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57 Cards in this Set

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Why are deposit insurance and other types of government safety nets important to the health of the economy




A. Deposit insurance and other types of government safety nets eliminate the adverse selection problem


B. Deposit insurance prevents depositors from withdrawing their funds and thus eliminates runs on banks


C. Deposit insurance and other government safety nets help eliminate a contagion effect

Deposit insurance and other government safety nets help eliminate a contagion effect

If casually insurance companies provided insurance without any restrictions, what kind of moral hazard problem might result?




A. Insurance premiums would likely be lower with no need for deductibles


B. With no restrictions, individuals would likely engage in less risk-taking behavior with this type of insurance


C. Customers would take less preventive care in avoiding fire risk with this type of insurance

Customers would take less preventive care in avoiding fire risk with this type of insurance

Do you think that eliminating or limiting the amount of deposit insurance would be a good idea?




A. It is not a good idea. Eliminating or limiting the amount of deposit insurance would help reduce the moral hazard of excessive risk taking on the part of banks. It would however, make bank failures and panics more likely




B.It is not a good idea. Eliminating or limiting the amount of deposit insurance would help increase the moral hazard of excessive risk taking on the part of banks. It would however, make bank failures and panics more likely




C. It is a good idea. Eliminating or limiting the amount of deposit insurance would help increase the moral hazard of excessive risk taking on the part of banks. Moreover, It would make bank failures and panics less likely

It is not a good idea. Eliminating or limiting the amount of deposit insurance would help reduce the moral hazard of excessive risk taking on the part of banks. It would however, make bank failures and panics more likely

How could higher deposit insurance premiums for banks with riskier assets benefit the economy




A. Risk-based premiums would help mitigate the moral hazard problem; however, it is difficult to monitor the degree of risk bank assets because often only the bank making the loans knows how risky they are




B. The benefit is that it makes bank panics less likely; however, the cost is that it increases the incentive for moral hazard by big banks

Risk-based premiums would help mitigate the moral hazard problem; however, it is difficult to monitor the degree of risk bank assets because often only the bank making the loans knows how risky they are

What are the costs and benefits of a too-big-fail policy?




A. The benefit is that it makes bank panics less likely; however, the cost is that it increases the incentive for moral hazard by big banks




B. the benefit is that it makes bank panics less likely, however, the cost is that it increases the incentive for adverse selection by big banks.





The benefit is that it makes bank panics less likely; however, the cost is that it increases the incentive for moral hazard by big banks

What bank regulation is not designed to reduce moral hazard problems created by deposit insurance




A. Restrictions on holding risky assets


B. Regulation-Q


C. Minimum capital requirements


D. All of the above are designed to reduce moral hazard problems created by deposit insurance

Regulation-Q

Why does imposing bank capital requirements on banks help limit risk taking?




A. Regulatory arbitrage arises and encourages a bank to decrease its risks by keeping low-risk assets


B. With capital requirements, banks have less funds to invest in risky assets; therefore, the risk declines.


C. Banks have more to lose if they fail and are thus more likely to pursue less risky activities

Banks have more to lose if they fail and are thus more likely to pursue less risky activities

At the height of the global financial crisis in October 2008, the US Treasury forced nine of the larges US banks to accept capital injections, in exchange for nonvoting ownership stock, even though some of the banks did not need the capital and did not want to participate. What could be the rationale for doing this




A. These activities do not appear on bank balance sheets and thus cannot be handled with bank capital requirements


B. Bank regulators have imposed an additional risk-based bank capital requirement


C.By forcing all banks to accept capital injections, it would help prevent bank runs on the weakest banks

By forcing all banks to accept capital injections, it would help prevent bank runs on the weakest banks

What special problem do off-balance-sheet activities present to bank regulators




What have bank regulators done about this problem if anything?




