Econ 303 Test 2

The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to

$250,000.

The oldest central bank, having been founded in 1694, is the

Bank of England.

Of the following, which would be the last choice for a bank facing a reserve deficiency?

Call in loans.

That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by

Congress's unwillingness to allocate the necessary funds to thrift regulators.

Under the European System of Central Banks, the Governing Council is similar in structure to the ________ of the Federal Reserve System.

Federal Open Market Committee

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the

Federal Open Market Committee.

The Federal Home Loan Bank Board and the FSLIC, both of which failed in their regulatory tasks, were abolished by the

Financial Institutions Reform, Recovery and Enforcement Act of 1989.

One suggested method of dealing with the too-big-to-fail problem is to reimpose the restrictions that were in place under

Glass-Steagall.

A major difference between the United States and Japanese banking systems is that

Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot.

A deposit outflow results in equal reductions in

assets and liabilities.

There are ________ members of the Board of Governors of the Federal Reserve System.

7

A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of

8 percent.

FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to

8%.

Which of the following are generally TRUE of bonds?

A bond's return equals the yield to maturity when the time to maturity is the same as the holding period.

The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the

McFadden Act.

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

Secretary of the Treasury.

A debit card differs from a credit card in that

a credit card is a loan while for a debit card purchase, payment is made immediately.

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the

adverse selection problem.

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem.

adverse selection; moral hazard

The research document given to the Federal Open Market Committee that contains information on the state of the economy in each Federal Reserve district is called the

beige book.

Banks are required to file ________ usually quarterly that list information on the bank's assets and liabilities, income and dividends, and so forth.

call reports

The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the

central bank.

A ________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there are losses on the underlying assets.

collateralized debt obligation (CDO)

When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in

credit rationing.

The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression.

credit spread

Eurodollars are

dollar-dominated deposits held in banks outside the United States.

The concept of diversification is captured by the statement

don't put all your eggs in one basket.

Banks can lower the cost of information production by applying one information resource to many different services. This process is called

economies of scope.

The McFadden Act of 1927

effectively prohibited banks from branching across state lines.

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

eight

During the 1960s, 1970s, and early 1980s, traditional bank profitability declined because of

financial innovation that increased competition from new financial institutions.

The ability of a central bank to set monetary policy goals is

goal independence.

Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers

has shrunk dramatically, from around 40 percent of total credit advanced to around 20 percent by 2017.

Agency problems in the subprime mortgage market included all of the following EXCEPT

homeowners could refinance their houses with larger loans when their homes appreciated in value.

The growth of the subprime mortgage market led to

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

FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk.

increased; decreased

The ability of a central bank to set monetary policy instruments is

instrument independence.

While legislation enacted in 1998 granted the Bank of Japan new powers and greater autonomy, its critics contend that its independence is

limited by the Ministry of Finance's veto power over a portion of its budget.

In order to compete with changing market conditions in the 1980s, banks supported legislation to remove interest rate ceilings and to allow banks to pay interest on checking accounts. These actions

lowered transactions costs for banks.

The difference between money and income is that

money is a stock and income is a flow.

As "haircuts" increased during 2007-2009, financial institutions found that to borrow the same loan amount now required ________ collateral.

more

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; less

All ________ are required to be members of the Fed.

national banks chartered by the Office of the Comptroller of the Currency

Interest income minus interest expenses divided by assets is a measure of bank performance known as the

net interest margin.

Each governor on the Board of Governors can serve

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

During the "Great Recession" unemployment rates in the United States increased to

over 10%.

The goals of bank asset management include

purchasing securities with high returns and low risk.

Consumer protection legislation includes legislation to

reduce discrimination in credit markets.

If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to

reduce the bank's assets by making fewer loans.

A $5 million deposit outflow from a bank has the immediate effect of

reducing deposits and reserves by $5 million.

Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called

restrictive covenants.

Net profit after taxes per dollar of assets is a basic measure of bank profitability called

return on assets.

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can

sell $3 million of securities that the bank currently owns.

All of the following are examples of off-balance sheet activities that generate fee income for banks EXCEPT

selling negotiable CDs.

In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.

specialization in lending; diversifying

China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas.

state

Banks responded to disintermediation by

supporting the elimination of interest rate regulations, enabling them to better compete for funds.

The business term for economies of scope is

synergies.

Which of the following is an entity of the Federal Reserve System?

the FOMC

As a result of the global financial crisis several of the large, free-standing investment banking firms chose to become bank holding companies. This means that they will now be regulated by

the Federal Reserve.

The ________ that required separation of commercial and investment banking was repealed in 1999.

the Glass-Steagall Act.

What country is given credit for the birth of the Eurodollar market?

the Soviet Union

Prior to 2008, the bank's cost of holding reserves equaled

the interest earned on loans times the amount on reserves.

Recent research indicates that inflation performance (low inflation) has been found to be best in countries with

the most independent central banks.

When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that

the value of the house fell below the amount of the mortgage.

Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following EXCEPT

they did not have the authority to close the insolvent S&Ls.

If a banker expects interest rates to fall in the future, her best strategy for the present is

to increase the duration of the bank's assets.

The Volcker Rule addresses the off-balance-sheet problem involving

trading risks.

In order to ensure that borrowers have an ability to repay residential mortgages, the new consumer protection legislation requires lenders to do all of the following EXCEPT

verify that the borrower can read and understand a loan contract.