econ 135 ch14

Time consistency tends to be problematic in terms of the trade-off between _____ and _____. Multiple choice question. profitability; crisis management liquidity constraints; crisis prevention crisis mitigation; insolvency crisis mitigation; crisis prevention

crisis mitigation; crisis prevention

Select all that apply Since its inception, deposit insurance _____. Multiple select question. did not prevent the runs associated with the 2007-2009 crisis has helped prevent runs on commercial banks helped prevent the runs associated with the 2007-2009 crisis has not helped prevent runs on commercial banks

did not prevent the runs associated with the 2007-2009 crisis has helped prevent runs on commercial banks

Evidence suggests that deposit insurance _______ cause moral hazard problems in bank management; after the implementation of FDIC insurance, we see ________ in banks' ratio of assets to capital. Multiple choice question. does; a significant increase does; a significant decrease does not; no significant change does; no significant change

does; a significant increase

While Dodd-Frank may reduce the chances of a financial crisis, Multiple choice question. due to financial innovation, one will likely occur. its main components are non-binding. it regulates function rather than form. it will certainly end big bailouts.

due to financial innovation, one will likely occur.

Dodd-Frank attempts to strengthen the financial system by Multiple choice question. eliminating government bailouts. encouraging transparency. strengthening government bailouts. locating and quantifying systemic risks.

encouraging transparency.

Common exposure and pro-cyclicality can be fixed in general terms with regulations that make financial intermediaries _______ these externalities. Multiple choice question. securitize minimize internalize diversify

internalize

Select all that apply The Comprehensive Capital Analysis and Review Multiple select question. is one of the most powerful regulatory tools. is conducted once a year on all banks. is conducted by the Federal Reserve. is considered to be a prominent stress test.

is one of the most powerful regulatory tools. is conducted by the Federal Reserve. is considered to be a prominent stress test.

Since depositors protected by deposit insurance have no incentive to monitor their bankers, the bankers may assume more risk than they would otherwise. This is an example of Multiple choice question. too big to fail. adverse selection. too big to resolve. moral hazard.

moral hazard.

Over the last several decades in the Unites States, banks have become ________ globalized and innovate _________. less; more more; less less; less more; more

more; more

Regulations on bank chartering attempt to ensure that Multiple choice question. banks make legally-mandated information available. banks hold sufficient amounts of capital. banks hold only certain allowable assets. people who start and run a bank are qualified and not criminal.

people who start and run a bank are qualified and not criminal.

In the 1990s, Congress removed many barriers for financial institutions along geographical and functional lines. Today Multiple choice question. regulation and supervision have not fully changed to reflect this. state and federal bank regulatory agencies are no longer distinct from each other. there is already significant regulation across functional lines. there is already significant regulation across state lines.

regulation and supervision have not fully changed to reflect this.

Drag and drop the regulators against the corresponding bank types. Instructions 1. Commercial bank, federal charter 2. Commercial bank, state charter, member of the Federal Reserve system 3. Savings and Loan 4. Credit Union

1. Office of the Comptroller of the Currency 2. Federal Reserve System 3. Federal Deposit Insurance Corporation 4. National Credit Union Administration

On average, a financial disruption has occurred in Multiple choice question. 8 countries per year since 1970. only a handful of small economies since 1970. 151 countries. only a handful of large economies since 1970.

8 countries per year since 1970.

Which of the following statements concerning bank runs is true and uses terminology correctly? Multiple choice question. Only illiquid banks experience bank runs. A run affecting one bank can be contagious to other banks. Most banks that experience bank runs have too much liquidity. Individual banks experiencing bank panics can snowball into a system-wide bank run.

A run affecting one bank can be contagious to other banks. Reason: Individual banks experiencing bank runs can snowball into a system-wide bank panic.

Match each of the three ways the government ensures that risks created by its safety net are contained with its correct definition. Regulation Supervision Examination

Choice Establishing rules for bank managers Overseeing financial institutions in general Choice Procuring information on financial institutions' operations

Select all that apply As in the environment, externalities exist in finance. Indicate two types of externalities in finance. Multiple select question. Common exposure Asymmetrical information Pro-cyclicality Moral hazard

Common exposure Pro-cyclicality

Two types of externalities pose risks and require regulatory intervention in the financial sector. What are these two externalities called? Multiple choice question. Idiosyncratic risk and systematic risk Moral hazard and adverse selection Economies of scope and economies of scale Common exposure and pro-cyclicality

Common exposure and pro-cyclicality

Which of the following are shortfalls of Dodd-Frank? Multiple select question. Fannie Mae and Freddy Mac still dominate U.S. housing finance. It ignores shadow banks. It fails to streamline the regulatory apparatus. Government guarantees are still free. Many government guarantees are too costly.

