Question 1

A run on a bank is not necessarily a bad occurrence.

Accepted Answer

A) True 
 B)False

Question 2

During the financial crisis of 2008-2009, deposit balances at DIs increased.

Accepted Answer

A) True 
 B)False

Question 3

How can the regulators reduce the effects of moral hazard in the absence of depositor discipline?

Accepted Answer

A) By allowing DIs to undertake high-risk high-return asset investments. 
B) By basing deposit insurance premiums on a DI's deposit size. 
C) By charging explicit deposit insurance premiums and implicit premiums on DIs. 
D) By exhibiting excessive capital forbearance. 
E) By implementing prompt corrective action capital zones based on rules rather than discretion. 
A) By allowing DIs to undertake high-risk high-return asset investments. 
B) By basing deposit insurance premiums on a DI's deposit size. 
C) By charging explicit deposit insurance premiums and implicit premiums on DIs. 
D) By exhibiting excessive capital forbearance. 
E) By implementing prompt corrective action capital zones based on rules rather than discretion.

Question 4

Access to the discount window of the Federal Reserve is unlikely to deter bank runs because

Accepted Answer

A) discount loans are meant to provide temporary liquidity for inherently solvent banks. 
B) borrowing is not automatic, that is, banks gain access only on a "need to borrow" basis. 
C) a bank needs high-quality liquid assets to pledge as collateral. 
D) discount window advances to undercapitalized banks that eventually fail requires the Federal Reserve to compensate the FDIC for incremental losses caused by keeping the bank open for an additional period of time. 
E) All of the options. 
A) discount loans are meant to provide temporary liquidity for inherently solvent banks. 
B) borrowing is not automatic, that is, banks gain access only on a "need to borrow" basis. 
C) a bank needs high-quality liquid assets to pledge as collateral. 
D) discount window advances to undercapitalized banks that eventually fail requires the Federal Reserve to compensate the FDIC for incremental losses caused by keeping the bank open for an additional period of time. 
E) All of the options.

Question 5

Explicit deposit insurance premiums applied by regulators can involve restricting and more closely monitoring the risky activities of banks.

Accepted Answer

A) True 
 B)False

Question 6

Pricing insurance premiums in an actuarially fair manner involves assessing the risk-taking profile of the financial institution.

Accepted Answer

A) True 
 B)False

Question 7

What is the benefit of a regulatory guarantee or insurance program for liability holders of FIs?

Accepted Answer

A) It decreases the likelihood contagious runs. 
B) It increases concerns about the asset quality of FI. 
C) It increases concerns about solvency of an FI. 
D) It provides incentives to liability holders to engage in bank runs. 
E) It provides preference to those who are first in line to withdraw funds over those last in line. 
A) It decreases the likelihood contagious runs. 
B) It increases concerns about the asset quality of FI. 
C) It increases concerns about solvency of an FI. 
D) It provides incentives to liability holders to engage in bank runs. 
E) It provides preference to those who are first in line to withdraw funds over those last in line.

Question 8

The adverse effects of a contagious run include the restrictions on the ability of individuals to transfer wealth through time and a negative impact on the level or rate of savings.

Accepted Answer

A) True 
 B)False

Question 9

The cost of insolvency of an FI to the FDIC is offset in part by the deposit insurance premiums paid by the bank.

Accepted Answer

A) True 
 B)False

Question 10

The regulatory practice of excessive capital forbearance is a method of reducing the short-run and long-run costs to deposit insurance funds.

Accepted Answer

A) True 
 B)False

Question 11

Pricing deposit insurance premiums to reflect increases in risk-taking by financial institutions is one method to reduce incentives to take risks.

Accepted Answer

A) True 
 B)False

Question 12

The current "too big to fail" policy doctrine relies on the separation of small depositors who would receive deposit insurance and large depositors who would not receive the benefits of deposit insurance.

Accepted Answer

A) True 
 B)False

Question 13

The use of the option pricing model to determine the actuarially fair premium for deposit insurance indicates that the cost of the insurance should rely on both the asset size and level of leverage of the DI.

Accepted Answer

A) True 
 B)False

Question 14

The Designated Reserve Ratio is a rule that stipulates that highly-rated DIs would not pay deposit insurance premiums if this ratio was above 0.25 percent.

Accepted Answer

A) True 
 B)False

Question 15

A major cause of the FSLIC insolvency in the 1980s was the dramatic rise in interest rates in 1979-82 that created extensive duration mismatches of assets and liabilities in the savings and loan industry.

