Question 1

The policy of forbearance practiced by the FSLIC in the late 1980s allowed many commercial banks to remain open even in the face of continuing losses and insolvency.

Accepted Answer

A) True 
 B)False

Question 2

The 1993 Depositor Protection legislation gives equal claim to the value of liquidated assets less the amount of insured deposits to foreign uninsured depositors, domestic uninsured depositors, and the FDIC.

Accepted Answer

A) True 
 B)False

Question 3

The contagion effect

Accepted Answer

A) stems from the positive correlation in FI returns. 
B) results when interest rate risk increases credit risk and liquidity risk exposures. 
C) occurs when liquidity risk problems at bad banks damages well-run banks. 
D) occurs when a computer virus infects the computerized electronics payments systems Fedwire and CHIPS. 
E) is completely eliminated by government provided deposit insurance against bank runs.

Question 4

All of the following are associated with contagious runs EXCEPT

Accepted Answer

A) liability holders not distinguishing between good and bad FIs. 
B) liability holders seeking to quickly turn their liabilities into cash or safe securities. 
C) a contractionary effect on the supply of credit. 
D) negative social welfare effects. 
E) an expansionary effect on the regional money supply.

Question 5

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 6

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 7

The following market value balance sheet of a failed bank ($ millions) $$\begin{array} { | l | l | l | l | } 
\hline \text { Assets } & 400 & \text { Insured Deposits } & \$ 200 \
\hline & & \text { Uninsured Deposits } & \$ 400 \
\hline
\end{array}$$
-If the insured depositor transfer resolution method is utilized, what is the cost to uninsured depositors of bank failure resolution?

Accepted Answer

A) $0. 
B) -$200 million. 
C) $67 million. 
D) $133 million. 
E) $200 million.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Question 10

The Designated Reserve Ratio is a rule that stipulates that highly-rated DIs would not pay deposit insurance premiums if this ratio was above 1.25 percent.

Accepted Answer

A) True 
 B)False

Question 11

From January 2008 to December 2009, there were a total of ____ FDIC insured bank failures, which cost the FDIC approximately ____ billion to resolve.

Accepted Answer

A) 26; $17 
B) 140; $39 
C) 166; $56 
D) 211; $69 
E) 234; $72

Question 12

The National Credit Union Administration (NCUA) is an independent federal agency that insures credit union deposits.

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 quality and level of leverage of the DI.

Accepted Answer

A) True 
 B)False

Question 14

The FDICIA of 1991 strengthened the role of regulators to monitor bank asset quality by the following measures EXCEPT

Accepted Answer

A) requiring improved accounting standards for banks. 
B) giving private accountants an increased role in monitoring bank performances. 
C) requiring an annual on-site examination by regulators. 
D) requiring banks to work on achieving market value accounting. 
E) disallowing independent audits.

Question 15

What was the objective of the FDIC Improvement Act (FDICIA) of 1991?

Accepted Answer

A) Returning the banking industry to record profit levels. 
B) Restructure the savings association deposit insurance fund and transfer its management to FDIC. 
C) To deny deposit insurance coverage to funds obtained through deposit brokers. 
D) To restructure the bank deposit insurance fund and prevent its potential insolvency. 
E) To enforce the capital standards on insured depository institutions.

Question 16

The Federal safety net to protect the integrity of the payments system consists of deposit insurance and social welfare.

Accepted Answer

A) True 
 B)False

Question 17

The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) required the FDIC to establish risk-based premiums for deposit insurance coverage at banks.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is a drawback of charging flat deposit insurance premiums?

Accepted Answer

A) The FDIC acts more like a private property-casualty insurer when charging flat premiums. 
B) It discourages banks from taking risks. 
C) Both high risk and low risk banks are charged the same premium rate. 
D) High risk banks will be charged an unreasonably high premium rate. 
E) Premiums reflect the expected private costs or losses to the insurer from the provision of deposit insurance.

Question 19

As a result of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), the deposit insurance fund for the savings and loan industry has been combined with the deposit insurance fund for the commercial banking industry.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 19: Deposit Insurance and Other Liability Guarantees

The policy of forbearance practiced by the FSLIC in the late 1980s allowed many commercial banks to remain open even in the face of continuing losses and insolvency.

The 1993 Depositor Protection legislation gives equal claim to the value of liquidated assets less the amount of insured deposits to foreign uninsured depositors, domestic uninsured depositors, and the FDIC.

The contagion effect

All of the following are associated with contagious runs EXCEPT

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

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.

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

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

The Designated Reserve Ratio is a rule that stipulates that highly-rated DIs would not pay deposit insurance premiums if this ratio was above 1.25 percent.

From January 2008 to December 2009, there were a total of FDIC insured bank failures, which cost the FDIC approximately billion to resolve.

The National Credit Union Administration (NCUA) is an independent federal agency that insures credit union deposits.

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 quality and level of leverage of the DI.

The FDICIA of 1991 strengthened the role of regulators to monitor bank asset quality by the following measures EXCEPT

What was the objective of the FDIC Improvement Act (FDICIA) of 1991?

The Federal safety net to protect the integrity of the payments system consists of deposit insurance and social welfare.

The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) required the FDIC to establish risk-based premiums for deposit insurance coverage at banks.

Which of the following is a drawback of charging flat deposit insurance premiums?

As a result of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), the deposit insurance fund for the savings and loan industry has been combined with the deposit insurance fund for the commercial banking industry.

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