Econ 3229

The members of Federal Reserve district bank board of directors who represent public interest are known as

Class C directors

33. If we assume a ten percent required reserve rate, and banks not holding any excess reserves and no change in currency holdings, an open market sale of $5 million of U.S. Treasury securities by the Fed, will result in deposits:

Decreasing by $50 Million

2. The fact that a financial intermediary can hire a lawyer to write one contract that works for many customers is an example of:

Economies of scale

24. Exchange-rate stability is likely to be a more important goal for the central banks of:

Emerging market economies

Main parts of Fed

Fed reserve banks, member commercial banks, board of governors, Fed open market committee

13. The Federal Deposit Insurance Corporation (FDIC) was created as part of the

Glass-Steagall Act

25. General agreement among economists finds that they believe monetary policy is more effective when it is formed:

Independently of political pressure

Bank Liabilities: expense generation

11% checkable deposits, 58% non transaction deposits, 20% borrowings

Bank Assets: revenue generations

19% cash, 20% reserves, 55% loans

Bank Management: capital adequacy management

3 reasons: cusion against bank failure, determines bank profitability, to comply with bank capital requirements, provides insurance against insolvency, loan loss reserves

Length of term for chairman of the board of govenors

4 years

If 1 year interest rates for the next 3 years are expected to be 4, 2, 3 percent and the 3 year term premium is 1%, than the 3 year bond rate will be

4%

If interest rates for 1 year, 2 year and 3 year bonds are 1.25,1.5 and 3 percent, what is expected interest rate on 1 year bond 2 years from now according to Expectations Theory?

6%

If a bank has a capital to asset ratio of 0.16 and return on assets of 1%, what is the return on equity

6.25%

Board of governors

7, appointed by pres, 14 yr term, chair 4 yr renewable

If int rate is 7% on euro-denominated assets and 5% on dollar dominated assets, and fi the dollar is expected to apprciate at a 4% rate, the Francois the Frenchman the expected rate of return on dollar dominated assets is

9%

14. One of the results of the Reigel-Neal Interstate Banking and Branching Efficiency Act of 1994 was:

A reversal of the branching restrictions of the McFadden Act

23. Keeping interest rates stable is:

A secondary goal for central banks

35. When the Fed makes a discount loan, the impact on the Banking System's balance sheet will reflect:

An increase in assets and liabilities

ML was bought by

Bank of America

1. If financial intermediaries did not have the ability to pool the resources of small savers:

Borrowers needing large amounts of money would find it more costly to obtain the funds

8. The primary difference in certificates of deposit (CDs) that are equal to or less than $100,000 and those over $100,000 (other than the amount) is:

CDs greater than $100,000 are negotiable and therefore can be bought and sold

Credit Default Swaps compared with ordinary insurance

CDs traded over the counter, seller not required to hold reserves to cover losses, holder of CDs may not actually be same entity that owns insured asset, Goldman Sachs sold lots of subprime MBS to investors, at same time, bought CDs on those MBS, conflicts of interest

Functions of federal reserve bank

Check clearing, manage currency, discount lending, regulation and supervision, economic research

26. Member banks of the Federal Reserve System include:

Nationally chartered banks and state chartered banks that decide to join

Arguments against Fed's independence

Not democratic, not accountable and transparent, congress gave broad goals to fed but they made their own

20. Considering the methods available to the FDIC for dealing with a failed bank, the depositors of the failed bank should:

Prefer the purchase and assumption method since the deposits over $250,000 will also be protected

15. The Gramm-Leach-Bliley Act:

Repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms

Dodd-Frank Act of 2010

SIFIs must submit living wills, volker rule, large hedge funds are required to register with SEC retaining at least 5% credit risk for firms that sell MBS

Fed funds rate

ST int rt for interbank lending

Banks transform ______ to ______ still giving us access to liquidity

ST liab into LT assets

36. The Fed sells German bonds to commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction?

The Fed's assets and liabilities both decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes

21. Monetary policy in the United States is under the control of:

The Federal Reserve

12. The dual banking system in the U.S. today refers to:

The ability of banks to be either federally or state chartered

19. One reason customers do not care about the quality of their bank's assets is:

With deposit insurance, there isn't any real reason to care; their deposits are protected even if the bank fails

___ in foreign interest rate causes demand for domestic assets to shift to the right and the domestic currency to ____

a decrease; appreciate

moral hazard

after transaction

Foreign exchange market interventions will always

alter a central bank's holdings of international reserves

A sale of foreign assets by a central bank has the same effect on the monetary base

an open market sale of gvt bonds

Expectation theory:

assumes investors are pretty certain about future and don't have preference over particular maturity

