and if the insurer does well and the market value of the insurer's assets is greater than the depositis, the net worth is positive and can continue in this manner.

Which the following statements about the Pension Benefit Guarantee Corporation (PBGC) is FALSE?

The employment of deposit brokers allows individual depositors to receive deposit insurance coverage on total asset balances well in excess of $250,000 at any given bank.

Banks that are viewed by regulators as being too big to be closed and liquidated without imposing a systemic risk to the banking and financial system are referred to is large and in charge banks.

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