Deck 15: Banking Regulation: Crisis and Response

Question 1

The first stage in the regulatory process is

A)a banking crisis.
B)response by the financial system.
C)regulation.
D)regulatory response.

Answer 1

a banking crisis.

Question 2

The first crucial test for the Fed as a lender of last resort occurred

A)as Southern banks left the system during the Civil War.
B)as the federal government needed to raise large amounts of money during World War I.
C)during the S&L crisis of the 1980s.
D)following the stock market crash of October 1929.

Answer 2

following the stock market crash of October 1929.

Question 3

In 1931 the Fed increased the interest rate it charged on loans to banks

A)to protect its gold reserves.
B)to raise funds to meet its expenses.
C)to spur residential construction.
D)to offset the negative impact of the federal budget deficit on the economy.

Answer 3

to protect its gold reserves.

Question 4

For a lender of last resort to be effective

A)it must operate in an economic environment of low interest rates.
B)its promise to lend to banks during a crisis must be credible and carried out quickly.
C)the banks it lends to cannot be illiquid.
D)the economy must not experience periods of recession.

Question 5

The primary motive for financial innovation during the regulatory process is

A)profit.
B)adherence to the new regulations.
C)return to the way business was conducted prior to the new regulations.
D)increase coordination with other financial institutions.

Question 6

The regulatory response stage of the regulatory process consists of all of the following EXCEPT

A)regulators observe the impact of regulations on changes in the way financial institutions do business.
B)government steps in to end the crisis.
C)regulators adapt their policies in response to financial innovations that circumvent regulatory restrictions.
D)regulators seek new authority in response to attempts to get around regulations.

Question 7

The fourth stage in the regulatory process is

A)a banking crisis.
B)response by the financial system.
C)regulation.
D)regulatory response.

Question 8

Which of the following did NOT occur as a result of the weakness of the Fed's actions during the banking crisis of the early 1930s?

A)Congress amended the Fed's charter to broaden the permissible collateral for discount loans.
B)Congress amended the Fed's charter to limit the convertibility of dollars into gold.
C)A federal system of deposit insurance was introduced.
D)Congress amended the Fed's charter to require it to make discount loans to any banks requesting them.

Question 9

Which of the following factors contributed to the problems that banks began to face during the 1960s and 1970s?

A)Very low interest rates
B)Very low inflation rates
C)Banking regulations enacted during the 1930s
D)Prolonged periods of recession

Question 10

Because of the bank failures of the early 1930s, many small and medium-sized businesses were

A)forced to move from bank loans to stock sales to raise funds.
B)unable to obtain credit.
C)forced to move from bank loans to bond sales to raise funds.
D)forced to rely on government loans for credit.

Question 11

The usual response of the banking system to new government regulations is

A)evasion through whatever means are necessary.
B)strict compliance.
C)an attempt to circumvent the regulations through financial innovation.
D)bankruptcy.

Question 12

As a result of the bank failures of the early 1930s

A)bank reserves as a fraction of deposits rose and total bank deposits fell.
B)bank reserves as a fraction of deposits and total bank deposits both fell.
C)bank reserves as a fraction of deposits and total bank deposits both rose.
D)bank reserves as a fraction of deposits fell and total bank deposits rose.

Question 13

Congress created the Federal Reserve System

A)to serve as a lender of last resort.
B)to process the receipt of taxes received by the Internal Revenue Service.
C)to regulate the value of the U.S. dollar against foreign currencies.
D)to provide a source of mortgage loans to the residential housing market.

Question 14

Which of the following did NOT significantly exacerbate the banking crisis of the early 1930s?

A)The Fed's inability to lend against anything other than good commercial loans
B)The large number of small, poorly diversified banks
C)The large number of rural banks that held agricultural loans during a time of falling commodity prices
D)The large amount of fraud carried out by bank managers

Question 15

Government regulation of banks in the United States

A)changes slowly over time as knowledge of the best way to organize the system increases.
B)generally increases during election campaigns as politicians exploit the public's hostility toward banks.
C)changes abruptly in response to periodic financial crises.
D)has remained essentially unchanged since the early twentieth century.

