ECON Chapter 9
The main idea of the government's supervision and regulation of banks is that it is willing to banks that are solvent, banks that are insolvent or badly run. a. insure deposits for; and provide loans to b. close; but insure deposits for c. close; but provide loans to d. insure deposits for or provide loans to; but will close
d. insure deposits for or provide loans to; but will close
A commercial bank that gets its charter from a state government (the state in which its headquarters are located) is called a bank. a. local b. community c. charter d. state
d. state
A national bank is supervised by all of the following agencies EXCEPT a. the Federal Deposit Insurance Corporation. b. the Federal Reserve. c. the Office of the Comptroller of the Currency. d. the National Credit Union Administration.
d. the National Credit Union Administration.
The government provides deposit insurance through the a. FDIC. b. FHC. c. FSLIC. d. IDC.
a. FDIC.
The Gramm-Leach Bliley Act was passed in the year a. 1930. b. 1999. c. 1956. d. 1977.
b. 1999
The Act allows national bank to have additional offices in the same city as their main office. a. Glass-Steagall b. McFadden c. Bank Holding Company d. National Bank
b. McFadden
Which of the following is an error made by commercial banks in 1920s that caused depositors to lose money and forced regulators to impose restrictions? a. Banks sold securities in the primary market. b. Smaller banks merged to form larger banks. c. Banks issued loans to a number of firms that went bankrupt during the Great depression. d. Banks did not diversify their activities and were engaged only in banking activities.
c. Banks issued loans to a number of firms that went bankrupt during the Great depression
The Dodd-Frank act was passed into law in a. 2010. b. 1999. c. 1933. d. 1913.
a. 2010.
The _______ agreement concluded in 2010 imposed higher capital requirements on banks all over the world. a. Basel III. b. Basel II. c. Basel I. d. Basel IV.
a. Basel III
To keep large financial firms from behaving recklessly and endangering the rest of the economy, the Dodd-Frank Wall Street Reform and Consumer Protection Act created the a. Financial Stability Oversight Council. b. Financial Stimulus Oversight Council. c. Financial Stability Output Council. d. Financial Crisis Oversight Corporation.
a. Financial Stability Oversight Council.
Which of the following is NOT a method used by the FDIC to handle a bank failure? a. Foreclosure b. Purchase and assumption c. Assistance d. Payoff
a. Foreclosure
The law that allowed banks to engage in investment banking was the a. Gramm-Leach-Bliley Act. b. Glass-Steagall Act. c. McFadden Act. d. Garn-St. Germain Act.
a. Gramm-Leach-Bliley Act.
Which of the following is true of the GarnSt. Germain Act? a. It allows thrifts to invest up to 10 percent of portfolios in riskier assets such as stocks and real estate. b. It creates the system of national banks to be chartered by the Comptroller of the currency. c. It creates the Federal Reserve system and gives it the responsibility as the lender of last resort. d. It prohibits commercial banks from investment banking activities.
a. It allows thrifts to invest up to 10 percent of portfolios in riskier assets such as stocks and real estate.
Which of the following is the purpose of the Bank Holding Company Act of 1956? a. To prevent bank holding companies from branching across state lines b. To allow bank holding companies to open branches across state lines c. To allow interstate bank mergers d. To prevent banks from owning commercial firms
a. To prevent bank holding companies from branching across state lines
Which of the following is a reason for the government to regulate banks? a. To prevent bank runs b. To prevent the situation of contagion c. To help a bank grow in size d. To allow for the situation of a bank run
a. To prevent bank runs
When a bank run spreads from one bank to another, it is said to be a. contagion. b. a loss of depositor's credibility. c. a loss of reserves. d. an over-run.
a. contagion.
In the CAMELS rating system, the letter L stands for a. liquidity. b. losses. c. legal environment. d. loan documentation.
a. liquidity.
