Money and Banking Chapter 14 Complete
13) The reason that a run on a single bank can turn into a bank panic that threatens the entire financial system is A) information asymmetries. B) moral hazard. C) the lack of regulation. D) the increased reliance on web-based funds transfers.
A
20) The reasons for the government to get involved in the financial system include each of the following, except which one? A) preserve a bank's monopoly position B) protect investors C) ensure stability of the financial system D) protect bank customers from monopolistic exploitation
A
28) As of January, 2019, the interbank loans that appear on banks' balance sheets represent about what proportion of bank capital? A) 33 percent B) 10 percent C) 3 percent D) less than 1 percent
A
29) The best way for a government to stop the failure of one bank from turning into a bank panic is to A) make sure solvent institutions can meet the withdrawal demands of depositors. B) declare a bank holiday until solvent banks can acquire adequate liquidity. C) limit the withdrawals of depositors. D) provide zero-interest rate loans to all banks regardless of net worth.
A
31) The creation of the Federal Reserve in 1913 A) provided the opportunity for lender of last resort but not the guarantee that it would be used. B) guaranteed the Federal Reserve would always act as lender of last resort. C) eliminated bank panics in the United States. D) was in response to the Great Depression in the United States.
A
36) A moral hazard situation arises in the lender of last resort function because a central bank A) finds it difficult to distinguish illiquid from insolvent banks. B) usually will only make a loan to a bank after it becomes insolvent. C) usually undervalues the assets of a bank in a crisis. D) is the first place a bank facing a crisis will turn.
A
38) The existence of a lender of last resort creates moral hazard for bank managers because A) they have an incentive to take too much risk in their operations. B) officials are likely to undervalue the bank's portfolio of assets. C) they are less likely to apply for a direct loan from the central bank. D) banks seek loans from the central bank only after exploring other options.
A
44) Under the purchase-and-assumption method of dealing with a failed bank, the FDIC 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.
A
49) As a result of government-provided deposit insurance, the ratio of assets to capital for commercial banks since the 1920s has A) just about doubled. B) almost tripled. C) not changed. D) decreased.
A
50) The moral hazard problem caused by government safety nets 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.
A
53) If the government did not offer the too-big-to-fail safety net, then A) large banks would be more disciplined by the potential loss of large corporate accounts. B) the moral hazard problem of insuring large banks would increase. C) the moral hazard problem of insuring large banks would not be affected. D) the FDIC deposit insurance limits would have to be raised.
A
54) Governments employ three strategies to contain the risks created by government safety nets. These include each of the following, except which one? A) government taxation B) government regulation C) government supervision D) formal bank examination
A
57) Which one of the following is not involved in regulating savings banks and savings and loans? A) the Federal Reserve System B) the Comptroller of the Currency C) the Federal Deposit Insurance Corporation D) state authorities
A
60) Credit unions are regulated by a combination of agencies, which includes A) state authorities. B) the Federal Reserve. C) the Federal Deposit Insurance Corporation. D) the Office of the Comptroller of the Currency.
A
67) 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 this happens and the merged bank fails, you would receive A) $250,000. B) $60,000. C) $260,000. D) $200,000.
A
68) A long-standing goal of financial regulators has been to A) prevent banks from growing too big and powerful. B) minimize the competition that banks face. C) encourage banks to grow as large as possible. D) discourage small rural banks.
A
7) Contagion is the A) failure of one bank spreading to other banks through depositors withdrawing of funds. B) phenomenon that if one bank loan defaults it will cause other bank loans to default. C) rapid contraction of investment spending that occurs when interest rates are increased by the Federal Reserve. D) rapid inflation that results from the printing of money.
A
73) One reason that financial regulations restrict the assets that banks can own is to 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.
A
84) 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 CAMELS criteria, this would be part of rating the bank's A) asset quality. B) losses. C) management. D) earnings.
A
11) When healthy banks fail due to widespread bank panics, those who are likely to be hurt are A) government regulators. B) households and small businesses. C) the FDIC. D) the Federal Reserve.
B
17) The Financial Crisis of 2007-08 occurred in three distinct phases which, in the order of occurrence, are A) a solvency crisis, a liquidity crisis, and government intervention. B) a liquidity crisis, a solvency crisis, and a recapitalization of the system. C) government intervention, a liquidity crisis, and a recapitalization of the system. D) a recapitalization of the system, a solvency crisis, and government intervention.
