Question 1

You have savings accounts at two separately FDIC insured banks. At one of the banks your account has a balance of $200,000. At the other bank the account balance is $60,000. You find out the banks are going to merge. If you are concerned about the possibility of the new bank failing, you should:

Accepted Answer

A)   do nothing; you are still insured up $250,000 per account.
B)   consider moving $10,000 to another account at the same bank.
C)   consider moving $10,000 to another account at a different bank.
D)   do nothing; as an individual you are only insured up $250,000 no matter where the accounts are. C

Question 2

Discuss the case for a "super-regulator" in the context of what you have learned about
"regulatory competition."

Accepted Answer

Regulatory competition describes the current situation in which banks can effectively choose their regulators by choosing whether to be a state or national bank and whether or not to belong to the Federal Reserve System. If one regulator allows an activity that another prohibits, a bank's managers can threaten to switch, or argue that a competitor who answers to a more permissive regulator has an unfair advantage. This has two consequences: first, regulators force each other to innovate, improving the quality of the regulations they writing. This is a positive outcome because it ensures that regulators and banks follow current best practice. But there is also a less desirable outcome in that bank managers can "shop" for the most lenient regulator. This was compounded in the 1990s when Congress removed the functional (and geographic) barriers that one separated commercial banking from other forms of financial intermediation (and which had outlawed interstate branching). It is likely that in the future regulators and supervisors will have no choice but to combine forces, either cooperating or merging, and the creation of a "super-regulator" would have the advantage of making the process more uniform and coherent.

Question 3

In the ten years after the FDIC limit was increased to $100,000:

Accepted Answer

A)   more than four times the number of banks and savings and loans failed than did during the first 46 years of FDIC's existence.
B)   less than one-fourth the number of banks and savings and loans failed than during the first 46 years of FDIC's existence.
C)   the cost to taxpayers of failed institutions in that period was negligible because FDIC was in place.
D)   increasing the deposit insurance limit to $250,000 provided complete coverage for all deposits except those of large corporations. A

Question 4

The financial system is inherently more unstable than most other industries due to the fact that:

Accepted Answer

A)   while in most other industries customers disappear at a faster rate, in banking they disappear slowly so the damage is done before the real problem is identified.
B)   banks deal in paper profits, not in real profits.
C)   a single firm failing in banking can bring down the entire system; this isn't true in most other industries.
D)   there is less competition than in other industries.

Question 5

Which of the following is not a positive effect of the Basel Accord?

Accepted Answer

A)   It forced regulators to change the way they thought about bank capital.
B)   It promoted a more uniform international system.
C)   It provided a framework that less developed countries could use to improve the regulation of their banks.
D)   It provided a system to differentiate between bonds based on their systemic risk.

Question 6

The supervision of banks includes:

Accepted Answer

A)   requiring bank officers to attend classes on an annual basis.
B)   on-site examinations of the bank.
C)   extensive background checks of all bank officers.
D)   requiring banks to file monthly reports on their revenues, expenses and profits.

Question 7

In today's world, the goal of financial stability means:

Accepted Answer

A)   no institution should fail.
B)   competition should be eliminated.
C)   preventing large-scale financial catastrophes.
D)   creating one mega regulatory agency.

Question 8

You have savings accounts at two separately FDIC insured banks. At one of the banks your account has a balance of $200,000. At the other bank the account balance is $60,000. If both banks fail, you will receive:

Accepted Answer

A)   $250,000.
B)   $60,000.
C)   $260,000.
D)   $200,000.

Question 9

Under the purchase-and-assumption method, the FDIC usually finds it:

Accepted Answer

A)   can sell the failed bank for more than the bank is actually worth.
B)   can sell the bank at a price equaling the value of the failed banks assets.
C)   has to sell the bank at a negative price since the bank is insolvent.
D)   cannot sell the bank and almost always has to revert to the payoff method for dealing with a failed bank.

Question 10

Which of the following statements is most correct?

Accepted Answer

A)   The higher the deposit insurance limit the lower the risk of moral hazard.
B)   The higher the deposit insurance limit the greater the risk of moral hazard.
C)   Deposit insurance limits do not impact moral hazard, they impact adverse selection.
D)   Increasing the deposit insurance limits above $100,000 would increase coverage for over 50 percent of all depositors.

Question 11

Under the purchase-and-assumption method of dealing with a failed bank, the FDIC:

Accepted Answer

A)   finds another bank to take over the insolvent bank.
B)   takes over the day to day management of the bank.
C)   sells the failed bank to the Federal Reserve.
D)   sells off the profitable loans of the failed bank in an open auction.

Question 12

Governments employ three strategies to contain the risks created by government safety nets. These include each of the following, except:

Accepted Answer

A)   government supervision.
B)   an excise tax on bank profits.
C)   government regulation.
D)   formal bank examination.

Question 13

One reason that financial regulations restrict the assets that banks can own is to:

Accepted Answer

A)   combat the moral hazard that government safety nets provide.
B)   limit the growth rate of banks.
C)   prevent banks from being too profitable.
D)   keep banks from spending lavishly on perks for executives.

Question 14

Deflation can cause widespread bank crises for all of the following reasons except:

Accepted Answer

A)   a decline in the value of borrowers' net worth but not their liabilities.
B)   borrowers' default rates increase.
C)   bank balance sheets deteriorate as the level of economic activity decreases.
D)   information asymmetry problems decrease during deflationary periods.

Question 15

Why do bank runs usually have people rushing to their bank instead of waiting for the lines to taper off so they do not have to wait so long?

Accepted Answer

The answer of Why do bank runs usually have people...

Question 16

What was the primary motivation behind the creation of the 1988 Basel Accord?

Accepted Answer

The answer of What was the primary motivation behind the...

Question 17

When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by:

Accepted Answer

A)   taking over the lender of last resort function and assigning this function to the U.S. Treasury.
B)   ordering the printing of tens of billions of dollars of additional currency.
C)   creating the FDIC and offering deposit insurance.
D)   declaring a bank holiday and closing banks for 30 days.

Question 18

Bank failures tend to occur most often during periods of:

Accepted Answer

A)   stock market run ups when, like many companies, banks tend to be overvalued.
B)   high inflation when the fixed rate loans of many banks cause their real returns to decrease.
C)   recessions when many borrowers have a difficult time repaying loans and lending activity slows.
D)   wars and other civil unrest.

Question 19

The moral hazard problem caused by government safety nets:

Accepted Answer

A)   is greater for larger banks.
B)   is greater for smaller banks.
C)   is pretty constant across banks of all sizes.
D)   only exists for banks with high leverage ratios.

Question 20

Explain why the ratio of assets to capital increased dramatically for commercial banks from the 1920s to the present.

Accepted Answer

The answer of Explain why the ratio of assets to...

Exam 14: Regulating the Financial System