Assignment 12

With a 20% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A. $80. B. $100. C. $90. D. $110.

A. $80.

The Federal Board of Governors has_________ members. A. 7 B. 12 C. 5 D. 17

A. 7

Which of the following would be utilizing asset management? A. Purchase securities with high returns and low risk B. Increasing saving account deposits. C. Increasing (selling) more certificates of deposit. D. All of the above E. None of the above

A. Purchase securities with high returns and low risk

The leverage ratio is the ratio of a bank's A. capital divided by its total assets. B. capital divided by its total liabilities. C. assets divided by its liabilities. D. income divided by its assets.

A. capital divided by its total assets.

Which method of shutting down a bank has the greatest moral hazard? A. purchase and assumption B. payoff method C. both A and B have equal moral hazard D. neither A or B have any moral hazard.

A. purchase and assumption

The legislation overturning the Glass-Steagall Act (i.e. part of the Banking Acts of 1933-1935 ) that separated commercial banking from investment banking is A. the Gramm-Leach-Bliley Act (Banking Act of 1999). B. the Riegle-Neal Act (Banking Act of 1994). C. DIDMCA and the Garn-St. Germain Act (Banking Acts of 1980-82). D. the McFadden Act (Banking Act of 1927).

A. the Gramm-Leach-Bliley Act (Banking Act of 1999).

The recent legislation that overturned the prohibition on interstate banking is A. the Riegle-Neal Act (Banking Act of 1994) B. the Glass-Steagall Act (Part of the Banking Acts of 1933-1935) C. the Gramm-Leach-Bliley Act (Banking Act of 1999). D. the McFadden Act (Bankig Act of 1927).

A. the Riegle-Neal Act (Banking Act of 1994)

The formula for the M1 money multiplier is A. m = [1/(r + e + c)] × MB. B. m = (1 + c)/(r + e + c). C. M = 1/(r + e + c). D. M = (1 + c)/(r + e + c).

B. m = (1 + c)/(r + e + c).

The Federal Open Market Committee (FOMC) is composed of: A. the 12 Presidents of the Federal Reserve regional banks. B. presidents of 5 Federal Reserve regional banks and the seven Board of Governors. C. representatives from the governors of all 50 states. D. the Board of Governors, the Vice-President of the United States, and the Secretary of Treasury for the United States.

B. presidents of 5 Federal Reserve regional banks and the seven Board of Governors.

The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is known as A. competition in laxity. B. regulatory arbitrage. C. depositor supervision. D. a dual banking system.

B. regulatory arbitrage.

The Basel Accord, an international agreement, requires banks to hold capital based on A. the total value of assets. B. risk-weighted assets. C. liabilities. D. deposits.

B. risk-weighted assets.

Everything else held constant, an increase in the required reserve ratio on checkable deposits will cause A. the money supply to remain constant. B. the money supply to fall. C. checkable deposits to rise. D. the money supply to rise.

B. the money supply to fall.

Which of the following is one of the eight basic puzzles about financial structure? A. Stocks are the most important source of finance for American businesses. B. Banks are not the most important source of external funds to finance businesses. C. Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. D. Issuing marketable securities is the primary way businesses finance their operations.

C. Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets.

Which of the following is true: A. Monetary base = currency in circulation plus savings accounts balances. B. Monetary base = currency in circulation plus bank checking deposits. C. Monetary base = currency in circulation plus bank reserves. D. None of the above.

C. Monetary base = currency in circulation plus bank reserves.

Depositors lack of information about the quality of bank assets can lead to A. bank booms. B. asset transformation. C. bank panics. D. sequencing.

C. bank panics.

A sharp depreciation of the domestic currency after a currency crisis leads to A. decrease in the value of foreign currency-denominated liabilities. B. lower import prices. C. higher inflation. D. lower interest rates.

C. higher inflation.

Risk that is related to the uncertainty about interest rate movements is called A. the problem of moral hazard. B. default risk. C. interest-rate risk. D. security risk.

C. interest-rate risk.

The Federal Open Market Committee has_________ members. A. 7 B. 5 C. 17 D. 12

D. 12

The free banking ERA was from: A. 1989-1994. B. 1863-1914. C. 1792-1836. D. 1836-1864. E. 1933-1980.

D. 1836-1864.

The cost of financial crises around the world ranged from ___________ to ___________ as a percent of GDP A. 17% to 75% B. 1% to 5% C. 1% to 92% D. 3% to 55%

D. 3% to 55%

Which of the following would be utilizing liquidity management? A. Security sales or loan rollovers B. Borrowing funds from the discount window or the federal funds market C. Increasing excess reserves. D. All of the above E. None of the above

D. All of the above

Which of the following are types of conflict of interest in the financial markets? A. Auditing and consulting in accounting firms B. Credit rating agencies sources of payments and services C. Underwriting and research in investment banking D. All of the answers in this question

D. All of the answers in this question

The legislation that deregulated energy futures markets and credit default swaps was the: A. Banking Act of 1999. B. Banking Act of 1989 (FIRREA). C. Banking Act of 1991 (FDICIA). D. Banking Act of 2000. E. Banking Acts of 2002 (Sarbanes Oxley) .