B
19) Policy responses were critical in arresting the Financial Crisis of 2007-08 and promoting recovery. The responses used include all of the following except which one? A) macro-prudential stress tests B) elimination of interest rate floors C) use of taxpayer funds to recapitalize the financial system D) introduction of unconventional tools such as quantitative easing
B
21) An economic rationale for government protection of small investors, in particular, is that A) large investors can better afford losses. B) often small investors cannot adequately judge the soundness of their bank. C) there is inadequate competition to ensure a bank is operating efficiently. D) banks are often run by unethical managers who might exploit small investors.
B
25) The government provides deposit insurance which protects A) large corporate deposit accounts in excess of the $250,000 deductible. B) depositors for up to $250,000 should a bank fail. C) the deposits of banks in their Federal Reserve accounts. D) the deposits that people have at federally chartered banks.
B
27) One of the unique problems that banks face is that A) they hold liquid assets to meet illiquid liabilities. B) they hold illiquid assets to meet liquid liabilities. C) they hold liquid assets to meet liquid liabilities. D) both their assets and their liabilities are illiquid.
B
3) Banks serve essential functions in an economy, but their fragility arises from the fact that A) the government controls banks. B) banks provide liquidity to depositors. C) banks must screen and monitor borrowers. D) only healthy banks are immune to depositors' loss of confidence.
B
34) One lesson learned from the bank panics of the early 1930s is that A) the lender of last resort function almost guarantees that bank panics are a thing of the past. B) the mere existence of a lender of last resort will not keep the financial system from collapsing. C) only the U.S. Treasury can be a true lender of last resort. D) the financial system will collapse without a lender of last resort.
B
35) During a bank crisis, A) officials at the Federal Reserve find it easy to sort out solvent from insolvent banks. B) it is important for regulators to be able to distinguish insolvent from illiquid banks. C) it is easy to determine the market prices of bank's assets. D) a bank will go to the central bank for a loan before going to other banks.
B
37) If your stockbroker gives you bad advice and you lose your investment, A) the government will reimburse you just as it would reimburse depositors if a bank fails. B) the government will not reimburse you for the loss because you are not protected from bad advice by your stockbroker. C) you can recoup your losses through FDIC insurance since these losses would be covered. D) your investment would only be covered by FDIC insurance if the stockbroker was employed by a bank.
B
39) During the financial crisis of 2007-2009 in the United States it was revealed that the function of a lender of last resort had not kept pace with the evolving financial system because A) financial intermediaries had grown sufficiently large so as not to need a lender of last resort. B) shadow banks lacked access to the financial resources available through the lender of last resort. C) banks were sufficiently linked to one another that the need for a lender of last resort had diminished. D) banks had become sufficiently diversified so as to be able to provide for their own liquidity.
B
4) In principle, banks are like any other business such that new ones could open up and others close every year. It is problematic, however, if banks fail at the same rate as, say, restaurants because banks A) are too big to fail. B) provide access to the payments system. C) generate much of the tax revenue in the community. D) are typically run by prominent community members.
B
45) Do depositors of a failed bank generally prefer that the FDIC use the "payoff method" or the "purchase-and-assumption method" for dealing with the failed bank? Depositors would A) be indifferent between the two since the impacts on depositors are the same in both methods. B) prefer the purchase and assumption method since deposits over $250,000 will also be protected. C) prefer the payoff method since they will have access to their funds earlier. D) prefer the payoff method since it is typically seamless for the depositor.
B
47) Which one of the following incentives promotes more risk of moral hazard? A) eliminating protection of financial institutions that are "too-big-to-fail" B) raising the deposit insurance limit C) allowing smaller financial institutions to fail D) increasing restrictions on lender-of-last-resort loans.
B
51) The government's too-big-to-fail policy applies to A) certain highly populated states where a bank run impacts a large percent of the total population. B) large banks whose failure would start a widespread panic in the financial system. C) large corporate payroll accounts held by some banks where many people would lose their income. D) banks that have branches in more than two states.
B
55) The purpose of the government's safety net for banks is to do each of the following, except which one? A) protect the integrity of the financial system B) eliminate all risk that investors face C) stop bank panics D) improve the efficiency of the economy
B
58) Savings banks and savings and loans are regulated by a combination of agencies, which includes the A) Federal Reserve System. B) Office of the Comptroller of the Currency. C) Securities and Exchange Commission. D) Internal Revenue Service.
B
64) You hold an FDIC-insured savings account at your neighborhood bank. Your current balance is $275,000. If the bank fails you will receive A) $275,000. B) $250,000. C) $100,000. D) $125,000.