Question 16

Many economists believe

A)the Fed could have reduced the severity of the Great Depression by raising interest rates.
B)the Fed could have reduced the severity of the Great Depression by encouraging banks to make fewer loans to insolvent businesses.
C)bank failures increased the severity of the Great Depression.
D)the severity of the Great Depression and the policies of the Fed were unrelated.

Question 17

The creation of a lender of last resort in the United States

A)occurred in response to banking panics.
B)was mandated in the U.S. Constitution.
C)occurred in response to the S&L crisis of the 1980s.
D)has been recommended by the Treasury in its report of late 1992.

Question 18

The third stage in the regulatory process is

A)a banking crisis.
B)response by the financial system.
C)regulation.
D)regulatory response.

Question 19

The second stage in the regulatory process is

A)a banking crisis
B)regulation
C)response by the financial system
D)regulatory response

Question 20

The weakness of the Fed's actions during the banking crisis of the early 1930s resulted in

A)a change in the law restricting its ability to make discount loans.
B)the introduction of a federal system of deposit insurance.
C)the establishment of the savings-and-loan industry.
D)the elimination of reserve requirements on demand deposits.

Question 21

Anticompetitive restrictions on banks generally result in

A)an increase in innovation and competition.
B)a stifling of innovation.
C)the persistence of traditional ways of doing things.
D)a passive attitude on the part of bank managers as they realize attempts to compete vigorously have been closed off.

Question 22

When households and businesses substitute Treasury bills, commercial paper, and repurchase agreements for short-term bank deposits in their portfolios, they are

A)sacrificing liquidity for return.
B)sacrificing return for liquidity.
C)increasing both their liquidity and return.
D)decreasing both their liquidity and return.

Question 23

The crisis involving the Hunt brothers had its greatest impact on the market for

A)commercial paper.
B)commodity futures.
C)negotiable certificates of deposit.
D)Eurodollars.

Question 24

Congress has attempted to reduce competition among banks in order to

A)increase the tax revenues generated from bank profits.
B)lower interest rates charged on bank loans.
C)reduce the chance of moral hazard in banks' behavior.
D)make the process of check clearing easier.

Question 25

In 1971 money market mutual funds were introduced as an alternative to

A)commercial paper.
B)Treasury bills.
C)repurchase agreements.
D)bank deposits.

Question 26

Which of the following statements about the Penn Central Railroad crisis is NOT true?

A)The crisis resulted in a large decline in commercial paper lending.
B)The crisis was ended by the Fed making credit available to commercial banks.
C)During the crisis, banks made loans to companies that would normally have used the commercial paper market.
D)The Fed's charter greatly restricted the number of banks to which it could make loans.

Question 27

An important consequence of regulations that reduce competition among banks is

A)a sharp reduction in the number of banks.
B)an incentive for unregulated financial institutions and markets to compete with banks.
C)an increase in moral hazard in banks' behavior.
D)lower interest rates on bank loans than would otherwise exist.

Question 28

In 2006 the assets of money market mutual funds were approximately

A)$100 billion.
B)$627 billion.
C)$1075 billion.
D)$2014 billion.

Question 29

Historically, commercial banks have dominated the short-term credit market by

A)specializing in reducing information costs.
B)being willing to pay whatever rate is necessary to attract deposits.
C)maintaining only short-term relationships with borrowers.
D)issuing commercial paper.

Question 30

The Franklin National Bank Crisis had its greatest impact on the market for

A)commercial paper.
B)commodity futures.
C)negotiable certificates of deposit.
D)Eurodollars.

Question 31

The market for short-term credit exists in large part to

A)provide the federal government with a means of financing its budget deficit.
B)provide banks with short-term investments.
C)accommodate firms' demands for working capital.
D)accommodate consumers' demand to own houses.

Question 32

The popularity of money market mutual funds during the 1970s is best explained by

A)the rapid economic growth of that decade.
B)the repeal of the McFadden Act.
C)the rise in market interest rates above Regulation Q ceilings.
D)the rapid increase in federal debt outstanding.

Question 33

Which of the following organizations has check clearing as its main role?

