Money and Banking Module 10

a long-standing goal of financial regulators has been to: a. prevent banks from growing too big and powerful b. minimize the competition that banks face c. encourage banks to grow as large as possible d. discourage small rural banks

a. prevent banks from growing too big and powerful

the creation of the Federal Reserve in 1913: a. provided the opportunity for lender of last resort but no the guarantee that it would be used b. guaranteed the Federal Reserve would always act as lender of last resort c. eliminated bank panics in the U.S. d. was in response to the Great Depression in the U.S.

a. provided the opportunity for lender of last resort but not the guarantee that it would be used

contagion is: a. the failure of one bank spreading to other banks through depositors withdrawing of funds b. the phenomenon that if one bank loan defaults it will cause other bank loans to default c. the rapid contraction of investment spending that occurs when interest rates are increased by the Federal Reserve d. the rapid inflation that results from the printing of money

a. the failure of one bank spreading to other banks through depositors withdrawing of funds

the purpose of the government's safety net for banks is to do each of the following, except: a. protect the integrity of the financial system b. eliminate all risk that investors face c. stop bank panics d. improve the efficiency of the economy

b. eliminate all risk that investors face

during a bank crisis: a. officials at the Federal Reserve find it easy to sort out solvent from insolvent banks b. it is important for regulators to be able to distinguish insolvent from illiquid banks c. it is easy to determine the market prices of bank's assets d. a bank will go to the central bank for a loan before going to other banks

b. it is important for regulators to be able to distinguish insolvent from illiquid banks

bank panics have often begun as a result of: a. rumors only b. real economic events only c. both rumors and real economic events d. neither rumors nor economic evenets

c. both rumors and economic events

Explain how a bank run can turn into a bank panic. Bank runs occur when people fear that their bank has become (insolvent/illiquid). Depositors rush to their bank to withdraw their funds. Depositors at other banks become concerned about their own bank's (solvency/liquidity), so they also hurry to withdraw their funds. Bank runs can turn into system-wide bank panics because customers have a difficult time distinguishing (insolvent/illiquid) banks from (solvent/liquid) ones.

Bank runs occur when people fear that their bank has become insolvent. Depositors rush to their bank to withdraw their funds. Depositors at other banks become concerned about their own bank's solvency, so they also hurry to withdraw their funds. Bank runs can turn into system-wide bank panics because customers have a difficult time distinguishing insolvent banks from solvent ones.

Why were runs during the financial crisis of 2007-2009 not limited to institutions with large exposures to subprime mortgage lending? a. Banks and shadow banks are highly interconnected with one another and so problems in one institution can quickly spread to others, making otherwise healthy institutions vulnerable. b. Banks that did not have large exposures to subprime mortgage lending were largely unaffected by the crisis. c. All banks and shadow banks had large exposures to subprime mortgage lending and so were directly affected by the problems in that market. d. Shadow banks that did not have large exposures to subprime mortgage lending were largely unaffected by the crisis.

a. Banks and shadow banks are highly interconnected with one another and so problems in one institution can quickly spread to others, making otherwise healthy institutions vulnerable.

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 acronym CAMELS, this would be part of rating the bank's: a. asset quality b. losses c. management d. earnings

a. asset quality

under the purchase-and-assumption method of dealing with a failed bank, the FDIC: a. finds another bank to take over the insolvent bank b. takes over the day to day management of the bank c. sells the failed bank to the Federal Reserve d. sells off the profitable loans of the failed bank in an open auction

a. finds another bank to take over the insolvent bank

If bank's fragility arises from the fact that they provide liquidity to depositors, as a bank manager, how might you reduce the fragility of your institution? Select all that apply. a. increase the excess reserves you hold on the asset side of the balance sheet b. increase time deposits c. reduce demand deposits as a percentage of liabilities d. hold a lower portion of assets in the form of liquid securities

a. increase the excess reserves you hold on the asset side of the balance sheet b. increase time deposits c. reduce demand deposits as a percentage of liabilities

the reason that a run on a single bank can turn into a bank panic that threatens the entire financial system is: a. information asymmetries b. moral hazard c. the lack of regulation d. the increased reliance on web-based funds transfers

a. information asymmetries

if the government did not offer the too-big-to-fail safety net: a. large banks would be more disciplined by the potential loss of large corporate accounts b. the moral hazard problem of insuring large banks would increase c. the moral hazard problem of insuring large banks would not be affected d. the FDIC deposit insurance limits would have to be raised