B
71) Financial regulators A) do everything possible to encourage competition in banking. B) work to prevent monopolies but also work to prevent strong competition in banking. C) discourage competition in banking. D) prefer banks to have monopoly power in their geographic markets.
B
74) Financial regulators set capital requirements for banks. One characteristic about these requirements is that A) every bank will have to hold the same level of capital. B) the riskier the asset holdings of a bank, the more capital it will be required to have. C) the more branches a bank has, the more capital it must have. D) the amount of capital required is inversely related to the amount of assets the bank owns.
B
75) The original Basel Accord was A) the basic set of guidelines the Federal Reserve applies in regulating domestic banks. B) a set of guidelines for basic capital requirements for internationally active banks. C) an agreement between state and federal regulators to try to have one standard set of guidelines for all banks. D) a set of guidelines applied only to international banks operating with U.S. boundaries.
B
79) The supervision of banks includes 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.
B
81) One reason a bank's officer may be reluctant to write off a past-due loan is that it will A) increase the bank's liabilities. B) decrease the bank's assets and capital. C) increase the bank's liabilities and assets, requiring more capital to be held. D) make the bank's accounts less transparent.
B
82) The acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes all of the following except which one? A) asset quality B) losses C) management D) earnings
B
90) How was the Dodd-Frank Act of 2010 relatively inefficient? A) It promoted competition among financial institutions that were too big to fail. B) It failed to adopt least-cost mechanisms to make the financial system more resilient. C) It aimed to reduce systemic risk instead of addressing risk in particular areas of the financial system. D) It imposed increased capital requirements to reduce distortions arising from the government safety net and "too-big-to-fail."
B
91) The 2016 elections in the United States A) brought increased political support for Dodd-Frank. B) led to resistance to Dodd-Frank becoming enshrined in law and regulatory changes. C) ushered in practitioners that supported the additional regulations accompanying Dodd-Frank. D) led to more nonbanks being designated as systemically important financial institutions (SIFIs).
B
1) Empirical evidence points to the fact that financial crises A) are newsworthy but have no impact on economic growth. B) in more advanced economies lead to less public debt as a percent of GDP. C) have a negative impact on economic growth for years. D) can have a positive impact on economic growth as weak borrowers are weeded out.
C
12) It is difficult for depositors to know the true health of banks because A) regulations prohibit banks making their financial statements publicly available. B) the financial statements of banks are too difficult for most people to understand. C) most of the information on bank loans is private and based on sophisticated models. D) banking is competitive and financial records of banks are not divulged to prevent competitor banks from having an advantage.
C
14) Bank failures tend to occur most often during periods of 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.
C
16) Which of the following does NOT tend to precede a financial crisis? A) an abrupt downturn in the business cycle B) decreases in liquidity C) a reduction in systemic risk D) too much easy credit
C
18) The first phase of the Financial Crisis of 2007-08 began when A) the Fed provided support to a solvent, but illiquid, nonbank. B) Bear Stearns collapsed due to toxic assets held in hedge funds. C) the French bank BNP Paribas suspended redemptions from three mutual funds invested in U.S. subprime mortgage debt. D) Lehman Brothers failed after holding on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages.
C
22) The government regulates bank mergers, sometimes denying the proposed merger. Often the reason given for the denial is to protect small investors. What are small investors being protected from? A) Larger banks are more likely to take greater risk and may fail. B) In order to pay for the merger, the bank may seek higher returns and put depositors' funds at greater risk. C) Mergers can increase the monopoly power of banks, and the bank may seek to exploit this power by raising prices and earning unwarranted profits. D) Bank runs hurt larger banks more than smaller banks.
C
23) The financial system is inherently more unstable than most other industries due to the fact that A) in banking, customers disappear at a slower rate than in other industries 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 unlike in most other industries. D) there is less competition in banking than in many other industries.
C
30) The need for a lender of last resort was identified as far back as A) the start of the Great Depression in 1929. B) 1913, when the Federal Reserve was created. C) 1873, by British economist Walter Bagehot. D) 1776, by the first U.S. Secretary of the Treasury, Alexander Hamilton.
C
32) If the lender of last resort function of the government is to be effective in working to minimize a crisis, it must be A) reserved only for those banks that are most deserving. B) used on a limited basis. C) credible, with banks knowing they can get loans quickly. D) only available during economic downturns.
C
40) When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by 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.