The letter M, in the CAMELS rating system, which is used to assess the health of the banks, stands for _____. a. management b. money market account c. mortgage d. maturity
a. management
In the 1950s, the number of failures (of commercial banks and thrifts) per year averaged a. near zero. b. about fifty. c. about 100. d. in the hundreds.
a. near zero.
A financial holding company (FHC) is the a financial structure that can a. own a bank and an insurance underwriting firm. b. own either an insurance underwriting firm or an insurance agency. c. own either an insurance agency or a securities agency. d. own either a securities agency or a securities underwriting firm.
a. own a bank and an insurance underwriting firm.
The Community Reinvestment Act attempts to prevent a banking practice known as a. redlining. b. credit scoring. c. credit diving. d. term intermediation.
a. redlining.
Most often after a merger, bank profits a. rise. b. remain constant. c. drop slightly. d. fall to zero.
a. rise.
In its role as a lender of last resort, the government lends to banks that are a. solvent but illiquid. b. solvent and liquid. c. insolvent and illiquid. d. insolvent but liquid.
a. solvent but illiquid.
The Depository Institutions Deregulation and Monetary Control Act that allows payments on interest on transactions accounts of individuals was passed in the year a. 1990. b. 1980. c. 1965. d. 1975.
b. 1980.
The Dodd-Frank Act requires that the FDIC restore its Deposit Insurance Fund to a healthy level by the year a. 2040. b. 2020. c. 2018. d. 2012.
b. 2020
The U.S. government, in the year 2010, passed the activities that can lead to financial crisis _________ Act to prevent financial institutions from engaging in a. Financial Institutions Reform, Recovery, and Enforcement b. Dodd-Frank Wall Street Reform and Consumer Protection c. Gramm-Leach-Bliley d. Glass-Steagall
b. Dodd-Frank Wall Street Reform and Consumer Protection
Which of the following acts gives the responsibility as the lender of last resort to the central bank in the U.S? a. National Bank Act b. Federal Reserve Act c. Bank Holding Company Act d. McFadden Act
b. Federal Reserve Act
A national bank that is part of a financial holding company or a bank holding company is mainly supervised by the a. Federal Deposit Insurance Corporation. b. Federal Reserve. c. Office of the Comptroller of the Currency. d. National Credit Union Administration.
b. Federal Reserve.
A state bank that is a member of the Federal Reserve System and is not in a financial holding company or a bank holding company is mainly supervised by the a. Federal Deposit Insurance Corporation. b. Federal Reserve. c. Office of the Comptroller of the Currency. d. National Credit Union Administration
b. Federal Reserve.
The law that prohibited banks from engaging in investment banking was the a. Gramm-Leach-Bliley Act. b. Glass-Steagall Act. c. McFadden Act. d. Garn-St. Germain Act.
b. Glass-Steagall Act.
A credit union that obtains a federal charter obtains its charter from which government agency? a. The Federal Savings and Loan Insurance Corporation b. The National Credit Union Administration c. The Federal Deposit Insurance Corporation d. The Office of the Comptroller of the Currency
b. The National Credit Union Administration
Thrifts can have a maximum of 20 percent of their assets in the form of _______ and must have _______ percent of their assets in the form of mortgage or consumer loans in order to qualify for special funding from a Federal Home Loan bank. a. bank holding companies; 60 b. commercial loans; 65 c. securities; 75 d. government bonds; 70
b. commercial loans; 65
The funds used to pay for FDIC insurance coverage come from a. insurance premiums paid by depositors. b. insurance premiums paid by banks. c. U.S. government tax revenue. d. taxes imposed on interest income.
b. insurance premiums paid by banks.
The Office of the Comptroller of the Currency is the main supervisor for a. national banks that are part of a financial holding company or a bank holding company. b. national banks that are not in a financial holding company or a bank holding company. c. state banks that are not members of the Federal Reserve and are not in a financial holding company or a bank holding company. d. state banks that are members of the Federal Reserve System.
b. national banks that are not in a financial holding company or a bank holding company.