Interest on LT bonds represents ____ of int on ST bonds

average

equity multiplier

bank assets/bank capital

Repo financing

bank borrows $1M and pledges treasury security as collateral; in a month it repays $1M and gets treasuries back essentially repurchasing them

Class A

bankers

7. Checkable deposits have decreased since the 1970's mainly because:

These deposit accounts offer little or no interest so depositors find them to be expensive

Moral hazard in banking

banks monitor borrowers and enforce restrictive conenants

Financial intermediaries adverse selection

banks screen applicants, banks have exclusive information, investment banks research and certify corps that issues stocks and bonds

17. The government's role of lender of last resort is directed to:

banks that experience sudden deposit outflows

Adverse selection

before transaction

According to the liquidity premium theory, a yield curve that is flat means

bond purchasers expect interest rates to fall in the future

altering liab

borrow from other banks and pay fed funds rate, borrow from fed and pay discount rate secured, issue large CDs and borrow from anyone just like selling a bond, most preferred method: borrow on fed funds market

5. The moral hazard that can result from debt financing is mainly due to the:

borrower taking greater risk in hopes of obtaining a larger return

Moral Hazard insurance example

buyers change behavior

principal - agent problem

conflict of interest between shareholders and management, can't tell if management is doing everything possible to make profits

9. Everything else equal, if the ratio of bank assets to bank capital decreases, the bank's return on equity should:

decrease

A decrease in the expected future domestic exchange rate causes the demand for domestic assets to ____ and the domestic currency to ____

decrease; depreciate

Fed reserve releases policy statement today which leads people to believe Fed will be enacting expansionary monetary policy in the near future. The release of this statement would immediately cause demand for US assets to _____ and the US dollar to _____

decrease; depreciate

Suppose Fed enacts expansionary policy. This will cause demand for US assets to _____ and US dollar to _____

decrease; depreciate

When a bank takes savings from many small savers and lends it to many borrowers, the bank:

decreases the risk to savers through diversification

Under a fixed exchange rate regime, a country that depletes its international reserves in an attempt to keep its currency from _____ will be forced to ____ its currency

depreciating; devalue

Adverse selection solution for investments

disclosure of information, collateral and net worth

Bank loans from the Fed are called ____ and represent ____ of funds

discount loans; source

Moral hazard in debt financing

doesn't exist

As the relative expected return on dollar assets increases, foreigners will want to hold more ______ assets and less ______ assets

dollar; foreign

Inverted yield curve shape

downward

Green book

economic forecast, prepared by board, classified for 5 years

mutual funds

entities that pool funds from large number of small savers and take advantage of economies of scale

Fed Reserve Act 1913

established central bank, fear of centralized power, divided among states,

Because sterilized interventions mean offsetting open market operations, there is no impact on the monetary base and the money supply and therefore a sterilizied intervention

has no effect on exchange rate

Interest rates on long term bonds are usually ______ than interest rates on short term bonds

higher

An unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency will result in

higher domestic interest rates

When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ____ demand for dollar assets and correspondingly ___ demand for foreign assets:

higher; lower

08 triggers:

housing market bubble burst which increased defaults on loans and exposure to securitized mortgages, credit boom ad principal agent problem in mortgage orientation and credit rating, subprime borrowers, S&P paid for ratings

18. One of the unique problems that banks face is:

illiquid assets to meet liquid liabilities

Today's main goal of Fed Reserve

low and stable inflation, high and sustainable economic growth

FOMC

meet 8 times a year, 12 voting members,

each district fed res bank is owned by

member commercial bank

Arguments for Fed's independence

monetary policy us too important for politicians, politicians usually take short view, political business cycles

principal - agent problem solution

monitor and partial ownership

Fed and FDIC rescue of insolvent banks promotes

moral hazard

Less bank capital = ____ profitable

more

Shadow Banks

mutual funds, hedge funds, investment banks; investors can sell shares at any time, investors can also refuse to provide short term lending

Return on equity

net profit after tax/bank capital

Return on assets

net profit after taxes/bank assets

28. Buying and selling U.S. Treasury Securities for the Fed's own portfolio is called:

open market operations

Volker rule

prevents banks from using client funds to trade derivatives

22. The primary objective of most central banks in industrialized economies is:

price stability

Under a fixed exchange rate regime, if a central bank must intervene to purchase the domestic currency by selling foreign assets, then, like an open market sale, this action ______ the monetary base and the money supply, causing the interest rate on domestic assets to _____

reduces; rise

Original intent of Fed Reserve central banks

regulate currency and act as lender of last resort

Functions of governors

res requirement, discount rates, interest on reserves; regulation of bank holding companies and bank mergers; approves district bank budgets and president salaries; chair advises pres and testifies in congress, invokes emergency powers