Accepted Answer

A) True 
 B)False

Question 16

Risk-based capital supports risk-based deposit insurance premiums by increasing the cost risk taking for DI stockholders.

Accepted Answer

A) True 
 B)False

Question 17

When risk-taking is not actuarially fairly priced into deposit insurance premiums

Accepted Answer

A) depositors are required to pay the shortfall in funds collected. 
B) there is an increase in the incentives for owners of DIs to take additional risk. 
C) deposit insurance premiums are more costly than economically justified. 
D) depositors will be unprotected should the DI become insolvent and fail. 
E) the insurance provider is forced to find other sources of funds to continue coverage for the institution. 
A) depositors are required to pay the shortfall in funds collected. 
B) there is an increase in the incentives for owners of DIs to take additional risk. 
C) deposit insurance premiums are more costly than economically justified. 
D) depositors will be unprotected should the DI become insolvent and fail. 
E) the insurance provider is forced to find other sources of funds to continue coverage for the institution.

Question 18

The initial risk-based deposit insurance program implemented on January 1, 1993 was based on capital adequacy and supervisory judgments involving asset quality, loan underwriting standards and other operating risks.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is NOT a differentiation between deposit insurance and state guaranty funds for the insurance industry?

Accepted Answer

A) The required contributions provided by surviving insurers differs widely across states. 
B) The annual pro rata contributions often are legally capped for each insurer as a percent of premium income. 
C) A permanent guaranty fund does not exist for the insurance industry. 
D) Contributions by surviving firms into the guaranty fund occur before an insurance company has failed. 
E) The programs that are sponsored by state insurance regulators are administered by private insurance companies. 
A) The required contributions provided by surviving insurers differs widely across states. 
B) The annual pro rata contributions often are legally capped for each insurer as a percent of premium income. 
C) A permanent guaranty fund does not exist for the insurance industry. 
D) Contributions by surviving firms into the guaranty fund occur before an insurance company has failed. 
E) The programs that are sponsored by state insurance regulators are administered by private insurance companies.

Question 20

Moral hazard provides an incentive for bank owners to accept greater asset risks because they have less to lose, and potentially more to gain.

Accepted Answer

A) True 
 B)False

Exam 20: Deposit Insurance and Other Liability Guarantees

A run on a bank is not necessarily a bad occurrence.

During the financial crisis of 2008-2009, deposit balances at DIs increased.

How can the regulators reduce the effects of moral hazard in the absence of depositor discipline?

Access to the discount window of the Federal Reserve is unlikely to deter bank runs because

Explicit deposit insurance premiums applied by regulators can involve restricting and more closely monitoring the risky activities of banks.

Pricing insurance premiums in an actuarially fair manner involves assessing the risk-taking profile of the financial institution.

What is the benefit of a regulatory guarantee or insurance program for liability holders of FIs?

The adverse effects of a contagious run include the restrictions on the ability of individuals to transfer wealth through time and a negative impact on the level or rate of savings.

The cost of insolvency of an FI to the FDIC is offset in part by the deposit insurance premiums paid by the bank.

The regulatory practice of excessive capital forbearance is a method of reducing the short-run and long-run costs to deposit insurance funds.

Pricing deposit insurance premiums to reflect increases in risk-taking by financial institutions is one method to reduce incentives to take risks.

The current "too big to fail" policy doctrine relies on the separation of small depositors who would receive deposit insurance and large depositors who would not receive the benefits of deposit insurance.

The use of the option pricing model to determine the actuarially fair premium for deposit insurance indicates that the cost of the insurance should rely on both the asset size and level of leverage of the DI.

The Designated Reserve Ratio is a rule that stipulates that highly-rated DIs would not pay deposit insurance premiums if this ratio was above 0.25 percent.

A major cause of the FSLIC insolvency in the 1980s was the dramatic rise in interest rates in 1979-82 that created extensive duration mismatches of assets and liabilities in the savings and loan industry.

Risk-based capital supports risk-based deposit insurance premiums by increasing the cost risk taking for DI stockholders.

When risk-taking is not actuarially fairly priced into deposit insurance premiums

The initial risk-based deposit insurance program implemented on January 1, 1993 was based on capital adequacy and supervisory judgments involving asset quality, loan underwriting standards and other operating risks.

Which of the following is NOT a differentiation between deposit insurance and state guaranty funds for the insurance industry?

Moral hazard provides an incentive for bank owners to accept greater asset risks because they have less to lose, and potentially more to gain.

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