The least costly transaction method for the FDIC to close an insolvent bank is a. payoff. b. purchase and assumption. c. assistance. d. foreclosure
b. purchase and assumption
The government policy that does not allow large banks to fail is known as a. capital modernization. b. the too-big-to-fail policy. c. bank truncation. d. regulatory policy.
b. the too-big-to-fail policy.
According to the Dodd-Frank Act, a bank merger can be stopped if the new bank would hold more than _________ percent of the nation's deposits. a. 20 b. 15 c. 10 d. 5
c. 10
In the financial crisis in 2008 and 2009, FDIC using the assistance method. a. 1,300 b. 130 c. 13 d. 2
c. 13
The Glass-Steagall Act was passed into law in the year a. 1999. b. 1913. c. 1933. d. 1980.
c. 1933.
In which decade did the number of failures (of commercial banks and thrifts) per year average more than 100? a. 1930s b. 1960s c. 1980s d. 1950s
c. 1980s
Which of the following is NOT included in the call report filed by a commercial bank? a. A report on a bank's assets b. A report on a bank's liabilities c. A report on a bank's compliance with the Fair Lending Act d. A report on a bank's profits
c. A report on a bank's compliance with the Fair Lending Act
Which of the following is a government regulation that enables the government to achieve its goals for the banking system? a. A government regulation that allows for mergers in order to help increase the size of a bank. b. A government regulation that provides complete discretion to banks to manage the supply of money. c. Banks are required to hold reserves in order to control the money supply. d. Banks are penalized in case of inefficient functioning
c. Banks are required to hold reserves in order to control the money supply.
Which of the following serves as the lender of last resort for credit unions? a. The Federal Deposit Insurance Corporation b. The Federal Reserve c. National Credit Union Administration's Credit Liquidity Facility d. The National Credit Union Share Insurance Fund
c. National Credit Union Administration's Credit Liquidity Facility
A national bank that is not in a financial holding company or a bank holding company is mainly supervised by the a. Federal Deposit Insurance Corporation. b. Federal Reserve. c. Office of the Comptroller of the Currency. d. National Credit Union Administration
c. Office of the Comptroller of the Currency.
The too-big-to-fail policy is a policy under which bank regulators will not close a bank that is deemed to a. have enough reserves to meet the cash requirements of its customers. b. have a history of low default risk on debt issue. c. be so large that its closure would affect the financial system and cause other banks to fail. d. be larger than the Federal Reserve System.
c. be so large that its closure would affect the financial system and cause other banks to fail.
In the CAMELS rating system, which is used to assess the health of the banks, the letter C stands for a. controls. b. currency reserves. c. capital adequacy. d. compliance with regulations.
c. capital adequacy.
The letter E, in the CAMELS rating system, which is used to assess the health of the banks, represents the _____ for a bank. a. elasticity of demand. b. equal opportunity compliance. c. earnings. d. elements of risk.
c. earnings.
A thrift institution _______ have Federal Deposit Insurance Corporation insurance and, in general,_______ own or be owned by a commercial firm. a. must; cannot b. is not required to; cannot c. must; can d. is not required to; can
c. must; can
FDIC insurance covers a depositor up to a. $10,000. b. $50,000. c. $100,000. d. $250,000.
d. $250,000
Suppose the banking market in Cedar Rapids consists of banks that have the following shares of the market: 24 percent, 18 percent, 17 percent, 14 percent, 9 percent, 8 percent, 4 percent, 3 percent, 2 percent, 1 percent. Calculate the HHI. a. 100 b. 576 c. 780 d. 1,560
d. 1,560
A banking market with six banks of equal size would have an HHI approximately equal to a. 278. b. 556. c. 1,111. d. 1,667.
d. 1,667.