A)CHIPS
B)SEC
C)FDIC
D)COMEX

Question 34

Regulation Q

A)prohibited interstate banking.
B)placed ceilings on allowable interest rates on time and savings deposits.
C)required all banks to hold reserves against demand deposits.
D)broadened the basis on which the Fed could make discount loans.

Question 35

What is the Fedwire used for?

A)Relaying important developments in financial markets to broker-dealers
B)Relaying important business developments to Federal Reserve officials in Washington
C)Clearing securities transactions
D)Sending federal government funds to disaster areas

Question 36

What is the payments system?

A)The means of clearing transactions in the economy by check
B)The system by which exchange rates between currencies are determined
C)The means by which credit card companies calculate average daily balances for purposes of imposing finance charges
D)The system for transmitting funds from the U.S. Treasury to local banks for the purpose of making purchases for the federal government

Question 37

By 2006, total lending in the commercial paper market accounted for about what percentage of short-term business financing?

A)1%
B)7%
C)15%
D)40%

Question 38

In late 1998 the Fed averted a possible financial panic by

A)lowering interest rates.
B)raising interest rates.
C)using its influence to bring together the creditors of Long-Term Capital Management.
D)using its influence to encourage banks to make loans to broker-dealers in the securities industry.

Question 39

The development of money market mutual funds also aided large, well-established firms in raising funds by

A)lowering interest rates throughout the economy.
B)expanding the market for Treasury bills.
C)expanding the market for commercial paper.
D)expanding the market for negotiable certificates of deposit.

Question 40

Regulation Q was intended to

A)maintain banks' profitability by limiting competition for funds.
B)increase the reserves banks would hold against demand deposits.
C)increase the reserves banks would hold against time deposits.
D)eliminate the need for discount loans.

Question 41

Negotiable order of withdrawal accounts

A)are available only to large depositors.
B)are like checking accounts, but may not legally pay interest.
C)first appeared in New England during the early 1970s.
D)were declared illegal in the Depository Institution Deregulation and Monetary Control Act of 1980.

Question 42

Banks responded to their loss of borrowers to the commercial paper market by offering

A)standby letters of credit.
B)negotiable certificates of deposit.
C)NOW accounts.
D)money market deposit accounts.

Question 43

The Garn-St. Germain Act aided savings institutions by

A)imposing new regulatory burdens on banks.
B)eliminating all reserve requirements on deposits in savings institutions.
C)broadening their ability to invest in areas other than mortgages.
D)eliminating Regulation Q ceilings on deposits in them.

Question 44

Which of the following statements concerning money market deposit accounts is NOT true?

A)They were not subject to Regulation Q ceilings.
B)They are not covered by federal deposit insurance.
C)They are not subject to reserve requirements.
D)They generally pay higher interest rates than other bank deposits available to small depositors.

Question 45

When did Regulation Q finally disappear?

A)1934
B)1945
C)1986
D)2000

Question 46

A credit crunch refers to a

A)sharp rise in interest rates that banks charge on business loans.
B)sharp rise in interest rates that banks charge on consumer loans.
C)decline in the willingness of households and firms to borrow from banks.
D)reduction in borrowers' ability to obtain credit at prevailing interest rates.

Question 47

In an overnight Eurodollar transaction

A)foreign governments borrow dollars from the U.S. Treasury overnight.
B)a bank customer's demand deposit is automatically withdrawn and deposited in a foreign branch that pays interest.
C)U.S. tourists deposit dollars in a European bank at the end of the day and receive foreign currency the next morning.
D)foreign tourists deposit foreign currency in a U.S. bank at the end of the day and receive dollars the next morning.

Question 48

The loss of business to the commercial paper market that banks have suffered has been particularly damaging because most of the lost business was from

A)foreign borrowers.
B)low-quality borrowers.
C)high-quality borrowers.
D)local municipalities.

Question 49

Which of the following is NOT true of the Depository Institution Deregulation and Monetary Control Act of 1980?

A)Interest rate ceilings were placed on mortgage loans and certain types of commercial loans.
B)All banks were given access to the Fed's check-clearing facilities.
C)NOW accounts were permitted.
D)Regulation Q was phased out.