An inc in domestic int rate causes the demand for domestic assets to shift to the ____ and the domestic currency to _____

right; appreciate

Interest rates on bonds of all maturities tend to

rise and fall together

If the Fed wants to inc the value of a dollar, it will

sell foreign securities and buy dollars in international currency markets

Credit Default Swaps

seller of CD promises to pay the amt to the buyer of CDs in case underlying security defaults

In 08 key repo lenders and commercial paper buyers refused to rollover loans to investment banks which caused

several banks to fail

When yield curves are downward sloping

short-term interest rates are above long-term interest rates

Adverse selection insurance example

sick people buy insurance

bank liab

sources of funds

Name for when bank promises to lend funds to a borrower to pay off its commercial paper

standby letter of credit

Upward sloping yield curve means ST int rts are expected to ______ in the future

stay unchanged

Beige book

summary within districts, public

When $1M is deposited, the required reserve is 20% and the bank chooses nto to make any loans but to hold excess reserves instead, then, in the bank's final balance sheet

the asset increases by $1M

10. A bank's Return on Assets (ROA) is calculated by dividing:

the bank's net profits after taxes by its assets

30. Which of the books used at the FOMC meetings contains a discussion of financial markets and current policy options?

the blue book

When the Fed sells foreign assets and buy domestic assets at the same time

the composition of its assets changes, but its liabilties are unaffected

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is

the expected return on these assets relative to one another

34. Harry gets $1000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact on the monetary base of Harry's deposit?

the monetary base did not change

If the Fed sterilizes the purchase of foreign assets

the monetary base is left unchanged

4. One reason lenders usually require a lot of information from loan applicants is to avoid:

the problem of adverse selection

The term structure of interest rates

the relationship among interest rates on bonds with different maturities

"break the buck"

the value of its share declines below $1

Expectations theory can be used to read predictions from

the yield curve

27. The number of regional Federal Reserve Banks is:

twelve

Under a fixed exchange rate regime, if the domestic currency is initially ____, that is, ______ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets

undervalued; above

Because of inc in liquidity premium, yield curve is usually _____ sloping unless ST int rt are expected to fall in near future

upward

Bank asset

use of funds

Yields on short term bonds are more ___ than LT interest rates

volatile

Bank Run

fragility of commercial banking system, maturity mismatch, liquidity risk can lead to bank runs, bank panics can follow through contagion

financial transactions are full of

frictions

Legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the

glass steagall act

The national economic forecast for the next 2 years prepared by the staff of Board of Governors is

green book

When a central bank buys foreign assets

its holdings of foreign assets and the monetary base rise by the amount of the purchase

strategies for management liquidity risk

keeping enough excess reserves, altering assets, altering liab

Central Bank Roles

Gvt's bank: acts as bank for treasury, conducts monetary policy, oversees and regulates banks Banker's Bank: provides liquidity, operates payments system, every bank keeps reserve account by Fed

08 Gvt intervention

failed to see early signs of trouble, acted decisively when crisis peaked, fed started to cut fed funds rate in 07, created various facilities for securities firms in march 08, arranged assistance package for BS and ML, GS and MS became traditional bank holding companies, LB was let go, treasury nationalized Fannie Mac and Freddie Mae, bought commercial paper through toxic asset relief program

All commercial banks are obligated to keep required reserves at

fed

Changes under Dodd Frank

fed is part of financial stability oversight council, gvt accountability office audits fed's lending, fed's ability to lend to any institution under extreme circumstances is now limited, GAO can also audit for potential conflicts of interest, how directors of district banks are appointed

29. The interest rate that the FOMC currently chooses to control is:

federal funds rate

11. In recent years the U.S. banking structure has changed in such a way that there are now:

fewer banks but more banks with branches

Causes of financial crisis

financial innovation and deregulation (Glass Steagall, Gramm Leach, Citicorp and Travelers), credit booms and busts, asset bubbles and bursts

The main argument against Fed independence

in a democracy elected officilas should make public policy

If a central bank makes an unsterilized purchase for foreign assets, then the domestic monetary base will _____ and the domestic currency will _____

increase; depreciate

Class B

industry

When ST int rts are slightly higher than LT int rts it indicates that

investors expect monetary easing in the future