Money and Banking chapter 14
You have savings accounts at two separately FDIC-insured banks. At one of the banks your account has a balance of $200,000. At the other bank the account balance is $60,000. You find out the banks are going to merge. If this happens and the merged bank fails, you would receive
$250,000.
You have two savings accounts at an FDIC-insured bank. You have $225,000 in one account and $40,000 in the other. If the bank fails, you will receive
$250,000.
You hold an FDIC-insured savings account at your neighborhood bank. Your current balance is $275,000. If the bank fails you will receive
$250,000.
You have savings accounts at two separately FDIC-insured banks. At one of the banks your account has a balance of $200,000. At the other bank the account balance is $60,000. If both banks fail, you will receive
$260,000.
The need for a lender of last resort was identified as far back as
1873, by British economist Walter Bagehot.
As of 2018, the four largest commercial banks held what share of total deposits at U.S.commercial banks?
36 percent
What is the difference between solvency and liquidity for a bank?
A solvent bank has a positive net worth while a bank with liquidity means that thebank has sufficient reserves and immediately marketable assets to meet withdrawal demands.
When healthy banks fail due to widespread bank panics, those who are likely to be hurt are
Households and small businesses
How was the Dodd-Frank Act of 2010 relatively inefficient?
How was the Dodd-Frank Act of 2010 relatively inefficient?
The reason that a run on a single bank can turn into a bank panic that threatens the entirefinancial system is
Information assymetries
Which one of the following is not an important addition made to the Basel Accords byBasel III in 2010?
It ends the too-big-to-fail problem.
Which one of the following is not a positive effect of the Basel Accord?
It provided a system to differentiate between bonds based on their systemic risk.
If the government did not offer the too-big-to-fail safety net, then
Large banks would be more disciplined by the potential loss of large corporate accounts.
What matters most during a bank run is the
Liquidity on the bank
The government regulates bank mergers, sometimes denying the proposed merger. Often the reason given for the denial is to protect small investors. What are small investors being protected from?
Mergers can increase the monopoly power of banks, and the bank may seek to exploit this power by raising prices and earning unwarranted profits.
Savings banks and savings and loans are regulated by a combination of agencies, which includes the
Office of the Comptroller of the Currency.
On November 20, 1985, the Bank of New York needed to use the lender of last resort function due to
a computer error that made it impossible for the bank to keep track of its Treasury bond trades.
A bank run involves
a large number of depositors withdrawing their funds during a short time span.
The Financial Crisis of 2007-08 occurred in three distinct phases which, in the order of occurrence, are
a liquidity crisis, a solvency crisis, and a recapitalization of the system
Which of the following does NOT tend to precede a financial crisis?
a reduction in systemic risk
The original Basel Accord was
a set of guidelines for basic capital requirements for internationally active banks.
The financial system is inherently more unstable than most other industries due to the fact that
a single firm failing in banking can bring down the entire system unlike in most other industries
A bank supervisor examines the bank's portfolio of loans to see if the loans are being repaid in a timely manner. In terms of the CAMELS criteria, this would be part of rating the bank's
asset quality.
The financial crisis of 2007-2009 has made which one of the following regulatory goals atop priority for government?
avoidance of systemic risk
The federal government is concerned about the health of the banking system for manyreasons, the most important of which may be that
banks are of great importance in enabling the economy to operate efficiently
Banks serve essential functions in an economy, but their fragility arises from the fact that
banks provide liquidity to depositors
The government is "lender of last resort" to which one of the following groups?
banks that experience sudden deposit outflows
Banks can effectively choose their regulators by deciding whether to
be chartered at the national or state level.
Deflation causes financial disruption when
borrowers have invested in real assets whose value declines while loan payments stay the same.
One reason that financial regulations restrict the assets that banks can own is to
combat the moral hazard that government safety nets provide
When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by
creating the FDIC and offering deposit insurance.
If the lender of last resort function of the government is to be effective in working to minimize a crisis, it must be
credible, with banks knowing they can get loans quickly.
One reason a bank's officer may be reluctant to write off a past-due loan is that it will
decrease the bank's assets and capital.
The government provides deposit insurance which protects
depositors for up to $250,000 should a bank fail.
Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because
depositors will rush to the bank to withdraw their deposits and the bank under normal conditions would not have sufficient liquid assets on hand
Governments supervise banks mainly to do each of the following, except which one?
eliminate all risk faced by depositors and investors.
The purpose of the government's safety net for banks is to do each of the following, except which one?
eliminate all risk that investors face
Policy responses were critical in arresting the Financial Crisis of 2007-08 and promoting recovery. The responses used include all of the following except which one?
elimination of interest rate floors
Contagion is the
failure of one bank spreading to other banks through depositors withdrawing of funds
One negative consequence of regulatory competition is that
financial institutions often seek out the most lenient regulator.
Under the purchase-and-assumption method of dealing with a failed bank, the FDIC
finds another bank to take over the insolvent bank.
A moral hazard situation arises in the lender of last resort function because a central bank
finds it difficult to distinguish illiquid from insolvent banks.
