Exam 19: Deposit Insurance and Other Liability Guarantees

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.

Contagious runs on bank deposits are directed at FIs, whether they are failing or healthy.

The following market value balance sheet of a failed bank ($ millions) If the insured depositor transfer resolution method is utilized, what is the cost to uninsured depositors of bank failure resolution?

Subordinate debt (SD) has been proposed as a means of increasing the degree of overall market discipline at a depository institution. Which of the following objectives is considered to be achievable when attempting to increase market discipline?

The following market value balance sheet of a failed bank ($ millions) If the insured depositor transfer resolution method is utilized, what is the cost to the CDIC of bank failure resolution?

The following market value balance sheet of a failed bank ($ millions) What is the market value of capital?

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

Interest rates charged to healthy banks that borrow from the Bank of Canada are typically set one percent below the fed funds target interest rate.

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

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

All of the following are associated with contagious runs EXCEPT

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

The contagion effect

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. What is the current net worth (market value) of the bank?

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

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

Bank risk taking can be controlled by increasing

The prompt corrective action program of the FDIC Improvement Act allows a bank or thrift to be placed into receivership when the book value of capital to assets falls below 2 percent.

If regulators provide more protection against bank runs, the incidence of moral hazard is likely to increase.

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