Final Exam Review ECONS 320 Money and Banking

अब Quizwiz के साथ अपने होमवर्क और परीक्षाओं को एस करें!

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 A) "payoff" method. B) "purchase and assumption" method. C) "inequity" method. D) "Basel" method.

B) "purchase and assumption" method.

The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets. A) 10% B) 8% C) 5% D) 3%

B) 8%

Both ________ and ________ were financial innovations that occurred because of interest rate volatility. A) adjustable-rate mortgages; commercial paper B) adjustable-rate mortgages; financial derivatives C) sweep accounts; financial derivatives D) sweep accounts; commercial paper

B) adjustable-rate mortgages; financial derivatives

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem. A) adverse selection; adverse selection B) adverse selection; moral hazard C) moral hazard; adverse selection D) moral hazard; moral hazard

B) adverse selection; moral hazard

The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression. A) credit boom B) credit spread C) adjustable-rate D) default swap

B) credit spread

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 A) the dual banking system. B) economies of scale. C) disintermediation. D) interest-rate irregularities.

B) economies of scale.

The ability to use one resource to provide different products and services is A) economies of scale. B) economies of scope. C) diversification. D) vertical integration.

B) economies of scope.

The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from A) issuing equity to finance bank expansion. B) engaging in underwriting and dealing of corporate securities. C) selling new issues of government securities. D) purchasing any debt securities.

B) engaging in underwriting and dealing of corporate securities.

Financial instruments whose payoffs are linked to previously issued securities are called A) grandfathered bonds. B) financial derivatives. C) hedge securities. D) reversible bonds.

B) financial derivatives.

One factor contributing to the rapid growth of the commercial paper market since 1970 is A) the fact that commercial paper has no default risk. B) improved information technology making it easier to screen credit risks. C) government regulation. D) FDIC insurance for commercial paper.

B) improved information technology making it easier to screen credit risks.

Rising interest-rate risk A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation.

B) increased the demand for financial innovation.

To be considered well capitalized, a bank's leverage ratio must exceed A) 10%. B) 8%. C) 5%. D) 3%.

C) 5%.

The Dodd-Frank bill created an agency to monitor markets for asset price bubbles and the buildup of systemic risk. This agency is called the A) Resolution Trust Authority. B) Board of Governors. C) Financial Stability Oversight Council. D) Macroprudential Supervisory Agency.

C) Financial Stability Oversight Council.

The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the A) National Bank Act of 1863. B) Federal Reserve Act of 1913. C) Glass-Steagall Act. D) McFadden Act.

C) Glass-Steagall Act.

Adjustable rate mortgages A) protect households against higher mortgage payments when interest rates rise. B) keep financial institutions' earnings high even when interest rates are falling. C) benefit homeowners when interest rates are falling. D) generally have higher initial interest rates than on conventional fixed-rate mortgages.

C) benefit homeowners when interest rates are falling.

The leverage ratio is the ratio of a bank's A) assets divided by its liabilities. B) income divided by its assets. C) capital divided by its total assets. D) capital divided by its total liabilities.

C) capital divided by its total assets.

Mutual savings banks are owned by A) shareholders. B) partners. C) depositors. D) foreign investors.

C) depositors.

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

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

Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side. A) federal government; municipalities B) state governments; municipalities C) federal government; states D) municipalities; states

C) federal government; states

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

C) improvement in information technology.

Uncertainty about interest-rate movements and returns is called A) market potential. B) interest-rate irregularities C) interest-rate risk. D) financial creativity.

C) interest-rate risk.

The U.S. banking system is considered to be a dual system because A) banks offer both checking and savings accounts. B) it actually includes both banks and thrift institutions. C) it is regulated by both state and federal governments. D) it was established before the Civil War, requiring separate regulatory bodies for the North and South.

C) it is regulated by both state and federal governments.

As "haircuts" increased during 2007-2009, financial institutions found that to borrow the same loan amount now required ________ collateral. A) less B) no C) more D) default-free

C) 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. A) less; more B) more; no C) more; less D) less; no

C) more; less

The presence of so many commercial banks in the United States is most likely the result of A) consumers' strong desire for dealing with only local banks. B) adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks. C) prior regulations that restricted the ability of these financial institutions to open branches. D) consumers' preference for state banks.