In order to analyze the competitiveness of the banks affected by mergers, the Fed found out that in _______out of the 49 banking markets, in which both Wells Fargo and Wachovia had operations, the merger will not violate any guidelines based on HHI or other guidelines. a. 32 b. 40 c. 48 d. 37
d. 37
Suppose the Federal Reserve is considering the applications of four different banks to merge with other banks. Given the level of the new HHI and the change in the HHI shown below, in which case could the Fed challenge the merger? a. New HHI = 1,900; change in HHI = 150 b. New HHI = 1,500; change in HHI = 400 c. New HHI = 1,200; change in HHI = 700 d. New HHI = 1,850; change in HHI = 250
d. New HHI = 1,850; change in HHI = 250
Which of the following acts abolishes the FSLIC and gives responsibility of thrift deposit insurance to the FDIC? a. The GarnSt. Germain Act b. The Community Reinvestment Act c. The Federal Deposit Insurance Corporation Improvement Act d. The Financial Institutions Reform, Recovery, and Enforcement Act
d. The Financial Institutions Reform, Recovery, and Enforcement Act
Which of the following is NOT a reason for the government to regulate banks? a. To reduce the externalities caused by bank problems b. To stabilize the money supply c. To prevent bank runs d. To keep banks large
d. To keep banks large
The mechanisms by which cash, checks, and electronic payments flow from buyers to sellers are called a. the transactions system. b. float. c. the payments system. d. ACH.
c. the payments system.
Which of the following is a possible drawback of a bank run? a. It leaves the banks with excess reserves. b. It leads to a fall in investment activities because of lack of loans available to business firms. c. It leads to a fall in the demand for loans by the business firms. d. It leads to an excessive increase in the supply of money by the banks
a. It leaves the banks with excess reserves.
Which of the following illustrates a difference between the Federal Reserve and the Federal Deposit Insurance Corporation? a. The Fed supervises most of the largest banks; whereas the Federal Deposit Insurance Corporation has mostly very small banks under its supervision. b. The Fed supervises state banks that do are not the members of the Federal Reserve System; whereas the Federal Deposit Insurance Corporation supervises all financial holding companies. c. The Fed supervises national banks that are not in Financial Holding Companies or bank holding companies; whereas the Federal Deposit Insurance Corporation supervises bank holding companies. d. The Fed supervises credit unions; whereas the Federal Deposit Insurance Corporation supervises thrift institutions.
a. The Fed supervises most of the largest banks; whereas the Federal Deposit Insurance Corporation has mostly very small banks under its supervision.
The Gramm-Leach-Bliley Act created the financial holding company (FHC) structure in order to a. allow banks to engage in additional non-banking activities. b. allow banks to merge with other banks. c. prevent banks from dealing in securities and insurance products. d. prevent bank holding companies from branching across state lines.
a. allow banks to engage in additional non-banking activities.
Under the payoff method of handling a bank failure, the FDIC a. takes over the bank and controls its operations. b. closes the bank, sells off the assets, pays off insured depositors, and then pays off creditors of the bank if funds remain. c. keeps the bank open and lends funds to it so that it is able to continue its operation. d. finds a buyer for the bank, giving the buyer the good assets of the bank, and assumes the bad loans of the bank.
b. closes the bank, sells off the assets, pays off insured depositors, and then pays off creditors of the bank if funds remain.
The Herfindahl-Hirschman Index (HHI) is used to a. calculate whether or not a bank has met its reserve requirements. b. determine if a merger reduces competition in a banking market. c. measure the capital adequacy of a bank. d. find which bank has the lowest spread.
b. determine if a merger reduces competition in a banking market.
Credit Unions get slight competitive advantage over commercial banks and thrifts because they a. get their charter from the Comptroller of the Currency. b. get tax exemptions as they are often run as non-profit organizations. c. are insured by the Federal Deposit Insurance Corporation. d. can rely on the funds from the Federal Reserve at times of emergency.
b. get tax exemptions as they are often run as non-profit organizations.