A. Requiring financial institutions to have more stable funding


B. Raising capital requirements in good times and lowering them in bad times


C. These activities do not appear on bank balance sheets and thus cannot be handled with bank capital requirements


D. Bank regulators have imposed an additional risk-based bank capital requirement



These activities do not appear on bank balance sheets and thus cannot be handled with bank capital requirements




Bank regulators have imposed an additional risk-based bank capital requirement

How does the Basel 3 Accord attempt to address the shortfalls of the Basel and Basel 2 Accords?


(Check all that apply)




A. Requiring financial institutions to have more stable funding


B. Raising capital requirements in good times and lowering them in bad times


C. Establishing new rules on the use of credit ratings


D. Ensuring that the final documentation for Basel 3 is complex and as detailed as possible


E. Allocating assets and off-balance sheets activities into four main categories

Requiring financial institutions to have more stable funding




Raising capital requirements in good times and lowering them in bad times




Establishing new rules on the use of credit ratings



Bank chartering reduces adverse selection problems by:




A. Conducting regular on-site examinations of the financial institution


B. Assigning a mentor bank to conduct examinations and screen for principal-agent problems


C. Screening proposals for new institutions to prevent undesirable people from running the institution





Screening proposals for new institutions to prevent undesirable people from running the institution

Why has the trend in bank supervision moved away from a focus on capital requirements to a focus on risk management




A. Since capital requirements do not effectively indicate whether banks are taking on too much risk, risk management allows supervision to focus more on risk-taking procedures and thus may prevent insolvency in the future




B. Since financial institutions are required to hold large amounts of equity with capital requirements, they prefer risk management and an alternative to capital requirements, thus providing institutions with more funds to invest

Since capital requirements do not effectively indicate whether banks are taking on too much risk, risk management allows supervision to focus more on risk-taking procedures and thus may prevent insolvency in the future

Do disclosure requirements help limit excessive risk taking by banks




A. Uncertain. It depends on how much information financial institutions are willing to disclose


B. No. Until more regulations occurs, it is unlikely that the quality of information currently available will limit excessive risk taking.


C. Yes. Disclosure requirements better enable depositors to evaluate and monitor financial institutions and thus act as a deterrent to excessive risk taking

Yes. Disclosure requirements better enable depositors to evaluate and monitor financial institutions and thus act as a deterrent to excessive risk taking



Why might more competition in financial markets be bad


A. It would be more difficult for the FDIC to use the purchase and assumption method to handle failed banks


B. More funds would be spent on regulations to monitor financial institutions


C. There would be greater incentive for financial firms to take on greater risk




Would restrictions on competition be better




A. Yes, restrictions may increase the efficiency of banking institutions


B. Yes, restrictions would decrease the incentive for risk by financial markets and therefore increase bank profits


C. No, restrictions would decrease the efficiency of banking institutions

There would be greater incentive for financial firms to take on greater risk




No, restrictions would decrease the efficiency of banking institutions

Why is it a good idea for macroprudential policies to require countercyclical requirements




A. This type of policy allows for the use of the most appropriate accounting system to evaluate bank capital


B. This type of policy increases capital requirements during economic downturns to prevent bank failures


C. This type of policy reduces lending and helps to mitigate credit bubbles during economic booms

This type of policy reduces lending and helps to mitigate credit bubbles during economic booms

how does the process of financial innovation impact the effectiveness of macroprudential regulation?




A. Because financial innovations are constantly changing, they tend to reduce the efficiency of the financial system


B. It may be difficult for regulators to understand how new financial innovations will impact the overall financial system, these innovations may often be mismanages or misunderstood


C. With financial innovation and the new financial instruments created, legislation has increased, which has made financial regulation more difficult.


