econ 303 quizzes exam 2

Federal deposit insurance covers deposits up to $250,000, but as part of a doctrine called "too-big-to-fail" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses the "purchase and assumption" method. "inequity" method. "Basel" method. "payoff" method.

"purchase and assumption" method.

The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to $200,000. $100,000. $40,000. $250,000.

$250,000.

The modern commercial banking system began in America when the Bank of United States was chartered in Philadelphia in 1801. Bank of North America was chartered in New York in 1782. Bank of North America was chartered in Philadelphia in 1782. Bank of United States was chartered in New York in 1801.

Bank of North America was chartered in Philadelphia in 1782.

A(n) ________ is a subsidiary of a U.S. bank that is engaged primarily in international banking. Eurodollar agency universal bank McFadden corporation Edge Act corporation

Edge Act corporation

The FHLBS gives loans to S&Ls and thus performs a function similar to the ________ for commercial banks. Federal Reserve U.S. Mint Office of the Comptroller of the Currency U.S. Treasury

Federal Reserve

One suggested method of dealing with the too-big-to-fail problem is to reimpose the restrictions that were in place under the Edge Act. Glass-Steagall. the Federal Reserve Act. McFadden.

Glass-Steagall.

Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history? Bear Stearns Lehman Brothers Merrill Lynch Goldman Sachs

Lehman Brothers

The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee? Philadelphia San Francisco Boston New York

New York

The ability to use the too-big-to-fail policy was curtailed by the passage of the FDICIA. To use this action today, the FDIC must get approval of a two-thirds majority of both the Board of Governors of the Federal Reserve and the directors of the FDIC and also the approval of the Selected Answer:Secretary of the Treasury.Answers:Senate Finance Committee Chairperson.Secretary of the Treasury.President of the United States.governor of the state in which the failed bank is located. Senate Finance Committee Chairperson. Secretary of the Treasury. President of the United States. governor of the state in which the failed bank is located.

Secretary of the Treasury.

The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that the Federal Reserve System had failed to serve as a lender of last resort. a central bank was needed to prevent future panics. the Second Bank of the United States had failed to serve as a lender of last resort. the First Bank of the United States had failed to serve as a lender of last resort.

a central bank was needed to prevent future panics.

If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n) increase in information available to investors. banking crisis. financial recovery. reduction of the adverse selection and moral hazard problems.

banking crisis.

Before 1863 federally-chartered banks had regulatory advantages not granted to state-chartered banks. banks were required to maintain 100% of their deposits as reserves. banks acquired funds by issuing banknotes. the number of federally-chartered banks grew at a much faster rate than at any other time since the end of the Civil War.

banks acquired funds by issuing banknotes.

One of the criticisms of Basel 2 is that it is procyclical. That means that banks may be required to hold less capital during times when capital is short. banks may become professional at a cyclical response to economic conditions. banks may be required to hold more capital during times when capital is short. banks will not be required to hold capital during an expansion.

banks may be required to hold more capital during times when capital is short.

Banks that actively manage liabilities will most likely meet a reserve shortfall by calling in loans. seeking new deposits. borrowing federal funds. selling municipal bonds.

borrowing federal funds

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

capital divided by its total assets.

All of the following are nontransaction deposits EXCEPT small-denomination time deposits. checkable deposits. savings accounts. certificates of deposit.

checkable deposits.

The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression. increases in bond prices illiquidity an improvement in banks' balance sheets debt deflation

debt deflation

When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called releveraging. deleveraging. capitulation. deflation.

deleveraging.

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 depositor supervision. a dual banking system. competition in laxity. regulatory arbitrage.

depositor supervision.

Subject to the approval of the Board of Governors, the decision of choosing the president of a district Federal Reserve Bank is made by the six district bank directors elected by the member banks. class A and class B directors. district bank directors who are not professional bankers. all nine district bank directors. three district bank directors who are professional bankers.

district bank directors who are not professional bankers.

From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem. moral hazard; diversification adverse selection; diversification diversification; moral hazard diversification; adverse selection

diversification; adverse selection

Eurodollars are dollar-dominated deposits held in banks outside the United States. deposits held by U.S. banks in Europe. deposits held by U.S. banks in foreign countries. dollar-dominated deposits held in U.S. banks by Europeans.

dollar-dominated deposits held in banks outside the United States

Allowing bank branching across state lines gives banks greater ability to coordinate bank operations. This makes it easier for them to receive the benefits of interest-rate irregularities. disintermediation. economies of scale. the dual banking system.

economies of scale.

Members of the Executive Board of the European System of Central Banks are appointed to ________ year, nonrenewable terms. four eight ten fourteen

eight

The current supervisory practice toward risk management focuses on eliminating all risk. focuses on the quality of a bank's balance sheet. determines whether capital requirements have been met. evaluates the soundness of a bank's risk-management process.

evaluates the soundness of a bank's risk-management process.