Question 50

Certificates of deposit differ from demand deposits in that they

A)do not pay interest.
B)have penalties for early withdrawal.
C)are sold only by S&Ls.
D)pay non-taxable interest.

Question 51

During the 1980s banks lost loan business to

A)the corporate bond market.
B)the commercial paper market.
C)the savings-and-loan industry.
D)the Eurodollar market.

Question 52

Which sector of the economy was hurt the worst by the Credit Crunch of 1966?

A)The housing industry
B)The automobile industry
C)The vacation industry
D)Local governments

Question 53

Large commercial banks responded to the Credit Crunch of 1966 by

A)raising the interest rates they paid on deposits.
B)borrowing from the Fed.
C)raising funds through unregulated sources.
D)increasing their participation in the commercial paper market.

Question 54

In a repurchase agreement, a corporation

A)agrees to buy back previously issued stock.
B)agrees to pay back a bank loan whenever the bank asks it to.
C)purchases Treasury bills from a bank and the bank commits to repurchase them the next day.
D)guarantees the quality of its goods by offering to buy them back if the customer is dissatisfied.

Question 55

Disintermediation refers to the

A)failure of financial intermediaries due to moral hazard problems.
B)failure of financial intermediaries due to adverse selection problems.
C)movement of savers and borrowers from banks to financial markets.
D)removal of government regulations of financial intermediaries.

Question 56

Negotiable certificates of deposit were developed in order to

A)compete for loan business that had been going to the commercial paper market.
B)circumvent interest rate regulations on deposits.
C)increase assets that were acceptable as collateral for discount loans.
D)circumvent reserve requirements.

Question 57

What was the main reason Congress passed the Garn-St. Germain Act of 1982?

A)To phase out Regulation Q
B)To pump additional funds into the FDIC
C)To combat problems caused by the gradual demise of Regulation Q
D)To strengthen the market for municipal bonds

Question 58

NOW accounts were developed in order to

A)circumvent Regulation Q.
B)provide banks with a checkable deposit on which they did not have to pay interest.
C)provide banks with a liquid, interest-earning asset.
D)provide banks with a means of earning interest on the funds in their reserve accounts with the Fed.

Question 59

An ATS account

A)converts a corporation's checking account balance at the end of the day into an overnight RP.
B)is the name given to NOW accounts outside of New England.
C)are negotiable certificates of deposit of less than $100,000.
D)were used during the Great Depression by depositors who had lost faith in conventional checking accounts.

Question 60

Negotiable certificates of deposit differ from demand deposits in that they

A)are not subject to early withdrawal penalties.
B)may be bought and sold in the secondary market.
C)generally have lower interest rates.
D)are not subject to state and local income taxes.

Question 61

During the early 1980s, Congress relaxed restrictions on the asset holdings of S&Ls by allowing them to hold all of the following EXCEPT

A)junk bonds.
B)commercial mortgages.
C)direct real estate investments.
D)corporate stock.

Question 62

A rise in interest rates hurts thrifts because it

A)reduces their net worth.
B)raises the market value of their mortgages.
C)decreases their cost of funds.
D)increases their tax liability to the federal government.

Question 63

In 1995, the FDIC deposit insurance premiums for most banks were

A)eliminated.
B)raised.
C)adjusted for inflation.
D)set at $2000 per year.

Question 64

The key to the interest rate risk faced by thrifts was

A)their heavy investments in Treasury bills.
B)the mismatch between the maturities of their assets and liabilities.
C)their heavy investments in Treasury bonds.
D)their investments in very risky projects.

Question 65

The most important loss to the economy during the 1980s from the thrift crisis was

A)the loss of output represented by the $200 billion spent to pay off depositors of failed thrifts.
B)the increase in funds spent to hire more regulators.
C)the diversion of savings to less productive investments funded by insured deposits.
D)the increase in deposit insurance premiums mandated by new legislation.

Question 66

What did the Congressional Budget Office estimate the cost of the S&L debacle to be in 1992 dollars?

A)$100 million
B)$200 billion
C)$1 trillion
D)$3 trillion

Question 67

Which of the following statements concerning the problems of commercial banks during the 1980s is NOT true?