Fannie Mae and Freddy Mac still dominate U.S. housing finance. It ignores shadow banks. It fails to streamline the regulatory apparatus. Government guarantees are still free.

Select all that apply In a loan contract, which of the following is the bank required to disclose? Multiple select question. Fees charged by the bank Information to allow the interest rate charged by the bank to be compared to rates charged by its competitors Names of other local banks with lower rates or fees The interest rate on the loan in nominal terms

Fees charged by the bank Information to allow the interest rate charged by the bank to be compared to rates charged by its competitors The interest rate on the loan in nominal terms

shadow bank

Institution with liabilities that, like bank deposits, can be withdrawn at face value with little or no notice but that are usually subject to less oversight than banks. (14)

Select all that apply Which of the following are required before approval of a bank merger? Multiple select question. It cannot create a regional monopoly. A large bank cannot take over a small bank. A smaller bank's customers must benefit. Community banks must never be involved in mergers.

It cannot create a regional monopoly. A smaller bank's customers must benefit.

Select all that apply Which of the following was one of the positive effects of the 1988 Basel Accord, according to the text? Multiple select question. It created a uniform international system to weigh risk. It provided a framework to help less developed nations improve bank regulation. It set reserve requirements for commercial banks. It made regulators rethink bank capital.

It created a uniform international system to weigh risk. It provided a framework to help less developed nations improve bank regulation. It made regulators rethink bank capital.

Which of the following was not one of the positive effects of the 1988 Basel Accord, according to the text? Multiple choice question. It set reserve requirements for commercial banks. It created a uniform international system to weigh risk. It made regulators rethink bank capital. It provided a framework to help less developed nations improve bank regulation.

It set reserve requirements for commercial banks.

Select all that apply Why is the "too-big-to-fail policy" ripe for reform? Multiple select question. There is evidence that it worsens the moral hazard problem. It undermines market discipline that creditors impose on banks. The deposit insurance ceiling is meaningless for small banks. It only applies to banks that are most likely to fail.

It undermines market discipline that creditors impose on banks. There is evidence that it worsens the moral hazard problem.

The government acting as a lender of last resort is meant to reduce the risk that banks face. However, sometimes it brings about the opposite effect, resulting in increases in bank risk. Which of the following might explain this? Multiple choice question. Banks are too quick to ask the government for loans. The government often doesn't have money to make loans to banks. Knowing that these loans exist may encourage bank managers to take on increased risk. The government does not charge the bank any interest on loans.

Knowing that these loans exist may encourage bank managers to take on increased risk.

Which of the following is not one of the CAMELS criteria? Multiple choice question. Sensitivity to risk Asset quality Management Leverage

Leverage Reason: The CAMELS criteria are as follows: Capital adequacy; Asset quality; Management; Earnings; Liquidity (not leverage); and Sensitivity to risk.

How can increased competition between banks increase the risk banks take on? Multiple choice question. The central bank increases interest rates when bank competition increases. Because when there are so many banks, at least some of their managers will be incompetent at managing risk. Because competition increases prices paid by customers, banks have more money to invest and worry less about losing it in risky investments. Profits decrease as customers spread their business across more banks.

Profits decrease as customers spread their business across more banks.

Which of the following is not matched correctly with its letter in the acronym CAMELS? Multiple choice question. A = Asset quality E = Earnings L - Liquidity S = Solvency

S = Solvency Reason: The acronym breaks down as follows: C = Capital adequacy; A = Asset quality; M = Management; E= Earnings; L = Liquidity; and S = Sensitivity to Risk.

Which of the following is not a primary regulator/supervisor of banks in the United States today? Multiple choice question. The FDIC (Federal Deposit Insurance Corporation) The U.S. Treasury The SEC (Securities and Exchange Commission) State banking authorities

The SEC (Securities and Exchange Commission) Reason: Banks are regulated and supervised primarily by the U.S. Treasury, the FDIC, the Federal Reserve system, and state baking authorities - but not the SEC.

Which of the following is true about regulatory competition among U.S. banks? Multiple choice question. The choice of regulator essentially lies with each bank. Bank managers end up with the strictest regulation as a result of regulatory competition. Regulatory competition is a small problem in the U.S., compared to other nations. Regulatory competition results in a lack of innovation.