D. Banking Act of 2000.

________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. A. Debt deflation B. Distribution C. Origination D. Securitization

D. Securitization

Insolvent banks that were allowed to operate in the 1980s by banking authorities were called: A. Go-for-broke banks. B. skeleton banks. C. dead-on-arrival banks. D. Zombie banks.

D. Zombie banks.

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of A. moral hazard. B. costly state verification. C. free-riding. D. adverse selection.

D. adverse selection.

The 3-6-3 rule: A. be on he golf course by 3 pm B. charge 6% on loans C. pay 3% on savings accounts D. all of the above are true.

D. all of the above are true.

The leverage ratio is the ratio of a bank's A. capital divided by its total liabilities. B. assets divided by its liabilities. C. income divided by its assets. D. capital divided by its total assets.

D. capital divided by its total assets.

The McFadden Act of 1927 A. separated the commercial banks and investment banks. B. effectively required that banks maintain a correspondent relationship with large money center banks. C. required that banks maintain bank capital equal to at least 6 percent of their assets. D. effectively prohibited banks from branching across state lines.

D. effectively prohibited banks from branching across state lines.

Off-balance-sheet activities A. generate fee income with no increase in risk. B. generate fee income and reduce risk. C. increase bank risk but do not increase income. D. generate fee income but increase a bank's risk.

D. generate fee income but increase a bank's risk.

A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend. A. liability; more B. liability; less C. net worth; more D. net worth; less

D. net worth; less

The most important tool of the FED is: A. discount window. B. reserve requirement. C. frowns. D. open market operations.

D. open market operations.

The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk. A. debt deflation B. collateralized debt C. democratization of credit D. principal-agent

D. principal-agent

To increase the money supply, the FED can: A. raise the discount rate. B. sell bonds. C. raise the reserve requirement. D. purchase bonds.

D. purchase bonds.

During times of financial crisis, mark-to-market accounting A. leads to an increase in financial firms' lending. B. leads to an increase in the financial firms' balance sheets since they can now get assets at bargain prices. C. results in financial firms' assets increasing in value. D. requires that a financial firms' assets be marked down in value which can worsen the lending crisis.

D. requires that a financial firms' assets be marked down in value which can worsen the lending crisis.

Both ________ and ________ are Federal Reserve assets. A. securities; reserves B. currency in circulation; securities C. currency in circulation; reserves D. securities; loans to financial institutions

D. securities; loans to financial institutions

One reason financial systems in developing and transition countries are underdeveloped is A. the accounting standards are too stringent for the banks to meet. B. they have weak links to their governments. C. they make loans only to nonprofit entities. D. the legal system may be poor making it difficult to enforce restrictive covenants.

D. the legal system may be poor making it difficult to enforce restrictive covenants.

Recent research indicates that inflation performance (low inflation) has been found to be best in countries with A. a policy of always keeping interest rates low. B. money financing of budget deficits. C. political control of monetary policy. D. the most independent central banks.

D. the most independent central banks.

What are the major causal factors of all modern U.S. financial crises? A. lax oversight by existing banking authorities B. deregulation C. financial innovation D. speculative bubbles E. all of the above

E. all of the above

The national banking ERA was from: A. 1836-1863. B. 1864-1914. C. 1933-1980. D. 1792-1836. E. 1989-1994.

B. 1864-1914.

Depositors lack of information about the quality of bank assets can lead to ________. A. sequencing B. bank panics C. asset transformation D. bank booms

B. bank panics

A liability on a commercial bank's balance sheet is A. securities. B. checkable deposits. C. loans. D. discount loans.

B. checkable deposits.

Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the A. too-big-to-fail effect. B. contagion effect. C. moral hazard problem. D. adverse selection problem.

B. contagion effect.

The interest rate the Fed charges banks borrowing from the Fed is the A. prime rate. B. discount rate. C. federal funds rate. D. Treasury bill rate.

B. discount rate.

Total reserves are the sum of ________ and ________. A. vault cash; excess reserves B. excess reserves; required reserves C. required reserves; currency in circulation D. excess reserves; borrowed reserves

B. excess reserves; required reserves

Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side. A. federal government; municipalities B. federal government; states C. state governments; municipalities D. municipalities; states

B. federal government; states

Because banks engage in regulatory arbitrage, the Basel Accord on risk-based capital requirements may result in A. reduced supervision of banks by regulators. B. increased risk taking by banks. C. reduced risk taking by banks. D. increased fraudulent behavior by banks.

B. increased risk taking by banks.