Question 1

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely.

Accepted Answer

A) small; fewer 
B) small; greater 
C) large; fewer 
D) large; greater 
A) small; fewer 
B) small; greater 
C) large; fewer 
D) large; greater D

Question 2

Moral hazard and adverse selection problems increased in prominence in the 1980s

Accepted Answer

A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. 
C) following a decrease in federal deposit insurance from $100,000 to $40,000. 
D) because of all of the above. 
E) because of only A and B of the above. 
A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. 
C) following a decrease in federal deposit insurance from $100,000 to $40,000. 
D) because of all of the above. 
E) because of only A and B of the above. E

Question 3

Ways in which bank regulations reduce the adverse selection and moral hazard problems in banking include

Accepted Answer

A) a chartering process designed to prevent crooks from getting control of a bank. 
B) restrictions that prevent banks from acquiring certain risky assets, such as common stocks. 
C) high bank capital requirements to increase the cost of bank failure to the owners. 
D) all of the above. 
E) only A and B of the above. 
A) a chartering process designed to prevent crooks from getting control of a bank. 
B) restrictions that prevent banks from acquiring certain risky assets, such as common stocks. 
C) high bank capital requirements to increase the cost of bank failure to the owners. 
D) all of the above. 
E) only A and B of the above. D

Question 4

To understand banking regulation in the United States, it is helpful to understand the concepts of asymmetric information, adverse selection, and moral hazard.

Accepted Answer

A) True 
 B)False

Question 5

The increased integration of financial markets across countries and the need to make the playing field equal for banks from different countries led to the Basel Accord agreement to

Accepted Answer

A) standardize bank capital requirements internationally. 
B) reduce, across the board, bank capital requirements in all countries. 
C) sever the link between risk and capital requirements. 
D) do all of the above. 
A) standardize bank capital requirements internationally. 
B) reduce, across the board, bank capital requirements in all countries. 
C) sever the link between risk and capital requirements. 
D) do all of the above.

Question 6

Discuss the role of NINJA loans in the 2007-2009 financial crisis.

Accepted Answer

NINJA loans, which stands for "no income

Question 7

A better capitalized bank has more to lose when it fails and is less likely to take less risk.

Accepted Answer

A) True 
 B)False

Question 8

The failure of one bank can hasten the failure of others in what is referred to as a contagion effect.

Accepted Answer

A) True 
 B)False

Question 9

Moral hazard and adverse selection problems increased in prominence in the 1980s

Accepted Answer

A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. 
C) following an increase in federal deposit insurance from $40,000 to $100,000. 
D) because of all of the above. 
E) because of only A and B of the above. 
A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. 
C) following an increase in federal deposit insurance from $40,000 to $100,000. 
D) because of all of the above. 
E) because of only A and B of the above.

Question 10

Because asymmetric information problems in the banking industry are a fact of life throughout the world, bank regulation in other countries is similar to that in the United States.

Accepted Answer

A) True 
 B)False

Question 11

Once a bank has been chartered, it is required to file periodic call reports that reveal the bank's assets and liabilities, income, ownership, and other details.

Accepted Answer

A) True 
 B)False

Question 12

Why did the United States experience a banking crisis in the 1980s?

Accepted Answer

The United States experienced a banking

Question 13

Of the following assets, the one which has the highest capital requirement under the Basel Accord is

Accepted Answer

A) municipal bonds. 
B) residential mortgages. 
C) commercial paper. 
D) securities issued by industrialized countries' governments. 
A) municipal bonds. 
B) residential mortgages. 
C) commercial paper. 
D) securities issued by industrialized countries' governments.

Question 14

The legislation that separated commercial banking from the securities industry is known as the ________.

Accepted Answer

A) National Bank Act 
B) Federal Reserve Act 
C) Glass-Steagall Act 
D) McFadden Act 
A) National Bank Act 
B) Federal Reserve Act 
C) Glass-Steagall Act 
D) McFadden Act

Question 15

How can we change the way the credit-rating system works to avoid the problems encountered with ratings prior to the 2007-2009 financial crisis?

Accepted Answer

To change the way the credit-rating syst

Question 16

As a way of stemming the decline in the number of savings and loans and mutual savings banks, the Garn-St. Germain Act of 1982 allowed

Accepted Answer

A) money market certificates. 
B) money market mutual funds. 
C) money market deposit accounts. 
D) negotiable order of withdrawal accounts. 
A) money market certificates. 
B) money market mutual funds. 
C) money market deposit accounts. 
D) negotiable order of withdrawal accounts.