The choice of regulator essentially lies with each bank.

During the financial crisis of 2007 - 2009, which of the following unusual events occurred? Multiple choice question. The government engaged in lending to banks to avoid a bank panic. The government charged interest on loans to banks that borrowed from it. The government made loans to shadow banks. Interest rates fell during a recession.

The government made loans to shadow banks.

bank panic

The simultaneous failure of many banks during a financial crisis. (14)

Which of the following is NOT true as it applies to mergers? Multiple choice question. The new bank cannot constitute a regional monopoly. A small, community bank's customers must benefit from the merger. There are no restrictions on the new bank's size. There are restrictions on the new bank's size.

There are no restrictions on the new bank's size.

When a new bank opens, competition increases. Which of the following is true? Multiple choice question. This competition spurs innovation. Prices for bank customers tend to increase as a result. Competition increases bank profits. Increased competition tends to reduce the risk bank managers take on

This competition spurs innovation.

Select all that apply Identify the four primary goals of the Dodd-Frank Act of 2010. Multiple select question. To strengthen too-big-to-fail To anticipate and prevent financial crises To end too-big-to-fail To reduce moral hazard To make the financial system robust

To anticipate and prevent financial crises To end too-big-to-fail To reduce moral hazard To make the financial system robust

What is the purpose of the liquidity provided by banks and shadow banks? Multiple choice question. To facilitate repurchase agreements To provide a sufficient supply of the store of value To ensure a sufficient supply of the means of payment To avoid the propensity for bank runs

To ensure a sufficient supply of the means of payment

Which of the following is not a reason the government acts as a safety net for the financial system? Multiple choice question. To increase bank profits To protect bank depositors from a monopoly To protect investors To increase financial system stability

To increase bank profits

contagion

When the failure of one bank causes a run on other banks. (14)

Select all that apply Which of the following are not true about FDIC deposit insurance? Multiple select question. With the purchase and assumption method, the FDIC finds a bank willing to pay to take on a failed bank. FDIC insurance covers both banks in the traditional sense and shadow banks. With the payoff method, no depositor suffers losses. It is generally successful at preventing runs on commercial banks.

With the purchase and assumption method, the FDIC finds a bank willing to pay to take on a failed bank. FDIC insurance covers both banks in the traditional sense and shadow banks. With the payoff method, no depositor suffers losses.

Mary hears a rumor that her bank is having problems and withdraws all her money; many people in her town hear the same rumors and do the same thing. This is known as ______. Multiple choice question. a moral panic an insolvency a virtuous cycle a bank run

a bank run

When depositors all attempt to withdraw their assets from a single bank at the same time, it is called _____. Multiple choice question. insolvent a bank panic shadow banking a bank run

a bank run

One of the most powerful prudential tools available is Multiple choice question. a stress test on banks. remote supervision. surprise examinations. bank examination.

a stress test on banks.

Protecting investors, protecting banks' customers, and maintaining the stability of the financial system Multiple choice question. are reasons why government does not get involved in the financial system. are all prerequisites for solvency. are reasons why government gets involved in the financial system. are all prerequisites for liquidity.

are reasons why government gets involved in the financial system.

The main reason the government safeguards banks and shadow banks is because Multiple choice question. there is little link between banks and shadow banks. banks and shadow banks employ many people. banks and shadow banks provide liquidity. banks and shadow banks are not as good as insurance companies and pension funds as facilitating payments.

banks and shadow banks provide liquidity.

Supervision of banks in the United States is performed Multiple choice question. neither remotely nor on-site. both remotely and on-site. only remotely, examining bank documents off-site. only on-site, with examiners visiting the bank at least once a year.

both remotely and on-site.

Bank panic are often the result of Multiple select question. liquidity. moral hazard. contagion. information asymmetries.

contagion. information asymmetries.

Select all that apply Since its inception, deposit insurance _____. Multiple select question. has helped prevent runs on commercial banks did not prevent the runs associated with the 2007-2009 crisis has not helped prevent runs on commercial banks helped prevent the runs associated with the 2007-2009 crisis

has helped prevent runs on commercial banks did not prevent the runs associated with the 2007-2009 crisis

Select all that apply Shadow banks _____. Multiple select question. have liabilities like commercial banks are generally immune to financial crises are generally the cause of financial crises are subject to less oversight than commercial banks

have liabilities like commercial banks are subject to less oversight than commercial banks

When a bank's assets are not large enough to cover its liabilities, it is Multiple choice question. non-depository. profitable. insolvent. a shadow bank.

insolvent

Banks may find themselves in a situation where liabilities outweigh assets known as being _________; the text says that this is because banks provide ________. Multiple choice question. profitable; liquidity profitable; a double coincidence of wants insolvent; liquidity insolvent; a double coincidence of wants

insolvent; liquidity

Pro-cyclicality refers to the fact that financial activity Multiple choice question. is prone to virtuous and vicious cycles. requires regulation only during economic crises. is immune to virtuous and vicious cycles.

is prone to virtuous and vicious cycles.