D. As new financial innovations arise, regulators are better able to understand their impact on the financial system and thus may prevent a future bank crisis

It may be difficult for regulators to understand how new financial innovations will impact the overall financial system, these innovations may often be mismanages or misunderstood

How can S&L crisis be blames on the principal-agent problem




Politicians and regulators, who are known as the_______, have not had the same incentives to minimize costs of deposit insurance as do the taxpayers, who are known as the ______

Agents and Principals

As a result, politicians and regulators _______, thereby increasings the cost of the S&L bailout




A. Relaxed capital standards, added restrictions on holdings of risky assets, and engaged in regulatory forbearance




B. Relaxed capital standards, removed restrictions on holdings of risky assets, and engaged in regulatory forbearance




C. Tightened capital standards, removed restrictions on holdings of risky assets, and engaged in regulatory forbearance

Relaxed capital standards, removed restrictions on holdings of risky assets, and engaged in regulatory forbearance

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




A. Following a decrease required in federal deposit insurance from o$100,000 to $40,000




B. As interest rates were sharply decreased to bring down inflation




C. As a part of the financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widenings the scope for risk taking

As a part of the financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widenings the scope for risk taking

The Depository institutions Deregulation and Monetary Control Act of 1980:




A. Restricted the use of ATMs nationwide


B. Imposed usury ceilings on consumer loans


C. Led to the creating of NOW accounts nationwide

Led to the creating of NOW accounts nationwide

In order to halt the decline in the number of savings and loans and mutual savings banks, the Garn-St. Germain Act of 1982 allowed:




A. MMMFs


B. MMDAs


C. NOW accounts


D. Bank holding companies (BHCs)



Money market deposit accounts (MMDAs)

Identify an important factor that led to the banking crises in Latin America




A. High inflation that occurred in the 1980s


B. Sluggish economic growth that occurred in the 1980s


C. Financial liberalization that occurred in the 1980s


D. A decline in real interest rates that occurred in the 1980s

Financial liberalization that occurred in the 1980s

The Argentine banking crisis of 2001 resulted from banks in that nation being required to:




A. Make risky real estate loans


B. Make loans to only state-owned businesses


C. Purchase large amounts of government debt

Purchase large amounts of government debt

Identify a common feature between the American banking system in the 1980s and the Japanese banking system in the 1990s




A. Policy renewal


B. Regulatory Ignorance


C. Regulatory forbearance

Regulatory forbearance

What does the cross-sectional evidence from banking crises in several countries indicate




A. Deregulation and poor regulatory supervision raise moral hazard incentives


B. Regulatory forbearance never leads to problems


C. Deposit insurance is to blame in each country



Deregulation and poor regulatory supervision raise moral hazard incentives


Why were consumer protection provisions included in the Dodd-Frank bill, a bill designed to strengthen the financial system




A. By limiting banks' proprietary trading, it will protect consumer interest


B. Consumer protection provisions will simplify the loan process for consumers


C. Consumer protection will avert future financial problems in the housing market

Consumer protection will avert future financial problems in the housing market

Why is it important for the U.S. government to have resolution authority




A. Resolution authority allows the government to quickly takeover a failing firm


B. Resolution authority gives the government the authority to increase the level of deposit insurance if necessary


C. Resolution authority solves asymmetric information problems and thus prevents a contagion effect

Resolution authority allows the government to quickly takeover a failing firm

What are the five areas included in the Dodd-Frank Act of 2010?




A. Capital requirements, resolution authority, compensation, credit-rating agencies, and GSEs


B. Consumer protection, capital requirements, GSEs, credit rating agencies, and derivatives


C. Consumer protection, resolution authority, systemic risk regulation, Volcker Rule, and Derivatives

Consumer protection, resolution authority, systemic risk regulation, Volcker Rule, and Derivatives

Which of the following is a correct statement about the Dodd-Frank Act of 2010?




