chapter 18
Banks commonly use depositor funds to invest in stocks.
F
A federal bank charter is issued by the: Comptroller of the Currency Securities and Exchange Commission U.S. Treasury Federal Reserve None of these are correct.
a
The argument that interstate banking would allow banks to grow and more fully achieve a reduction in operating costs per unit of output as output increases is based on: economies of scale financial leverage diseconomies of scale capital adequacy theory
a
The liquidity coverage ratio, which is measured under the Basel III guidelines, is the ratio of a bank's _________ to its ___________. liquid assets; projected net cash outflow liquid assets; retained earnings Tier 1 capital; liquid assets projected net cash outflow; Tier 1 capital
a
The potential risk that financial problems can spread through financial institutions and the financial system is referred to as ________ risk. systemic systematic unsystematic market
a
Which of the following statements is incorrect with respect to the Financial Services Modernization Act of 1999? It expanded the Glass-Steagall Act. It enabled commercial banks to more easily pursue securities and insurance activities. It allowed securities firms and insurance companies to acquire banks. It required commercial banks to have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities. All of these are correct.
a
National banks are regulated by ____, and state banks are regulated by ____. the Comptroller of the Currency; their state agency the Comptroller of the Currency; the Comptroller of the Currency their state agency; their state agency their state agency; the Comptroller of the Currency
a
The Garn-St Germain Act of 1982 permitted depository institutions to offer money market deposit accounts. prevented depository institutions from acquiring problem institutions across geographic boundaries. required the Fed to explicitly charge depository institutions for its services. allowed the Fed to provide check clearing to depository institutions at no charge.
a
The Glass-Steagall Act of 1933 prevented any firm that accepts deposits from underwriting stocks and bonds of corporations. any firm that accepts deposits from underwriting general obligation bonds of states and municipalities. any firm that accepts deposits from holding any corporate bonds in its asset portfolio. state-chartered banks from offering commercial loans.
a
A bank can increase its capital ratio by buying back shares of its stock from shareholders. selling assets. increasing its dividend to encourage more investors to purchase its stock. increasing its off-balance sheet activities.
b
All Fed member banks must hold private insurance on deposits. FDIC insurance on deposits. both FDIC and private insurance on deposits. None of these are correct.
b
Federal deposit insurance has existed since the 1800s. was created in 1933. was created after World War II. was created in 1960.
b
The Financial Reform Act (Wall Street Reform and Consumer Protection Act or Dodd-Frank Act) of 2010 ended the system of risk-based insurance premiums. set requirements for the Deposit Insurance Fund's reserves. raised the limit for insured deposits to $750,000 per depositor. allowed large insurance companies such as American International Group to compete with the FDIC to insure bank deposits.
b
The Financial Services Modernization Act of 1999 gave banks and other financial service firms less freedom to merge. allowed financial institutions to offer a diversified set of financial services. offered very few benefits to a financial institution's clients. increased the reliance of financial institutions on the demand for the single service they offer.
b
The key reason for regulatory examinations (such as CAMELS ratings) is to rate past performance detect problems of a bank in time to correct them. check for embezzlement. monitor reserve requirements.
b
Which of the following is NOT a specific criterion that regulators use to monitor banks? capital adequacy dollar value of fixed assets asset quality earnings sensitivity to financial market conditions
b
____ is not a characteristics used by bank regulators to rate banks. capital adequacy current stock price asset quality management All of these are used to rate banks.
b
In making loans to a single customer, commercial banks ____ restricted to a maximum percentage of their capital, and they ____ allowed to use borrowed or deposited funds to purchase common stock. are; are are; are not are not; are are not; are not
b
Generally, the failure of small banks causes more widespread concern about the safety of the banking system than the failure of large banks. causes equal concern about the safety of the banking system as the failure of large banks. causes less concern about the safety of the banking system than the failure of large banks.
c
The Basel III framework proposes lower capital requirements for banks to enable them to generate higher earnings to make up for their losses during the credit crisis. relying on the rating agencies to assess the risk of bank assets. increased capital requirements and liquidity requirements for banks. using the gap ratio to set the capital ratio.
c
The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own reserve requirements. capital ratios. interest rates on savings deposits. corporate loan interest rates.