a. large banks would be more disciplined by the potential loss of large corporate accounts

the best way for a government to stop the failure of one bank from turning into a bank panic is to: a. make sure solvent institutions can meet the withdrawal demands of depositors b. declare a bank holiday until solvent banks can acquire adequate liquidity c. limit the withdrawals of depositors d. provide zero-interest rate loans to all banks regardless of net worth

a. make sure solvent institutions can meet the withdrawal demands of depositors

Which of the following are regulations that are designed to reduce the moral hazard created by deposit insurance? Select all that apply. a. regulators can restrict competition so that banks are not under as much pressure to engage in risky investments b. a U.S. banks' exposure to another bank cannot exceed 25% of its capital c. U.S. banks cannot make loans to single borrowers that exceed 50% of their capital d. U.S. banks are not allowed to hold any common stock or bonds e. U.S. banks' bond holdings from a single issuer cannot exceed 25% of their capital f. U.S. banks are not allowed to hold common stock or bonds that are below investment grade g. U.S. banks cannot make loans to single borrowers that exceed 25% of their capital h. U.S. banks' bond holdings from a single issuer cannot be less than 40% of their capital

a. regulators can restrict competition so that banks are not under as much pressure to engage in risky investments b. a U.S. banks' exposure to another bank cannot exceed 25% of its capital e. U.S. banks' holdings from a single issuer cannot exceed 25% of their capital f. U.S. banks are not allowed to hold common stock or bonds that are below investment grade g. U.S. banks cannot make loans to single borrowers that exceed 25% of their capital

credit unions are regulated by a combination of agencies which includes: a. state authorities b. the Federal Reserve c. the Federal Deposit Insurance Corporation d. the Office of the Comptroller of the Currency

a. state authorities

how might the existence of the government safety net lead to increased concentration in the banking industry? a. the safety net creates moral hazard problems for big banks by encouraging extremely risky behavior. This puts small banks at a competitive disadvantage, driving them out of the market and leading to an increase in concentration b. the safety net alleviates the too-big-to-fail problem, thus increasing concentration in the banking industry c. the safety net encourages larger banks to split into several smaller institutions, thus increasing the concentration in the banking industry d. the safety net encourages more banks to enter the market, thus increasing concentration in the industry

a. the safety net creates moral hazard problems for big banks by encouraging extremely risky behavior. This puts small banks at a competitive disadvantage, driving them out of the market and leading to an increase in concentration

the existence of a lender of last resort creates moral hazard for bank managers because: a. they have an incentive to take too much risk in their operations b. officials are likely to undervalue the bank's portfolio of assets c. they are less likely to apply for a direct loan from the central bank d. banks seek loans from the central bank only after exploring other options

a. they have an incentive to take too much risk in their operations

the reasons for the government to get involved in the financial system include each of the following, except: a. to protect the bank's monopoly position b. to protect investors c. to ensure the stability of the financial system d. to protect bank customer from monopolistic exploitation

a. to protect the bank's monopoly position

you hold an FDIC insured savings account at your neighborhood bank. your current balance is $275,000. if the bank fails you will receive: a. $275,000 b. $250,000 c. $100,000 d. $125,000

b. $250,000

savings banks and savings and loans are regulated by a combination of agencies which includes the: a. Federal Reserve System b. Office of the Comptroller of the Currency c. Securities and Exchange Commission d. Internal Revenue Service

b. Office of the Comptroller of the Currency

the government provides deposit insurance; this insurance protects: a. large corporate deposit accounts, but only the amounts that exceed the $250,000 deductible b. depositors for up to $250,000 should a bank fail c. the deposits of banks in their Federal Reserve accounts d. the deposits that people have, but only for federally chartered banks

b. depositors for up to $250,000 should a bank fail

when healthy banks fail due to widespread bank panics, those who are likely to be hurt are: a. government regulators b. households and small businesses c. the FDIC d. the Federal Reserve

b. households and small businesses

the government's too-big-to-fail policy applies to: a. certain highly populated states where a bank run impacts a large percent of the total population b. large banks whose failure would start a widespread panic in the financial system c. large corporate payroll accounts held by some banks where many people would lose their income d. banks that have branches in more than two states

b. large banks whose failure would start a widespread panic in the financial system

the acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes the following, except: a. asset quality b. losses c. management d. earnings

b. losses

an economic rationale for government protection of small investors is that: a. large investors can better afford losses b. many small investors cannot adequately judge the soundness of their bank c. there is inadequate competition to ensure a bank is operating efficiently d. banks are often run by unethical managers who will often exploit small investors