C
43) Which one of the following best describes the payoff method used by the FDIC to address the insolvency of a bank? The FDIC A) pays the owners of the bank for the losses they would otherwise face. B) pays off all depositors the balances in their accounts so no depositor suffers a loss, though the owners of the bank may suffer losses. C) pays off the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses. D) takes all of the assets of the bank, sells them, pays off the liabilities of the bank in full, and then replenishes their fund with any remaining balance.
C
46) Under the purchase-and-assumption method, the FDIC usually finds it 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.
C
5) Ceteris paribus, which one of the following business practices increases the possibility of a bank run? Banks A) must maintain a positive net worth. B) pay interest on accounts that meet certain requirements. C) promise to satisfy withdrawal requests on a first-come, first-served basis. D) keep cash at the ready in a vault in order to meet depositors' withdrawal requests.
C
52) Implicit government support for "too-big-to-fail" banks A) increases the scrutiny of the bank's risk by large corporate depositors. B) increases the risk that depositors will flee at the first sign of uncertainty. C) reduces the risk faced by depositors with accounts exceeding $250,000. D) reduces the moral hazard problem of insuring large banks.
C
59) Which one of the following regulates commercial banks as well as savings banks and savings and loans? A) the Federal Reserve System B) the Securities and Exchange Commission C) the Office of the Comptroller of the Currency D) the Internal Revenue Service
C
6) What matters most during a bank run is the A) number of loans outstanding. B) solvency of the bank. C) liquidity of the bank. D) size of the bank's assets.
C
62) The fact that banks can be either nationally or state chartered creates A) opportunities to avoid regulation altogether. B) a cooperative regulatory framework. C) regulatory competition. D) redundant regulation by more than one agency.
C
63) One negative consequence of regulatory competition is that A) it is expensive. B) financial institutions are over-regulated at a cost to customers. C) financial institutions often seek out the most lenient regulator. D) it minimizes competition.
C
66) 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 A) $250,000. B) $60,000. C) $260,000. D) $200,000.
C
69) As of 2018, the four largest commercial banks held what share of total deposits at U.S. commercial banks? A) 73 percent. B) 50 percent. C) 36 percent. D) 25 percent.
C
70) Bank mergers require government approval because banking officials want to make sure that the A) merger will create a larger bank. B) merged bank will be a monopoly. C) merged bank will be more profitable. D) merger will not result in regulatory competition.
C
72) Banking regulations prevent banks from A) holding more than 10 percent of their assets in common stock of companies. B) owning corporate jets. C) owning common stocks of corporations. D) building big office buildings.
C
8) What is the difference between solvency and liquidity for a bank? A) Nothing. These are different words for the same concept. B) Solvency is enough to stop a bank run, but liquidity is not. C) A solvent bank has a positive net worth while a bank with liquidity means that the bank has sufficient reserves and immediately marketable assets to meet withdrawal demands. D) Solvency means that the bank has enough cash on hand to meet withdrawal requests while liquidity means that the bank has access to enough cash to meet withdrawal requests within a specified time period.
C
86) In today's world, the goal of financial stability means A) no institution should fail. B) competition should be eliminated. C) preventing large-scale financial catastrophes. D) creating one mega regulatory agency.
C
87) The financial crisis of 2007-2009 has made which one of the following regulatory goals a top priority for government? A) disclosure of accounting information B) enforcement of minimum capital requirements C) avoidance of systemic risk D) promotion of competition
C
89) Which one of the following was not a goal of the Dodd-Frank Act of 2010? A) to anticipate and prevent financial crises by limiting systemic risk B) to end "too big to fail" C) to promote competition D) to reduce moral hazard
C
9) A bank run involves A) illegal activities on the part of the bank's officers. B) a bank being forced into bankruptcy. C) a large number of depositors withdrawing their funds during a short time span. D) a bank's return on assets being below the acceptable level.
C
10) The federal government is concerned about the health of the banking system for many reasons, the most important of which may be that A) banks are where government bonds are traded. B) a significant number of people are employed in the banking industry. C) many people earn the majority of their income from interest on bank deposits. D) banks are of great importance in enabling the economy to operate efficiently.
D
15) Deflation causes financial disruption when A) bank balance sheets swell as more borrowing occurs. B) problems of asymmetric information decrease as borrowers' net worth rises. C) borrowers are attracted to new financing with better terms for business and residential loans. D) borrowers have invested in real assets whose value declines while loan payments stay the same.
