module 10 (chapter 14)

On November 20, 1985, the Bank of New York needed to use the lender of last resort function due to:

A computer error that made it impossible for the bank to keep track of its treasury bond trades

A bank supervisor examines the bank's portfolio of loans to see if the loans are being repaid in a timely manner. In terms of the acronym CAMELS, this would be part of rating the bank's:

Asset quality

Explain how a bank run can turn into a bank panic

Bank runs occur when people fear that their bank has become insolvent. Depositors rush to their bank to withdraw their funds. Depositors at other banks become concerned about their own bank's solvency, so they also hurry to withdraw their funds. Bank runs can turn into system-wide bank panics because customers have a difficult time distinguishing insolvent banks from solvent ones.

The Acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes the following

Capital adequacy, asset Quality, management, Earnings, liquidity, and sensitivity (not losses)

Which of the following is not an important addition made to the Basel Accords by Basel III in 2010?

It ends the too-big-to-fail problem

During a bank crisis:

It is important for regulators to be able to distinguish insolvent from illiquid banks

The best way for a government to stop the failure of one bank from turning into a bank panic is to

Make sure solvent institutions can meet the withdrawal demands of depositors

Governments supervise banks mainly to do each of the following

Reduce the potential cost to taxpayers of bank failures Be sure the banks are following the regulations set out by banking laws Reduce the moral hazard risk NOT(Eliminate all risk faced by investors)

Contagion is

The failure of one bank spreading to other banks through depositors withdrawing of funds

Which statement is most correct?

The higher the deposit insurance limit the greater the risk of moral hazard

How might the existence of the goverment safety net lead to increased concentration in the banking industry?

The safety net creates moral hazard problems for big banks by encouraging extremely risky behavior. This puts small banks at a competitve disadvantage, driving them out of the market and leading to an increase in concentration.

One of the unique problems that banks face is

They hold illiquid assets to meet liquid liabilities

Which of the following are goals of the Dodd-Frank Act of 2010

To anticipate and prevent financial crises by limiting systemic risk To end "too big to fail" To reduce moral hazard NOT (to promote competition)

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

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

The federal government is concerned about the health of the banking system for many reasons, the most important of which may be:

banks are of great importance in enabling the economy to operate efficiently.

Prior to the financial crisis of 2007-2009 banks did all to bulk up their profit

bought or sponsored hedge funds Traded securities for customers Purchased equities for their own account (not) colluded to fix benchmark interest rates

When the federal reserve was unable to stem the bank panics of the 1930's, congress responded by

creating the FDIC and offering deposit insurance

Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because:

depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have sufficient liquid assets on hand

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

has to sell the bank at a negative price since the bank is insolvent

Empirical evidence points to the fact that financial crises

have a negative impact on economic growth for years

When healthy banks fail due to widespread bank panics, those who are likely to be hurt are

households and small businesses

The governments too-big-to-fail policy applies to:

large banks whose failure would start a widespread panic in the financial system

A bank run involves

large numbers of depositors withdrawing their funds during a short time span

An economic rationale for government protection of small investors is that:

many small investors cannot adequately judge the soundness of their bank

It is difficult for depositors to know the truth health of banks because

most of the information on bank loans is private and based on sophisticated models

Savings banks and savings and loans are regulated by a combination of agencies which includes the

office of the comptroller of the currency

A long-standing goal of financial regulators has been to

prevent banks form growing too big and powerful

The Creation of the federal Reserve in 1913

provided the opportunity to be lender of last resort but not the guarantee that it would be used

This statement is correct about deposit insurance limit

the higher the deposit insurance limit the greater the risk of moral hazard

Recession can cause widespread bank crises for all of the following reasons

there is less business investment as banks make fewer loans borrowers default rates increase The negative effect on banks' balance sheets (NOT) Bank Capital increases

The existence of a lender of last resort creates moral hazard for bank managers because

they have an incentive to take to much risk in their operations

The reasons for the government to get involved in the financial system include each of the following

to protect investors, to ensure the stability of the financial system, to protect bank customers from monopolistic exploitation (not to protect the banks monopoly position)