C) prior regulations that restricted the ability of these financial institutions to open branches.

The global financial crisis of 2007-2009 not only led to a worldwide recession, but also a ________ in the European nations that use the euro currency. A) currency devaluation B) budget surplus C) sovereign debt crisis D) tax cut

C) sovereign debt crisis

Which regulatory body charters national banks? A) the Federal Reserve B) the FDIC C) the Comptroller of the Currency D) the U.S. Treasury

C) the Comptroller of the Currency

With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System ________ to purchase FDIC insurance for their depositors, while non-member commercial banks ________ to buy deposit insurance. A) could choose; were required B) could choose; were given the option C) were required; could choose D) were required; were required

C) were required; could choose

Deposits in European banks denominated in dollars for the purpose of international transactions are known as A) Eurodollars. B) European Currency Units. C) European Monetary Units. D) International Monetary Units.

A) Eurodollars.

To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance. A) FDIC B) SEC C) Federal Reserve D) ATM

A) FDIC

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

A) Glass-Steagall.

Securitization is a process of asset transformation that involves a number of different financial institutions working together. These financial institutions are known collectively as the A) transformers. B) amalgamation. C) movers and shakers. D) shadow banking system.

D) shadow banking system.

Which bank regulatory agency has the sole regulatory authority over bank holding companies? A) the FDIC B) the Comptroller of the Currency C) the FHLBS D) the Federal Reserve System

D) the Federal Reserve System

The legislation that overturned the prohibition on interstate banking is A) the McFadden Act. B) the Gramm-Leach-Bliley Act. C) the Glass-Steagall Act. D) the Riegle-Neal Act.

D) the Riegle-Neal Act.

An essential characteristic of credit unions is that A) they are typically large. B) branching across state lines is prohibited. C) their lending is primarily for mortgage loans. D) they are organized for individuals with a common bond.

D) they are organized for individuals with a common bond.

The main center of the Eurodollar market is A) London. B) Basel. C) Paris. D) New York.

A) London.

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 A) McFadden Act. B) National Bank Act. C) Glass-Steagall Act. D) Garn-St.Germain Act.

A) McFadden Act.

________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. A) Securitization B) Origination C) Debt deflation D) Distribution

A) Securitization

A serious consequence of a financial crisis is A) a contraction in economic activity. B) an increase in asset prices. C) financial engineering. D) financial globalization.

A) a contraction in economic activity.

When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in A) a contraction of economic activity. B) an economic boom. C) an increased opportunity for growth. D) a call for government regulation.

A) a contraction of economic activity.

The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry. A) an adverse selection B) a moral hazard C) a lemons D) a revenue

A) an adverse selection

Debt deflation occurs when A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. B) rising interest rates worsen adverse selection and moral hazard problems. C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. D) corporations pay back their loans before the scheduled maturity date.

A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness.

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance A) are likely to take on greater risks than they otherwise would. B) are likely to be too conservative, reducing the probability of turning a profit. C) are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety. D) are placed at a competitive disadvantage in acquiring funds.

A) are likely to take on greater risks than they otherwise would.

A possible sequence for the three stages of a financial crisis might be ________ leads to ________ leads to ________. A) asset price declines; banking crises; unanticipated decline in price level B) unanticipated decline in price level; banking crises; increase in interest rates C) banking crises; increase in interest rates; unanticipated decline in price level D) banking crises; increase in uncertainty; increase in interest rates

A) asset price declines; banking crises; unanticipated decline in price level

When asset prices rise above their fundamental economic values, a(n) ________ occurs. A) asset-price bubble B) liability war C) decline in lending D) decrease in moral hazard

A) asset-price bubble

A system of deposit insurance A) attracts risk-taking entrepreneurs into the banking industry. B) encourages bank managers to decrease risk. C) increases the incentives of depositors to monitor the riskiness of their bank's asset portfolio. D) increases the likelihood of bank runs.

A) attracts risk-taking entrepreneurs into the banking industry.

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

A) banking crisis.