A)The rising cost of funds led banks to make riskier loans.
B)Interest rate risk was at least as great a problem for banks as for thrifts.
C)Banks increased their exposure to risk through their investments in HLTs.
D)By limiting diversification, branching restrictions contributed to the increase in bank failures.

Question 68

Adjustable-rate mortgages do not fully eliminate interest-rate risk for all of the following reasons EXCEPT

A)annual rate increases are limited.
B)the indexes on which they are based are imperfect.
C)financial institutions are reluctant to raise interest rates too much so as to not lose customers.
D)interest rate can only increase by a specified amount during the term of the mortgage.

Question 69

During the early 1980s, regulators kept many insolvent or nearly insolvent thrifts from being closed by

A)underestimating the value of goodwill that thrifts carried on their books as an asset.
B)allowing many assets to be carried on the books at face value rather than market value.
C)reducing the face value of many mortgages to current market value.
D)allowing them to pay interest rates to depositors that were below the going market rates.

Question 70

The incident in which an S&L entrepreneur contributed about $1.3 million to the campaigns of five U.S. senators in return for their assistance in getting FHLBB Chairman Edwin Gray to deal lightly with the problems of Lincoln Savings and Loan is known as the

A)"Lincoln Log" scandal.
B)"Keating Five" scandal.
C)"Bonfire of the Vanities" scandal.
D)"FSLIC" scandal.

Question 71

The thrift industry prospered during the period from the 1930s to the 1960s because

A)there was very little government regulation of the industry.
B)interest rates were continually increasing, but inflation rates were low.
C)interest rates were stable and regulation limited interest payments to depositors.
D)banks were prohibited from engaging in mortgage lending.

Question 72

During the early- to mid-1980s, thrifts in which parts of the country were particularly hard hit?

A)Those in the industrial areas of the northeast
B)Those in the industrial areas of the midwest
C)Those in areas dependent on the tourist trade, such as California and Florida
D)Those in areas dependent on farming or energy, such as Texas

Question 73

The thrift industry began to face serious problems following the rise in interest rates in

A)1929.
B)1941.
C)1979.
D)1990.

Question 74

The development of brokered deposits increased the moral hazard problem of deposit insurance by

A)attracting risk-loving depositors.
B)in effect, allowing the extension of insurance coverage to deposits above the $100,000 limit.
C)scaring cautious small depositors away from thrifts.
D)making depositors more conscious of the need to carefully monitor the behavior of thrift managers.

Question 75

The 1981-1982 recession hurt thrifts by

A)lowering interest rates.
B)raising interest rates.
C)raising default rates on mortgages.
D)reducing the demand for negotiable CDs.

Question 76

The lower the amount of deposits covered by insurance,

A)the greater the extent of moral hazard in the banking system.
B)the greater is the incentive for depositors to monitor banks.
C)the greater is the need for government regulation of banking.
D)the likelier the managers of banks are to make risky investments.

Question 77

Which of the following statements concerning federal deposit insurance is NOT true?

A)The FDIC, in effect, insures all deposits in large banks.
B)Regulators have been reluctant to impose a coinsurance requirement on deposit insurance.
C)Regulators have been reluctant to reduce the dollar value of deposits that can be insured.
D)The FDIC seems likely to do away with the too-big-to-fail doctrine.

Question 78

Which of the following statements is accurate?

A)Between the Great Depression and the mid-1970s in the United States, commercial banks prospered, but S&Ls did not.
B)Between the Great Depression and the mid-1970s in the United States, S&Ls prospered, but commercial banks did not.
C)Between the Great Depression and the mid-1970s in the United States, both commercial banks and S&Ls prospered.
D)Between the Great Depression and the mid-1970s in the United States, neither commercial banks nor S&Ls prospered.

Question 79

Which of the following was NOT a provision of FIRREA?

A)The Office of the Comptroller of the Currency was created to supervise and examine thrifts.
B)The FSLIC was abolished.
C)The FHLBB was abolished.
D)The Resolution Trust Corporation was created to handle the liquidation of assets of failed thrifts.

Question 80

Under FIRREA what are the capital requirements for S&Ls?

A)1% of assets
B)8% of assets
C)15% of net worth
D)$50,000,000