A charter is a bank's application for a. investing in non-bank activities. b. going into business. c. making a loan to a corporation. d. opening up a new branch
b. going into business
Suppose three banks in a banking market have market shares of 42 percent, 33 percent, and 25 percent. Calculate the HHI of the banking industry. a. 100 b. 1,356 c. 3,478 d. 4,320
c. 3,478
According to the Consumer Financial Protection Bureau, banks must not offer mortgage loans to households for whom the monthly mortgage payments costs more than __________ of their income. a. 20 percent b. 35 percent c. 43 percent d. 50 percent
c. 43 percent
Which of the following is NOT a component evaluated under the CAMELS rating system? a. Management b. Sensitivity to risk c. Strategic planning d. Asset quality
c. Strategic planning
Which act set a limit to prevent a bank from merging with others if it would increase its liabilities to more than 10 percent of national bank liabilities? a. The Gramm-Leach-Bliley Act b. The Community Reinvestment Act c. The Dodd-Frank Act d. The Interstate Banking and Branching Efficiency Act
c. The Dodd-Frank Act
From which of the following agencies does a national bank obtain its charter? a. The Federal Deposit Insurance corporation b. The Federal Reserve c. The Office of the Comptroller of the Currency d. National Credit Union Administration
c. The Office of the Comptroller of the Currency
During the time that the Glass-Steagall Act was in effect, which banking authority wanted to allow banks to be able to engage in more nonbanking activities through operating subsidiaries? a. The Federal Reserve b. The Office of Comptroller of the Currency c. The U.S. Treasury Department d. The Federal Deposit Insurance Corporation
c. The U.S. Treasury Department
Which of the following is true of the Glass-Steagall Act? a. The act provides authority to the Federal Reserve to regulate bank holding companies and prevent them from branching out. b. The act enables banks to engage in more non-banking activities by operating subsidiaries. c. The act prohibits banks to own subsidiary firms that sold products other than banking services. d. The act encourages banks to meet the credit needs of their communities.
c. The act prohibits banks to own subsidiary firms that sold products other than banking services.
Which of the following is a factor considered by authorities in evaluating the mergers of banks? a. The level to which the new bank increases competition in the market b. The number of employees in the new bank c. The adequacy of the financial and managerial resources of the new bank d. The value of the total assets owned by the new bank
c. The adequacy of the financial and managerial resources of the new bank
The government as a lender of last resort a. will make loans to anyone, regardless of their level of wealth or income. b. does not discriminate in loan markets. c. guarantees to supply funds to solvent but illiquid banks. d. gives money to banks with negative equity capital.
c. guarantees to supply funds to solvent but illiquid banks.
Under the assistance method of handling a bank failure, the FDIC a. takes over the bank and controls its operations. b. closes the bank, sells off the assets, pays off insured depositors, and then pays off creditors of the bank if funds remain. c. keeps the bank open and lends funds to it so that it survives. d. finds a buyer for the bank, giving the buyer the good assets of the bank, and assumes the bad loans of the bank.
c. keeps the bank open and lends funds to it so that it survives.
A commercial bank that gets a charter from the federal government is called a bank. a. charter b. state c. national d. federal reserve
c. national
An enterprise that either take deposits or make loans but do not perform both the activities together, and therefore is not subject to the same restrictions as banks is known as a. nongovernmental organizations. b. corporations. c. nonbanks. d. business firms.
c. nonbanks
The Federal Deposit Insurance Corporation is the main supervisor for a. national banks that are part of a financial holding company or a bank holding company. b. national banks that are not in a financial holding company or a bank holding company. c. state banks that are not members of the Federal Reserve System. d. state banks that do not have Federal Deposit Insurance Corporation insurance.
c. state banks that are not members of the Federal Reserve System.