During the 2007-2009 crisis, the government recapitalized some financial intermediaries. This means Multiple select question. it gave them public money. it bought the bank using borrowed funds. it took some ownership rights. it allowed the institution to fail.

it gave them public money. it took some ownership rights.

The government can influence liquidity and restore bank solvency by acting as a Multiple choice question. lender of last resort. printer of money. arbiter of moral hazard. deposit for stores of value.

lender of last resort.

Restrictions on bank assets in the United States Multiple choice question. encourage banks to hold more stocks than bonds. concentrate most on physical assets like buildings and furniture. specify acceptable asset quality and the acceptable maximum from any one issuer. tend to go against what banks should do in the absence of regulation.

specify acceptable asset quality and the acceptable maximum from any one issuer.

The most important part of a bank examination is _____. Multiple choice question. the evaluation of past-due loans counting the money in a teller's drawer identifying collateral determining that loans actually exist

the evaluation of past-due loans

Banks are required to hold capital in proportion to _____. Multiple choice question. the riskiness of bank operations bank short-term profitability the economic environment of the state(s) where the bank operates the income of bank owners and managers

the riskiness of bank operations

Since the central bank has a difficult time distinguishing insolvency from illiquidity, Multiple choice question. there is a propensity for moral hazard for bank managers. there is a likelihood of adverse selection on the part of bank managers. information asymmetries do not exist. there is a chance that information asymmetries will be minute.

there is a propensity for moral hazard for bank managers.

Between the 1930s and 2007-2009, worldwide, Multiple choice question. there were several very mild financial crises, with the worst between 2007 and 2009 and the very mildest in the 1930s. there were several financial crises, with the least serious in the 1930s and between 2007 and 2009. there were only two significant financial crises: one in the 1930s and one between 2007 and 2009. there were several financial crises, with the worst in the 1930s and between 2007 and 2009.

there were several financial crises, with the worst in the 1930s and between 2007 and 2009.

Since large intermediaries are more interconnected, _____. Multiple choice question. they are a greater source of systemic risk they are unlikely to experience common exposure they are unlikely to experience pro-cyclicality they are less likely to be a source of system risk

they are a greater source of systemic risk

The SIFI designation is a legal term used to describe institutions that are Multiple choice question. illiquid but not insolvent. covered by federal deposit insurance. too interconnected to fail. largely illiquid.

too interconnected to fail.

A bank panic is basically Multiple choice question. a system-wide bank run. the result of liquidity. the same as a bank run. the result of solvency.

a system-wide bank run.

The main difference between shadow banks and other banks is that Multiple choice question. shadow banks have less regulatory oversight than do other banks. shadow banks (but not other types of banks) have liabilities that can be withdrawn at face value. banks (but not shadow banks) have liabilities that can be withdrawn at face value. shadow banks have more regulatory oversight than do other banks.

shadow banks have less regulatory oversight than do other banks. : Both shadow banks and other types of banks have liabilities that can be withdrawn at face value - but shadow banks have less regulatory oversight than other types of banks.

A systematically important financial institution (SIFI) is a term that comes from ________ and involves institutions that are ______. Multiple choice question. the Dodd-Frank law; legally insolvent Gramm-Leach-Bliley; too big to fail the Federal Reserve; too big to resolve the Dodd-Frank law; too big to fail

the Dodd-Frank law; too big to fail

Micro-prudential oversight focuses on issues ________ financial institutions, whereas macro-prudential oversight focuses on __________ risk. Multiple choice question. among; idiosyncratic within; systematic among; systematic within; idiosyncratic

within; systematic

Select all that apply To be effective in limiting systemic threats, a systemic capital surcharge Multiple select question. would be larger for firms that contribute more to the systemic risk. would create incentives for intermediaries to limit the risk they create. would impose lower capital requirements for riskier intermediaries. would be smaller for firms that contribute more to the systemic risk.

would be larger for firms that contribute more to the systemic risk. would create incentives for intermediaries to limit the risk they create.