b. many small investors cannot adequately judge the soundness of their bank

in the United Kingdom, regulation of the financial system is concentrated in two agencies. they are: a. the Federal Deposit Insurance Conglomerate and the Bank of England b. the Financial Conduct Authority and the Bank of England c. the Financial Conduct Authority and the English Banking Authority d. the Bank of England and the U.K. Treasury

b. the Financial Conduct Authority and the Bank of England

if your stockbroker gives you bad advice and you lose your investment: a. the government will reimburse you similar to reimbursing depositors if a bank fails b. the government will not reimburse you for the loss; you are not protected from bad advice by your stockbroker c. these losses would be covered under FDIC insurance d. your investment would only be covered if the stockbroker was employed by a bank

b. the government will not reimburse you for the loss; you are not protected from bad advice by your stockbroker

which of the following statements is most correct? a. the higher the deposit insurance limit, the lower the risk of moral hazard b. the higher the deposit insurance limit, the greater the risk of moral hazard c. deposit insurance limits do not impact moral hazard, they impact adverse selection d. increasing the deposit insurance limits above $100,000 would increase coverage for over 50 percent of all depositors

b. the higher the deposit insurance limit, the greater the risk of moral hazard

financial regulators set capital requirements for banks. one characteristic about these requirements is: a. every bank will have to hold the same level b. the riskier the asset holdings of a bank, the more capital it will be required to have c. the more branches a bank has, the more capital it must have d. the amount of capital required is inversely related to the amount of assets the bank owns

b. the riskier the asset holdings of a bank, the more capital it will be required to have

one of the unique problems that banks face is: a. they hold liquid assets to meet illiquid liabilities b. they hold illiquid assets to meet liquid liabilities c. they hold liquid assets to meet liquid liabilities d. both their assets and their liabilities are illiquid

b. they hold illiquid assets to meet liquid liabilities

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: a. $250,000 b. $60,000 c. $260,000 d. $200,000

c. $260,000

a bank run involves: a. illegal activities on the part of the bank's officers b. a bank being forced into bankruptcy c. a large number of depositors withdrawing their funds during a short time span d. a bank's return on assets being below the acceptable level

c. a large number of depositors withdrawing their funds during a short time span

the financial system is inherently more unstable than most other industries due to the fact that: a. while in most other industries customers disappear at a faster rate, in banking they disappear slowly so the damage is done before the real problem is identified b. banks deal in paper profits, not in real profits c. a single firm failing in banking can bring down the entire system; this isn't true in most other industries d. there is less competition than in other industries

c. a single firm in banking can bring down the entire system; this isn't true in most other industries

recession can cause widespread bank crises for all of the following reasons except: a. there is less business investment as banks make fewer loans b. borrowers' default rates increase c. bank capital increases d. the negative effect on banks' balance sheets

c. bank capital increases

When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by: a. taking over the lender of last resort function and assigning this function to the U.S. Treasury b. ordering the printing of tens of billions of dollars of additional currency c. creating the FDIC and offering deposit insurance d. declaring a bank holiday and closing banks for 30 days

c. creating the FDIC and offering deposit insurance

under the purchase-and assumption method, the FDIC usually finds it: a. can sell the failed bank for more than the bank is actually worth b. can sell the bank at a price equaling the value of the failed banks assets c. has to sell the bank at a negative price since the bank is insolvent d. cannot sell the bank and almost always has to revert to the payoff method for dealing with a failed bank

c. has to sell the bank at a negative price since the bank is insolvent

empirical evidence points to the fact that financial crises: a. are newsworthy but have no impact on economic growth b. have a negative impact on economic growth only for the year of the crisis c. have a negative impact on economic growth for years d. can have a positive impact on economic growth as weak borrowers are weeded out

c. have a negative impact on economic growth for years

it is difficult for depositors to know the true health of banks because: a. regulations prohibit banks making their financial statements publicly available b. the financial statements of banks are too difficult for most people to understand c. most of the information on bank loans is private and based on sophisticated models d. banking is competitive and financial records of banks are not divulged to prevent competitor banks from having an advantage

c. most of the information on bank loans is private and based on sophisticated models

in today's world, the goal of financial stability means: a. no institution should fail b. competition should be eliminated c. preventing large-scale financial catastrophes d. creating one mega regulatory agency

