Econ 343 Test 3 (PT 4)

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) banking crises; increase in interest rates; unanticipated decline in price level C) banking crises; increase in uncertainty; increase in interest rates D) unanticipated decline in price level; banking crises; increase in interest rates

A

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

A

A(n) ________ is a subsidiary of a U.S. bank that is engaged primarily in international banking. A) Edge Act corporation B) Eurodollar agency C) McFadden corporation D) universal bank

A

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 A) the Federal Reserve. B) the state banking authorities. C) the FDIC. D) the Treasury.

A

In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity. A) universal B) severable C) dividerless D) barrier-free

A

Lack of competition in the United States banking industry can be attributed to A) nineteenth-century populist sentiment. B) recent legislation restricting competition. C) the fact that branching has eliminated competition. D) the fact that competition does not benefit consumers.

A

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) shadow banking system. B) amalgamation. C) transformers. D) movers and shakers.

A

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) sovereign debt crisis B) tax cut C) budget surplus D) currency devaluation

A

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) deleveraging. C) credit bust. D) market race.

A

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

B

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

B

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) adjustable-rate mortgages. B) subprime mortgages. C) bundled mortgages. D) risk-enhanced mortgages.

B

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

B

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

B

The entry of AT&T and GM into the credit card business is an indication of A) the reduction in costs of credit card operations since 1990. B) the rising profitability of credit card operations. C) the sale of unprofitable operations by Bank of America and Citicorp. D) governmentʹs efforts to deregulate the provision of financial services.

B

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

B

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

B

Although it has a population about half that of the United States, Japan has A) about 25 percent of the number of banks. B) more than 5000 commercial banks. C) fewer than 100 commercial banks. D) many more banks.

C

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

C

Bank holding companies that rival money center banks in size, but are not located in money center cities are A) international banks. B) local banks. C) superregional banks. D) bank clearing houses.

C

Experts predict that the future structure of the U.S. banking industry will have A) a few hundred banks. B) as few as ten banks. C) several thousand banks. D) an increased number of banks.

C

In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status. A) Ivan Boesky B) Carl Icahn C) Michael Milken D) Roger Milliken

C

In a bank panic, the source of contagion is the A) transactions cost problem. B) free-rider problem. C) asymmetric information problem. D) too-big-to-fail problem.

C

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 financial regulation B) low asset prices C) high uncertainty D) low interest rates

C

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

C

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

C

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) Macroprudential Supervisory Agency. B) Board of Governors. C) Financial Stability Oversight Council. D) Resolution Trust Authority.

C

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

C

The decline in traditional banking internationally can be attributed to A) increasing monopoly power of banks over depositors. B) increased regulation. C) improved information technology. D) increased protection from competition.

C

The development of money market mutual funds contributed to the growth of ________ since the money market mutual funds need to hold liquid, high-quality, short-terms assets. A) the corporate bond market B) the municipal bond market C) the commercial paper market D) the junk bond market

C

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

C

________ within the U.S. can make loans to foreigners but cannot make loans to domestic residents. A) Universal banks B) Edge Act corporations C) International Banking Facilities D) Euro banks

C

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

D

If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral, the ʺhaircutʺ is A) 5%. B) 20%. C) 50%. D) 10%.

D

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; increase B) decrease; increase C) decrease; decrease D) increase; decrease

D

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

D

Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers A) has shrunk dramatically, from around 70 percent of total credit advanced to below 50 percent by 2014. B) has expanded dramatically, from around 50 percent of total credit advanced to above 70 percent by 2014. C) has expanded dramatically, from around 30 percent of total credit advanced to above 50 percent by 2014. D) has shrunk dramatically, from around 40 percent of total credit advanced to around 25 percent by 2014.

D

The Volcker Rule addresses the off-balance-sheet problem involving A) interest rate risks. B) selling loans. C) loan guarantees. D) trading risks.

D

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) default swap C) adjustable-rate D) credit spread

D

The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk. A) debt deflation B) collateralized debt C) democratization of credit D) principal-agent

D

The process in which people seeking higher yielding securities take their funds out of the banking system thus restricting the amount of funds banks can lend is called A) deposit jumping. B) capital mobility. C) loophole mining. D) disintermediation.

D

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

D

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

D

Under the Gramm-Leach-Bliley Act the oversight of the securities activities of bank holding companies belongs to A) the Comptroller of the Currency. B) the U.S. Treasury. C) the Federal Reserve. D) the SEC.

D

________ are asymmetric information problems that act as a barrier to efficient allocation of capital. A) Credit imbalances B) Asset prices C) Financial derivatives D) Financial frictions

D