c
Which banking act removed deposit rate ceilings? McFadden Act Glass-Steagall Act DIDMCA Garn-St Germain Act
c
____ is not a rating criterion used by bank regulators. Capital adequacy Savings deposit volume Asset quality Management Liquidity
c
Bank regulations typically: involve a trade-off between the safety of the banking system and the efficiency of bank operations. impose restrictions on the types of assets in which banks can invest. set requirements for the minimum amount of capital that banks must hold. All of these are correct.
d
The fee banks pay to the FDIC for deposit insurance is now a fixed dollar amount for all banks. a fixed percentage of the bank's deposits for all banks. a fixed percentage of the bank's loan volume for all banks. based on the risk of the bank.
d
The opening of a commercial bank in the United States does not require a charter. always requires a charter from a state government. always requires a charter from the federal government. requires a charter from a state or the federal government. requires a charter from both the state and federal government.
d
Which banking act allowed banks to cross state lines in order to acquire a failing institution? McFadden Act Glass-Steagall Act DIDMCA Garn-St Germain Act
d
Which of the following is an "off-balance-sheet commitment"? long-term debt additional paid-in capital notes payable letters of credit backing commercial paper issued by firms
d
Which of the following was NOT a provision of the Financial Reform Act (Dodd-Frank Act) of 2010? established the Financial Stability Oversight Council put limits on banks' proprietary trading established the Consumer Financial Protection Bureau reestablished the separation between banking and securities activities that had existed under the Glass-Steagall Act required derivative securities to be traded through a clearinghouse or exchange
d
Which of the following was NOT achieved by the Depository Institutions Deregulation and Monetary Control Act of 1980? removed interest rate ceilings on deposits allowed banks to offer NOW accounts increased competition among depository institutions allowed interstate banking for depository institutions in most states
d
Deposit insurance has a limit of: $10,000. $25,000. $100,000. $250,000.
d
The Basel framework recommends that banks maintain capital in proportion to their: mortgages commercial paper liabilities risk-weighted assets
d
The moral hazard problem is minimized when deposit insurance premiums are zero (not imposed by the FDIC). the same percentage of deposits for all banks. set at a fixed percentage of deposits for large banks, and at zero for small banks. set at a percentage of deposits that is based on the bank's risk.
d
The liquidity component of the CAMELS rating refers to how a bank's earnings would change if economic conditions change. how readily a bank's management would detect its financial problems. a bank's sensitivity to financial market conditions. the type of loans that a bank provides, the bank's process for deciding whether to provide loans, and the credit rating of debt securities that it purchases. whether a bank frequently needs to borrow from outside sources, such as the discount window.
e
Deposit insurance now covers all bank deposits without any limit.
f
Shareholders and managers of banks may prefer that banks be required to hold higher levels of capital because this would allow for higher share prices for the banks and larger bonuses for bank managers.
f
The Sarbanes-Oxley Act (2002) was enacted in response to some banks taking too much risk.
f
All state banks are required to be members of the Federal Reserve System.
f
Commercial banks are allowed to invest in junk bonds.
f
State banks are regulated by the Comptroller of the Currency.
f
When a bank holds a lower level of capital, a given dollar level of profits represents a lower return on equity.
f
The Volcker Rule prohibits banks from sponsoring or holding an ownership interest in a hedge fund or a private equity fund.
t
The act of taking on more risk because of protection from adverse consequences due to the risk is referred to as a moral hazard problem.
t
When the Federal Reserve conducts stress tests of banks, it may examine the U.S. operations of foreign-based banks as well as U.S. banks.
t
Banks that are insured by the Federal Deposit Insurance Corporation (FDIC) are also regulated by the FDIC.
t
In general, a bank defines its value-at-risk as the estimated potential loss from its trading businesses that could result from adverse movements in market prices.
t
Publicly traded banks have incurred larger reporting expenses as a result of having to comply with the Sarbanes-Oxley Act.
t
Regulators put much emphasis on a bank's sensitivity to interest rate movements, since many banks have liabilities that are repriced more frequently than their assets and are adversely affected by rising interest rates.
t
The Sarbanes-Oxley Act (SOX) was enacted in 2002 in order to ensure a more transparent process for reporting on a firm's productivity and the financial condition.
t
The Sarbanes-Oxley Act was enacted to make corporate managers, board members, and auditors more accountable for the accuracy of the financial statements that their respective firms provide.
t
The provision of a letter of credit by a bank to back commercial paper issued by a corporation is an example of an off-balance sheet commitment.
t