Through correspondent banking, large banks provide services to small banks, including: foreign exchange transactions. loan guarantees. issuing stock. debt reduction

foreign exchange transactions

Deposit insurance is only one type of government safety net. All of the following are types of government support for troubled financial institutions EXCEPT lending from the central bank. forgiving tax debt. nationalizing and guaranteeing that all creditors will be repaid their loans in full. lending directly from the government's treasury department.

forgiving tax debt.

Money market mutual funds function as interest-earning checking accounts. are legally deposits. have an interest-rate ceiling. are subject to reserve requirements.

function as interest-earning checking accounts.

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the duration. rate-risk index. interest-sensitivity index. gap.

gap

The most important source of the changes in supply conditions that stimulate financial innovation has been the improvement in information technology. dramatic increase in competition from foreign banks. dramatic increase in the volatility of interest rates. deregulation of financial institutions.

improvement in information technology.

The growth of the subprime mortgage market led to a decrease in home ownership as investors chose other assets over housing. a decline in the housing industry because of higher default risk. decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages. increased demand for houses and helped fuel the boom in housing prices.

increased demand for houses and helped fuel the boom in housing prices.

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

interest-rate risk

So-called fallen angels differ from junk bonds in that junk bonds have ratings below Baa, whereas fallen angels have ratings below C. junk bonds refer to previously issued bonds that have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings. junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds that have had their credit ratings fall below Baa. fallen angels have ratings below Baa, whereas junk bonds have ratings below C.

junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds that have had their credit ratings fall below Baa.

Regulatory forbearance increased adverse selection dramatically. had the advantage of permitting many insolvent S&Ls the opportunity to return to profitability, saving the FSLIC billions of dollars. meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s. had the advantage of benefiting healthy S&Ls at the expense of "zombie S&Ls," as insolvent institutions lost deposits to health institutions.

meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s.

One suggested method of reducing excessive risk-taking by SIFIs is to require them to hold ________ capital when credit is expanding rapidly and ________ capital when credit is contracting. more; no more; less less; more less; no

more; less

The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers because regulators could not be fired, therefore, they didn't care if they did a good job or not. Congress did not wait long enough for many of the problems in the thrift industry to correct themselves. of regulators' initial attempts to downplay the seriousness of problems within the thrift industry. politicians listened to the taxpayers rather than the S&L lobbyists.

of regulators' initial attempts to downplay the seriousness of problems within the thrift industry.

Each governor on the Board of Governors can serve one full nonrenewable fourteen-year term plus part of another term. only one nonrenewable eight-year term. one full nonrenewable eight-year term plus part of another term. only one nonrenewable fourteen-year term.

one full nonrenewable fourteen-year term plus part of another term.

During the banking crisis of the Great Depression, more than ________ of all commercial banks in the United States failed. one-fifth one-half one-tenth one-third

one-third

The case for Federal Reserve independence does NOT include the idea that a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. political pressure would impart an inflationary bias to monetary policy. policy is always performed better by an elite group such as the Fed. a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level.

policy is always performed better by an elite group such as the Fed.

The Federal Reserve Banks are ________ institutions since they are owned by the ________. public; private commercial banks in the district where the Reserve Bank is located quasi-public; private commercial banks in the district where the Reserve Bank is located public; Board of Governors quasi-public; Board of Governors

quasi-public; Board of Governors

The amount of checkable deposits that banks are required by regulation to hold are the total reserves. required reserves. excess reserves. vault cash

required reserves

The Basel Committee ruled that regulators in other countries can ________ the operations of a foreign bank if they believe that it lacks effective oversight. restrict renegotiate encourage enhance

restrict

Sweep accounts which were created to avoid reserve requirements became possible because of a change in deposit ceilings. bank mergers. technology. government rules.

technology.

Which of the following is NOT an entity of the Federal Reserve System? Federal Reserve Banks the Comptroller of the Currency the Federal Open Market Committee the Board of Governors

the Comptroller of the Currency

Prior to 1980, member banks left the Federal Reserve System due to the high cost of required reserves. the high cost of discount loans. a desire to avoid credit controls. a desire to avoid interest rate regulations.

the high cost of required reserves.

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called the segmented maturity approach to interest-exposure analysis. the segmented maturity approach to gap analysis. the maturity bucket approach to gap analysis. basic gap analysis.

the maturity bucket approach to gap analysis.

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

the most independent central banks.

In the absence of regulation, banks would probably hold too much capital, making it more difficult to obtain loans. too much capital, reducing the profitability of banks. too little capital. too much capital, reducing the efficiency of the payments system.

too little capital.

The Volcker Rule addresses the off-balance-sheet problem involving interest rate risks. trading risks. selling loans. loan guarantees.

trading risks.

Bank reserves include vault cash and deposits at the Fed. vault cash and short-term Treasury securities. deposits at the Fed and short-term treasury securities. deposits at other banks and deposits at the Fed.

vault cash and deposits at the Fed.