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently. B) allows for a more efficient use of funds. C) increases economic activity. D) reduces uncertainty in the economy and increases market efficiency.

A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.

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. A) collateralized debt obligation (CDO) B) adjustable-rate mortgage C) negotiable CD D) discount bond

A) collateralized debt obligation (CDO)

When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a A) credit boom. B) credit bust. C) deleveraging. D) market race.

A) credit boom.

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. A) debt deflation B) illiquidity C) an improvement in banks' balance sheets D) increases in bond prices

A) debt deflation

A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called A) debt deflation. B) moral hazard. C) insolvency. D) illiquidity.

A) 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 A) deleveraging. B) releveraging. C) capitulation. D) deflation.

A) deleveraging.

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

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

The McFadden Act of 1927 A) effectively prohibited banks from branching across state lines. B) required that banks maintain bank capital equal to at least 6 percent of their assets. C) effectively required that banks maintain a correspondent relationship with large money center banks. D) separated the commercial banks and investment banks.

A) effectively prohibited banks from branching across state lines.

Competition between banks A) encourages greater risk taking. B) encourages conservative bank management. C) increases bank profitability. D) eliminates the need for government regulation.

A) encourages greater risk taking.

Sweep accounts A) have made reserve requirements nonbinding for many banks. B) sweep funds out of deposit accounts into long-term securities. C) enable banks to avoid paying interest to corporate customers. D) reduce banks' assets.

A) have made reserve requirements nonbinding for many banks.

Most U.S. financial crises have started during periods of ________ either after the start of a recession, a stock market crash, or the failure of a major financial institution. A) high uncertainty B) low interest rates C) low asset prices D) high financial regulation

A) high uncertainty

Macroprudential supervision policies try to prevent a leverage cycle by changing capital requirements so that they ________ during an expansion and ________ during a downturn. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease

A) increase; decrease

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

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

A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks. A) increases; moral hazard B) decreases; moral hazard C) decreases; adverse selection D) increases; adverse selection

A) increases; moral hazard

Microprudential supervision focuses on the safety and soundness of A) individual financial institutions. B) the financial system as a whole. C) the shadow banking system. D) government credit agencies.

A) individual financial institutions.

One of the concerns of increased bank consolidation is the reduction in community banks which could result in A) less lending to small businesses. B) loss of cultural identity. C) higher interest rates. D) more bank regulation.

A) less lending to small businesses.

Regulators attempt to reduce the riskiness of banks' asset portfolios by A) limiting the amount of loans in particular categories or to individual borrowers. B) encouraging banks to hold risky assets such as common stocks. C) establishing a minimum interest rate floor that banks can earn on certain assets. D) requiring collateral for all loans.

A) limiting the amount of loans in particular categories or to individual borrowers.

When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of A) moral hazard. B) split incentives. C) ex ante shirking. D) pre-contractual opportunism.

A) moral hazard.

Adjustable rate mortgages A) reduce the interest-rate risk for financial institutions. B) benefit homeowners when interest rates rise. C) generally have higher initial interest rates than conventional fixed-rate mortgages. D) allow borrowers to avoid paying interest on portions of their mortgage loans.

A) reduce the interest-rate risk for financial institutions.

The Basel Accord, an international agreement, requires banks to hold capital based on A) risk-weighted assets. B) the total value of assets. C) liabilities. D) deposits.

A) risk-weighted assets.

The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known as A) securitization. B) internationalization. C) arbitrage. D) program trading.

A) securitization.

If mortgage brokers do not make a strong effort to evaluate whether the borrower can pay off a loan, this creates a A) severe adverse selection problem. B) decline in mortgage applications. C) call to deregulate the industry. D) decrease in the demand for houses.

A) severe adverse selection problem.

Although the FDIC was created to prevent bank failures, its existence encourages banks to A) take too much risk. B) hold too much capital. C) open too many branches. D) buy too much stock.

A) take too much risk.

Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been A) the creation of the FDIC. B) rapid economic growth since 1941. C) the employment of new procedures by the Federal Reserve. D) better bank management.

A) the creation of the FDIC.

The spectacular growth in international banking can be explained by A) the rapid growth in international trade. B) the 1988 Basel Agreement. C) the collapse of the Bretton Woods system. D) the creation of the World Trade Organization.