Governments employ three strategies to contain the risks created by government safety nets. These include each of the following, except which one?
government taxation
Since the 1920s, the ratio of assets to capital has more than doubled for commercial banks. Many economists believe this is the direct result of
government-provided deposit insurance.
Under the purchase-and-assumption method, the FDIC usually finds it
has to sell the bank at a negative price since the bank is insolvent.
Empirical evidence points to the fact that financial crises
have a negative impact on economic growth for years.
The government's providing of deposit insurance and functioning as the lender of last resort has significantly
increased the amount of regulation of banks required and increased the incentive for banks to take on risk.
The moral hazard problem caused by government safety nets
is greater for larger banks.
During a bank crisis,
it is important for regulators to be able to distinguish insolvent from illiquid banks.
As a result of government-provided deposit insurance, the ratio of assets to capital for commercial banks since the 1920s has
just about doubled.
The government's too-big-to-fail policy applies to
large banks whose failure would start a widespread panic in the financial system.
The 2016 elections in the United States
led to resistance to Dodd-Frank becoming enshrined in law and regulatory changes.
As of January, 2019, the interbank loans that appear on banks' balance sheets represent about what proportion of bank capital?
less than 1 percent
The acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes all of the following except which one?
losses
The best way for a government to stop the failure of one bank from turning into a bank panic is to
make sure solvent institutions can meet the withdrawal demands of depositors.
Bank mergers require government approval because banking officials want to make sure that the
merged bank will be a monopoly.
The CAMELS ratings are
not made public.
An economic rationale for government protection of small investors, in particular, is that
often small investors cannot adequately judge the soundness of their bank
The supervision of banks includes
on-site examinations of the bank.
Banking regulations prevent banks from
owning common stocks of corporations.
Which one of the following best describes the payoff method used by the FDIC to address the insolvency of a bank? The FDIC
pays off the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses
Do depositors of a failed bank generally prefer that the FDIC use the "payoff method" or the "purchase-and-assumption method" for dealing with the failed bank? Depositors would:
prefer the purchase and assumption method since deposits over $250,000 will also be protected.
The reasons for the government to get involved in the financial system include each of the following, except which one?
preserve a bank's monopoly position
A long-standing goal of financial regulators has been to
prevent banks from growing too big and powerful.
In today's world, the goal of financial stability means
preventing large-scale financial catastrophes
Ceteris paribus, which one of the following business practices increases the possibility ofa bank run? Banks
promise to satisfy withdrawal requests on a first-come, first-served basis
In principle, banks are like any other business such that new ones could open up and others close every year. It is problematic, however, if banks fail at the same rate as, say, restaurants because banks
provide access to the payments system
The creation of the Federal Reserve in 1913
provided the opportunity for lender of last resort but not the guarantee that it would be used.
Prior to the financial crisis of 2007-2009 banks did all of the following except which one to bulk up their profit?
purchased equities for their own account
Which one of the following incentives promotes more risk of moral hazard?
raising the deposit insurance limit
Bank failures tend to occur most often during periods of
recessions when many borrowers have a difficult time repaying loans and lending activity slows
Implicit government support for "too-big-to-fail" banks
reduces the risk faced by depositors with accounts exceeding $250,000.
The fact that banks can be either nationally or state chartered creates
regulatory competition.
During the financial crisis of 2007-2009 in the United States it was revealed that the function of a lender of last resort had not kept pace with the evolving financial system because
shadow banks lacked access to the financial resources available through the lender of last resort.
Credit unions are regulated by a combination of agencies, which includes
state authorities.
The first test of the Federal Reserve as lender of last resort occurred with the
stock market crash in 1929
Which one of the following is not involved in regulating savings banks and savings and loans?
the Federal Reserve System
Which one of the following regulates commercial banks as well as savings banks and savings and loans?
the Federal Reserve System
The first phase of the Financial Crisis of 2007-08 began when
the French bank BNP Paribas suspended redemptions from three mutual funds invested in U.S. subprime mortgage debt
It is difficult for depositors to know the true health of banks because
the financial statements of banks are too difficult for most people to understand
If your stockbroker gives you bad advice and you lose your investment,
the government will not reimburse you for the loss because you are not protected from bad advice by your stockbroker.
One lesson learned from the bank panics of the early 1930s is that
the mere existence of a lender of last resort will not keep the financial system from collapsing.
Financial regulators set capital requirements for banks. One characteristic about these requirements is that
the riskier the asset holdings of a bank, the more capital it will be required to have.
Regulators and supervisors of banks are challenged by all of the following except which one?
the use of new financial instruments that shift risk without shifting ownership
One reason customers do not care about the quality of their bank's assets is that
there is deposit insurance which protects deposits even if the bank fails.
The existence of a lender of last resort creates moral hazard for bank managers because
they have an incentive to take too much risk in their operations.
One of the unique problems that banks face is that
they hold illiquid assets to meet liquid liabilities.
Banks are required to disclose certain information for all of the following reasons except which one?
to create uniform prices for standard bank services
Which one of the following was not a goal of the Dodd-Frank Act of 2010?
to promote competition
Which one of the following is not a pillar of the latest Basel Accord?
uniform international laws for bank regulation
Financial regulators
work to prevent monopolies but also work to prevent strong competition in banking.