A. This legislation requires that lenders extend credit to homeowners facing foreclosure


B. This legislation permanently increases the level of federal deposit insurance to $500,000


C. The Dodd-Frank Act created a new independent agency-the Consumer Financial protection Bureau- that is funded and housed within the Federal Reserve

The Dodd-Frank Act created a new independent agency-the Consumer Financial protection Bureau- that is funded and housed within the Federal Reserve

Why does the existence of deposit insurance increase the likelihood that depositors will need deposit protection




A. Insured banks tend to be too conservative, reducing the profitability of the bank.


B. With increased deposit protection, depositors are likely to withdraw large amounts of funds from their accounts


C. Insured banks tend to pursue greater risks than they otherwise would

Insured banks tend to pursue greater risks than they otherwise would

The Dodd-Frank Act of 2010 is the most comprehensive




A. Tax reform legislation since the Great Depression


B. Tax reform legislation since the Civil War


C. Financial reform legislation since the Great Depression


D. Financial reform legislation since the Civil War

Financial reform legislation since the Great Depression

Future regulation related to the Dodd-Frank Act of 2010 need to include:




A. Capital requirements, GSEs, Compensation, Credit-rating agencies, and systemic risk-regulation


B. Capital requirements, consumer protection, compensation, credit rating agencies, and systemic risk regulation


C. Capital requirements, compensations, GSEs, credit-rating agencies, and the dangers of overregulation.

Capital requirements, compensations, GSEs, credit-rating agencies, and the dangers of overregulation.

The analysis of the political economy of the savings and loan crisis provides an understanding of:




A. Why thrift regulators willingly accommodated pressures placed upon them by members of Congress


B. Why politicians listened so closely to the taxpayers they represented


C. Why thrift regulators were so quick to inform Congress of the problems that existed in the thrift industry

Why thrift regulators willingly accommodated pressures placed upon them by members of Congress

What does the cross-sectional evidence from banking crisis in several countries indicate?




A. Regulatory forbearance never lead to problems


B. Deregulation and poor regulatory supervision raise moral hazard incentives


C. A government safety net for depositors need not increase moral hazard


D. Deposit insurance is to blame in each country





Deregulation and poor regulatory supervision raise moral hazard incentives

The Federal Deposit Insurance Corporation Improvement Act of 1991




Required FDIC to establish risk-based deposit insurance premiums



Required FDIC to establish risk-based deposit insurance premiums

Do you think it is a good idea for Universal Bank to hold stock, corporate bonds, and commodities as assets




A. Yes, as these types of assets surely provide the bank with extra profit


B. No, as these types of assets are relatively high risk, and there is a threat of insolvency




What do your previous answers tell you about the tradeoffs between the accounting systems?




A. Historical-costs accounting often does not provide and accurate picture of a firm's capital position.


B. The historical-cost system provides an accurate picture of a firms capital position


C. Market-to-market rules increase the value of collateral in downturns


D. Mark-to-market rules generally provide a more accurate picture of a bank's capital position

Historical-costs accounting often does not provide and accurate picture of a firm's capital position




Mark-to-market rules generally provide a more accurate picture of a bank's capital position

Which of the following is not a difficulty in the regulation and supervision of banks?




A. Financial institution are not required to follow the rules


B. There can be political pressure to ease the rules


C. Financial institutions may have strong incentive to avoid existing regulations



Financial institution are not required to follow the rules

Give one example each of moral hazard and adverse selection in private insurance arrangements




A. An insurance company that sells a policy with inflated premiums is an example of adverse selection, while an insurance company intentionally selects high-risk clients is an example of moral hazard


B. Leaving you car unlocked with the keys in it is an example of moral hazard, while person with poor health seeking health insurance is an example of adverse selection


C. Leaving your car unlocked with the keys in it is an example of adverse selection, while a person with poor health seeking health insurance is an example of moral hazard.



Leaving you car unlocked with the keys in it is an example of moral hazard, while person with poor health seeking health insurance is an example of adverse selection

Deposit insurance has not worked well in countries with




A. A tradition of the rule of law


B. Few opportunities for corruption


C. A weak institutional environment


D. Strong supervision and regulation

A weak institutional environment

Moral hazard is an important concern of insurance arrangements because the existence of insurance




A. Provides increased incentives for risk taking


B. Is a hindrance to efficient risk taking


C. Creates an adverse selection problem but no moral hazard problem

Provides increased incentives for risk taking

Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government ________.