D
2) Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because A) customers will not want to obtain loans from this bank. B) equity investors will not be able to sell the bank's stock. C) regulators will scrutinize the bank heavily looking for something wrong. D) depositors will rush to the bank to withdraw their deposits and the bank under normal conditions would not have sufficient liquid assets on hand.
D
24) The government is "lender of last resort" to which one of the following groups? A) large manufacturing firms that employ thousands of people B) depositors—by insuring depositors' balances in banks that fail C) developing countries that are trying to build their financial systems D) banks that experience sudden deposit outflows
D
26) The government's providing of deposit insurance and functioning as the lender of last resort has significantly A) decreased the incentive for bank managers to take on risk. B) increased the amount of regulation of banks required, but has had no effect on bank's incentive to take on risk. C) increased the incentive for banks to take on risk, but has had no effect on the amount of regulation of banks required. D) increased the amount of regulation of banks required and increased the incentive for banks to take on risk.
D
33) The first test of the Federal Reserve as lender of last resort occurred with the A) attack on Pearl Harbor by the Japanese. B) widespread failures of Savings and Loans in the 1980s. C) introduction of flexible exchange rates in the United States in 1971. D) stock market crash in 1929.
D
41) One reason customers do not care about the quality of their bank's assets is that A) most people cannot distinguish an asset from a liability. B) the quality of a bank's assets changes almost daily. C) they assume the bank only has high quality assets. D) there is deposit insurance which protects deposits even if the bank fails.
D
42) On November 20, 1985, the Bank of New York needed to use the lender of last resort function due to A) a run on the bank started by a rumor that the president of the bank embezzled tens of millions of dollars from the bank. B) a computer error caused the bank's records to wipe out the balances of all of its customers. C) a rumor that the bank was about to be taken over by FDIC due to insolvency. D) a computer error that made it impossible for the bank to keep track of its Treasury bond trades.
D
48) Since the 1920s, the ratio of assets to capital has more than doubled for commercial banks. Many economists believe this is the direct result of A) lower quality management in banks. B) the increase in branch banking. C) allowing banks to offer nonbank services. D) government-provided deposit insurance.
D
56) Governments supervise banks mainly to do each of the following, except which one? A) reduce the potential cost to taxpayers of bank failures B) ensure that banks are following the regulations set out by banking laws C) reduce the moral hazard risk D) eliminate all risk faced by depositors and investors.
D
61) Banks can effectively choose their regulators by deciding whether to A) be a private or public corporation. B) align with the U.S. Office of Thrift Supervision. C) purchase FDIC insurance or to forgo the coverage. D) be chartered at the national or state level.
D
65) You have two savings accounts at an FDIC-insured bank. You have $225,000 in one account and $40,000 in the other. If the bank fails, you will receive A) $225,000. B) $40,000. C) $115,000. D) $250,000.
D
76) Which one of the following is not a positive effect of the Basel Accord? 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.
D
77) Which one of the following is not a pillar of the latest Basel Accord? A) a revised set of minimum capital requirements B) it includes liquidity requirements in addition to capital requirements C) it supplements capital requirements based on risk-weighted assets with restrictions on leverage D) uniform international laws for bank regulation
D
78) Banks are required to disclose certain information for all of the following reasons except which one? A) to enable regulators to more easily assess the financial condition of banks B) to allow financial market participants to penalize banks that carry additional risk C) to allow customers to more easily compare prices for services offered by banks D) to create uniform prices for standard bank services
D
80) Prior to the financial crisis of 2007-2009 banks did all of the following except which one to bulk up their profit? A) bought or sponsored hedge funds B) traded securities for customers C) purchased equities for their own account D) colluded to fix benchmark interest rates
D
83) The CAMELS ratings are A) made public monthly to the financial markets so people can judge the relative quality of banks. B) published once a quarter in banking journals issued by the Federal Reserve. C) included in the annual report of publicly owned banks. D) not made public.
D
85) Regulators and supervisors of banks are challenged by all of the following except which one? A) globalization of financial services B) the use of new financial instruments that shift risk without shifting ownership C) technological innovation D) reinforcement by Congress of functional and geographic barriers in banking
D
88) Which one of the following is not an important addition made to the Basel Accords by Basel III in 2010? A) It supplements capital requirements based on risk-weighted assets with restrictions on leverage. B) It introduces three buffers over and above capital requirements itself. C) It adds a liquidity requirement that compels banks to hold a quantity of high-quality liquid assets. D) It ends the too-big-to-fail problem.
D