c. preventing large-scale financial catastrophes

bank failures tend to occur most often during periods of: a. stock market run ups when, like many companies, banks tend to be overvalued b. high inflation when the fixed rate loans of many banks cause their real returns to decrease c. recessions when many borrowers have a difficult time repaying loans and lending activity slows d. wars and other civil unrest

c. recession when many borrowers have a difficult time repaying loans and lending activity slows

the fact that banks can be either nationally or state chartered creates: a. situations where some banks go unregulated b. situations where banks operating in more than one state can escape regulation c. regulatory competition d. banks being simultaneously regulated by more than one agency

c. regulatory competition

deposit insurance only seems to be viable at the federal level. This is likely due to the fact that: a. state funds are less informed about the solvency of national banks b. a run on the banks within a state will always spread countrywide c. the U.S. Treasury backs the FDIC and can therefore withstand virtually any crisis d. the cost of state insurance is prohibitively high

c. the U.S. Treasury backs the FDIC and can therefore withstand virtually any crisis

what matters most during a bank run is: a. the number of loans outstanding b. the solvency of the bank c. the liquidity of the bank d. the size of the bank's assets

c. the liquidity of the bank

bank mergers require government approval because banking officials want to make sure that: a. the merger will create a larger bank b. the merger will not create a monopoly c. the merged bank will be more profitable d. the merger will not result in regulatory competition

c. the merged bank will be more profitable

which of the following is not a goal of the Dodd-Frank Act of 2010? a. to anticipate and prevent financial crises by limiting systemic risk b. to end "too big to fail" c. to promote competition d. to reduce moral hazard

c. to promote competition

on November 20, 1985, the Bank of New York needed to use the lender of last resort function due to: a. a run on the bank started by a rumor that the president of the bank embezzled tens of millions of dollars from the bank b. a computer error caused the bank's records to wipe out the balances of all of its customers c. a rumor that the bank was about to be taken over by FDIC due to insolvency d. a computer error that made it impossible for the bank to keep track of its Treasury bond trades

d. a computer error that made it impossible for the bank to keep track of its Treasury bond trades

the federal government is concerned about the health of the banking system for many reasons, the most important of which may be: a. banks are where government bonds are traded b. a significant number of people are employed in the banking industry c. many people earn the majority of their income from interest on bank deposits d. banks are of great importance in enabling the economy to operate efficiently

d. banks are of great importance in enabling the economy to operate efficiently

prior to the financial crisis of 2007-2009 banks did all but which of the following to bulk up their profit: a. bought or sponsored hedge funds b. traded securities for customers c. purchased equities for their own account d. colluded to fix benchmark interest rates

d. colluded to fix benchmark interest rates

Banks are required to disclose certain information. This disclosure is done for all of the following reasons except: a. to enable regulators to more easily assess the financial condition of banks b. to allow financial market participants to penalize banks that carry additional risk c. to allow customers to more easily compare prices for services offered by banks d. create uniform prices for standard bank services

d. create uniform prices for standard bank services

rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because: a. customers will not want to obtain loans from this bank b. equity investors will not be able to sell the bank's stock c. regulators will scrutinize the bank heavily looking for something wrong d. depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have sufficient liquid assets on hand

d. depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have sufficient liquid assets on hand

deflation can cause widespread bank crises for all of the following reasons except: a. a decline in the value of borrowers' net worth but not their liabilities b. borrowers' default rates increase c. bank balance sheets deteriorate as the level of economic activity decreases d. information asymmetry problems decrease during deflationary periods

d. information asymmetry problems decrease during deflationary periods

which of the following is not an important addition made to the Basel Accords by Basel III in 2010? a. it supplements capital requirements based on risk-weighted assets with restrictions on leverage b. it introduces three buffers over and above capital requirements itself c. it adds a liquidity requirement that compels banks to hold a quantity of high-quality liquid assets d. it ends the too-big-to-fail problem

d. it ends the too-big-to-fail problem

which of the following is not a positive effect of the Basel Accord? a. it forced regulators to change the way they thought about bank capital b. it promoted a more uniform international system c. it provided a framework that less developed countries could use to improve the regulation of their banks d. it provided a system to differentiate between bonds based on their systematic risk

d. it provided a system to differentiate between bonds based on their systematic risk

the first test of the Federal Reserve as lender of last resort occurred with the: a. attack on Pearl Harbor by the Japanese b. widespread failures of Savings and Loans in the 1980s c. introduction of flexible exchange rates in the U.S. in 1971 d. stock market crash in 1929

d. stock market crash in 1929