Question 17

The Federal Deposit Insurance Corporation Improvement Act of 1991

Accepted Answer

A) instructed the FDIC to come up with risk-based deposit insurance premiums. 
B) expanded the FDIC's ability to use the "too-big-to-fail" policy. 
C) instructed the FDIC to wait longer before intervening when a bank gets into trouble. 
D) did all of the above. 
A) instructed the FDIC to come up with risk-based deposit insurance premiums. 
B) expanded the FDIC's ability to use the "too-big-to-fail" policy. 
C) instructed the FDIC to wait longer before intervening when a bank gets into trouble. 
D) did all of the above.

Question 18

Banks do not want to hold too much capital because

Accepted Answer

A) they do not bear fully the costs of bank failures. 
B) higher returns on equity are earned when bank capital is smaller, all else equal. 
C) higher capital levels attract the scrutiny of regulators. 
D) all of the above. 
E) only A and B of the above. 
A) they do not bear fully the costs of bank failures. 
B) higher returns on equity are earned when bank capital is smaller, all else equal. 
C) higher capital levels attract the scrutiny of regulators. 
D) all of the above. 
E) only A and B of the above.

Question 19

Which of the following is not true regarding the Basel 2 proposal to reform the original 1988 Basel Accord?

Accepted Answer

A) It attempts to link capital requirements more closely to actual risk by expanding the number of risk categories. 
B) It focuses on assessing the quality of risk management in banking institutions. 
C) It attempts to improve market discipline by requiring increased disclosure of pertinent information about banks. 
D) It has been well received by banks and national regulatory agencies. 
A) It attempts to link capital requirements more closely to actual risk by expanding the number of risk categories. 
B) It focuses on assessing the quality of risk management in banking institutions. 
C) It attempts to improve market discipline by requiring increased disclosure of pertinent information about banks. 
D) It has been well received by banks and national regulatory agencies.

Question 20

Just prior to the 2007 financial crisis, mortgage loans known as NINJA loans were issued to borrowers. What is a NINJA loan?

Accepted Answer

A) A loan issued by a Japanese bank, thus avoiding U.S. regulation. 
B) A loan document originated by a mortgage banker named Bruce Lee. 
C) A loan issued to borrowers with no income, employment, nor assets to speak of. 
D) A loan issued with a "martial arts" clause. 
A) A loan issued by a Japanese bank, thus avoiding U.S. regulation. 
B) A loan document originated by a mortgage banker named Bruce Lee. 
C) A loan issued to borrowers with no income, employment, nor assets to speak of. 
D) A loan issued with a "martial arts" clause.

Exam 18: Financial Regulation

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely.

Moral hazard and adverse selection problems increased in prominence in the 1980s

Ways in which bank regulations reduce the adverse selection and moral hazard problems in banking include

To understand banking regulation in the United States, it is helpful to understand the concepts of asymmetric information, adverse selection, and moral hazard.

The increased integration of financial markets across countries and the need to make the playing field equal for banks from different countries led to the Basel Accord agreement to

Discuss the role of NINJA loans in the 2007-2009 financial crisis.

A better capitalized bank has more to lose when it fails and is less likely to take less risk.

The failure of one bank can hasten the failure of others in what is referred to as a contagion effect.

Moral hazard and adverse selection problems increased in prominence in the 1980s

Because asymmetric information problems in the banking industry are a fact of life throughout the world, bank regulation in other countries is similar to that in the United States.

Once a bank has been chartered, it is required to file periodic call reports that reveal the bank's assets and liabilities, income, ownership, and other details.

Why did the United States experience a banking crisis in the 1980s?

Of the following assets, the one which has the highest capital requirement under the Basel Accord is

The legislation that separated commercial banking from the securities industry is known as the ________.

How can we change the way the credit-rating system works to avoid the problems encountered with ratings prior to the 2007-2009 financial crisis?

As a way of stemming the decline in the number of savings and loans and mutual savings banks, the Garn-St. Germain Act of 1982 allowed

The Federal Deposit Insurance Corporation Improvement Act of 1991

Banks do not want to hold too much capital because

Which of the following is not true regarding the Basel 2 proposal to reform the original 1988 Basel Accord?

Just prior to the 2007 financial crisis, mortgage loans known as NINJA loans were issued to borrowers. What is a NINJA loan?

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

The result of the too-big-to-fail policy is that banks will take on risks, making bank failures more likely.