A) the rapid growth in international trade.

When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that A) the value of the house fell below the amount of the mortgage. B) the basement flooded since they could not afford to fix the leaky plumbing. C) the roof leaked during a rainstorm. D) the amount that they owed on their mortgage was less than the value of their house.

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

State banking authorities have sole jurisdiction over state banks A) without FDIC insurance. B) that are not members of the Federal Reserve System. C) operating as bank holding companies. D) chartered in the 21st century.

A) without FDIC insurance.

With the creation of the Federal Deposit Insurance Corporation A) member banks of the Federal Reserve System were given the option to purchase FDIC insurance for their depositors, while non-member commercial banks were required to buy deposit insurance. B) member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could choose to buy deposit insurance. C) both member and non-member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors. D) both member and non-member banks of the Federal Reserve System could choose, but were not required, to purchase FDIC insurance for their depositors.

B) member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could choose to buy deposit insurance.

A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities. A) more; more B) more; less C) less; more D) less; less

B) more; less

Because of securitization, a new class of residential mortgages offered to borrowers with less-than-stellar credit records developed. These mortgages are known as A) risk-enhanced mortgages. B) subprime mortgages. C) bundled mortgages. D) adjustable-rate mortgages.

B) subprime mortgages.

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

B) technology.

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is A) that the FDIC guarantees all deposits when it uses the "payoff" method. B) that the FDIC guarantees all deposits when it uses the "purchase and assumption" method. C) that the FDIC is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions.

B) that the FDIC guarantees all deposits when it uses the "purchase and assumption" method.

The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within A) the Treasury Department. B) the Federal Reserve. C) the SEC. D) the IRS.

B) the Federal Reserve.

The legislation overturning the Glass-Steagall Act is A) the McFadden Act. B) the Gramm-Leach-Bliley Act. C) the Garn-St. Germain Act. D) the Riegle-Neal Act.

B) the Gramm-Leach-Bliley Act.

A major controversy involving the banking industry in its early years was A) whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions. B) whether the federal government or the states should charter banks. C) what percent of deposits banks should hold as fractional reserves. D) whether banks should be allowed to issue their own bank notes.

B) whether the federal government or the states should charter banks.

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

D) $250,000.

Under the Basel Accord, assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________. A) 2; adverse selection B) 2; credit risk C) 4; adverse selection D) 4; credit risk

D) 4; credit risk

________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans. A) Diversification B) Arbitrage C) Computerization D) Securitization

D) Securitization

The primary reason for the recent reduction in the number of banks is A) bank failures. B) re-regulation of banking. C) restrictions on interstate branching. D) bank consolidation.

D) bank consolidation.

A financial innovation that developed as a result of banks avoidance of bank branching restrictions was A) money market mutual funds. B) commercial paper. C) junk bonds. D) bank holding companies.

D) bank holding companies.

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely. A) small; fewer B) small; greater C) big; fewer D) big; greater

D) big; greater

Microprudential supervision does all of the following EXCEPT A) checking capital ratios of a bank. B) checking a bank's compliance with disclosure requirements. C) assessing the riskiness of an individual bank's activities. D) focusing on financial system liquidity.

D) focusing on financial system liquidity.

Firms that are designated as systemically important financial institutions (SIFIs) are subject to all of the following additional Federal Reserve regulations EXCEPT A) higher capital standards. B) stricter liquidity requirements. C) providing a plan for orderly liquidation if necessary. D) interest rate ceilings on time deposits.

D) interest rate ceilings on time deposits.

Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as A) municipal bonds. B) Yankee bonds. C) "fallen angels." D) junk bonds.

D) junk bonds.

Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk. A) adverse selection; little B) adverse selection; much C) moral hazard; little D) moral hazard; much

D) moral hazard; much

Thrift institutions include A) commercial banks. B) brokerage firms. C) insurance companies. D) mutual savings banks.

D) mutual savings banks.


संबंधित स्टडी सेट्स

ch.4: linux file system mangement

View Set

SUBJECT/VERB AND PRONOUN (usage problems of case, agreement, and consistency)

View Set