A. Forbearance


B. Regulation


C. Recall


D. Ownership

Regulation

If the FDIC decided that a bank is too big to fail, it will use the _____ method, effectively ensuring that ______ depositors will suffer losses.




A. Purchase and assumption; no


B. Purchase and assumption; large


C. Payoff; large


D. Payoff; no

Purchase and assumption; no

A well-capitalized financial institution has _____ to lose if it fails and thus is ______ likely to pursue risky activities




A. more; less


B. less; less


C. more; more


D. less; more

more; less

The FDIC must take steps to close down banks whose equity capital is less than ______ of assets




A. 1%


B. 2%


C. 3%


D. 2%

2%

The Basel Accor requires banks to hold as capital an amount that is at least _______ of their risk-weighted assets




A. 10%


B. 8%


C. 5%


D. 3%



8%

Banks engage in regulatory arbitrage by




A. Keeping low-risk assets on their books while removing high-assets with the same capital requirement


B. Keeping high-risk assets on their books while removing low-assets with the same capital requirement


C. Hiding risky assets from regulators

Keeping high-risk assets on their books while removing low-assets with the same capital requirement

The federal agencies that examine banks include




A. The US Treasury


B. The SEC


C. The Federal Reserve System


D. The Internal Revenue Service

The Federal Reserve System

Competition between banks




A. Encourages greater risk taking


B. Increases bank profitability


C. Eliminates the need for government regulation



Encourages greater risk taking

The S&L crisis can be analyzed as a principal-agent problem.. The principals in this case, the _____, did not have the same incentive to minimize cost to the economy as the agent, the ______.




A. Taxpayers; bank managers


B. Taxpayers; politicians/regulators


C. Bank managers; politicians/regulators



Taxpayers; politicians/regulators

The fact that hundreds of S&Ls were not examined even once in the period of January 1984 through June 1986 can be explained by:




A. The reluctance of regulators to find the specific problem thrifts that they knew existed


B. The unwillingness of Congress to listen to campaign contributors


C. The unwillingness of Congress to allocate the necessary funds to thrift regulators

The unwillingness of Congress to allocate the necessary funds to thrift regulators

Which of the following is a main provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989?




A. The establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts


B. Reducing the regulatory responsibilities of the FDIC


C. Directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance


D. Encouraging the FDIC to take prompt corrective action

The establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts

Once motive behind the development of the current regulatory system has been the desire to:




A. Ensure a sounds banking system


B. Prevent monopolistic practices


C. Foster highly competitive banking system

Ensure a sounds banking system

The Federal Deposit Insurance Corporation Improvement Act of 1991:




A. Required the FDIC to establish risk-based deposit insurance premiums


B. Expanded the FDIC's ability to use the "too-big-to-fail" policy


C. Reduced the FDIC's ability to borrow from the Treasury

Required the FDIC to establish risk-based deposit insurance premiums

Moral hazard problems increased in prominence in the 1980's




A. 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


B. As interest rates were sharply decreased to bring down inflation


C. Following a decrease in federal deposit insurance from $100,000-$40,000

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

Identify an important factor that led to the banking crises in Latin America




A. Sluggish economic growth that occurred int the 1980s


B. High inflation that occurred in the 1980s


C. Financial liberalization that occurred in the 1980s


D. A decline in real interest rates that occurred in 1980s

Financial liberalization that occurred in the 1980s

The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to




A. $40,000


B. $200,000


C. $100,000


D. $250,000

$250,000

Higher capital requirements will reduce the problems incurred when troubled _______ which had been off-balance sheet activities come back on the balance sheet.




A. Federal Funds


B. Eurodollars


C. Structured investment vehicles (SIVs)


D. Negotiable CDs

Structured investment vehicles (SIVs)