When the Federal Reserve makes a loan to a bank at the discount window, a. the Fed requires that the loan be repaid the next day. b. the interest rate charged by the Fed is equal to the federal funds rate. c. the loan is backed by collateral. d. the Fed requires the bank to buy additional deposit insurance.
c. the loan is backed by collateral
Which of the following is an example of a solvent bank? a. A bank that is out of funds to meet the demand of customers b. A bank with negative equity capital c. A bank that has high default risk on debt issue d. A bank with positive equity capital
d. A bank with positive equity capital
Bank supervisors around the world use a common measurement standard for capital adequacy, based on agreement known as the _______ . a. Bank Holding Record b. balance sheet c. Redlining d. Basel Accord
d. Basel Accord
Most credit unions obtain deposit insurance from which government agency? a. The Federal Savings and Loan Insurance Corporation b. The National Credit Union Administration c. The Federal Deposit Insurance Corporation d. The National Credit Union Share Insurance Fund
d. The National Credit Union Share Insurance Fund
A thrift institution that obtains a federal charter obtains its charter from which government agency? a. The Federal Savings and Loan Insurance Corporation b. Federal Reserve c. The Office of Thrift Supervision d. The Office of Comptroller of Currency
d. The Office of Comptroller of Currency
Which of the following is true of the Dodd-Frank Wall Street Reform and Consumer Protection Act? a. The Dodd-Frank Act prevents bank holding companies from branching across state lines. b. The Dodd-Frank Act allowed banks to sell insurance and engage in investment banking activities. c. The Dodd-Frank Act was passed in the year 1999. d. Under the Dodd-Frank Act banking regulators increased the capital and liquidity requirements for banks and other financial institutions.
d. Under the Dodd-Frank Act banking regulators increased the capital and liquidity requirements for banks and other financial institutions.
When many depositors go to a bank at the same time to withdraw their money, there is said to be a. contagion. b. a loss of depositor's credibility. c. a loss of reserves. d. a bank run.
d. a bank run
The Federal Reserve's function as the lender of last resort leads to the problem of a. economic instability. b. contagion. c. bank run. d. adverse selection.
d. adverse selection.
In the CAMELS rating system, which is used to assess the health of the banks, the letter A stands for a. accounting practices. b. auditing procedures. c. analysis of risk. d. asset quality
d. asset quality
The document that a bank must fill out quarterly, reporting its assets, liabilities, and profits to the government, is called a a. balance-sheet analysis. b. P&L statement. c. white paper. d. call report.
d. call report.
To oppose the Glass-Steagall Act, banks argued that they a. would be forced to extend deposit insurance coverage to firms that were not banks. b. would have a conflict of interest between their needs to underwrite stocks and to serve their customers. c. could gain greater monopoly power by lending only to big businesses. d. could take advantage of economies of scope if they were able to underwrite securities and sell them directly to their customers.
d. could take advantage of economies of scope if they were able to underwrite securities and sell them directly to their customers.
Under the purchase-and-assumption method of handling a bank failure, the FDIC a. takes over the bank and controls its operations. b. closes the bank, sells off the assets, pays off insured depositors, and then pays off creditors of the bank if funds remain. c. keeps the bank open and lends funds to it so that it is able to continue its operations. d. finds a buyer for the bank, giving the buyer the good assets of the bank, and assumes the bad loans of the bank.
d. finds a buyer for the bank, giving the buyer the good assets of the bank, and assumes the bad loans of the bank.
The proponents of repeal of the Glass-Steagall Act argued that repeal will a. lead to an increase in operational and information costs of banks. b. increase externalities because of banking problems. c. reduce the international competitiveness of the commercial banks. d. lead to the generation of a higher capital level.
d. lead to the generation of a higher capital level.
The United States has a dual banking system, which means that a bank a. has two regulators. b. may hold its reserves either in the form of vault cash or as deposits at a Federal Reserve Bank. c. may take out a primary credit discount loan or a secondary credit discount loan. d. may choose whether to be chartered by federal government authorities or by a state government.
d. may choose whether to be chartered by federal government authorities or by a state government.