MGMT 473 Chapter 19 Deposit Insurance and Other Liability Guarantees
Which of the following refers to the regulators' policy of allowing an FI to continue operating even when its capital funds are fully depleted? A. Capital forbearance. B. Prompt corrective action. C. Risk-based deposit insurance. D. Too-big-to-fail. E. Regulatory oversight.
A. Capital forbearance.
Which of the following is NOT a social welfare effect of bank runs? A. Discipline of incompetent managers. B. Negatively affecting the payments function of DIs. C. Reduced availability of credit. D. Potential decrease in the money supply. E. Inability to perform intergenerational wealth transfers.
A. Discipline of incompetent managers.
Subordinate debt (SD) has been proposed as a means of increasing the degree of overall market discipline at a depository institution. Which of the following objectives is considered to be achievable when attempting to increase market discipline? A. Issuing SD might increase the size of the DI's capital cushion. B. The expected cost of issuing SD should decrease as the risk of the DI increased. C. Mandatory SD would reduce transparency at DIs. D. SD would further emphasize the use of capital forbearance. E. Secondary market yields on the SD would be inversely related to an increase in the risk of the DI.
A. Issuing SD might increase the size of the DI's capital cushion.
What is the benefit of a regulatory guarantee or insurance program for liability holders of FIs? A. It decreases the likelihood contagious runs. B. It increases concerns about the asset quality of FI. C. It increases concerns about solvency of an FI. D. It provides incentives to liability holders to engage in runs. E. It provides preference to those who are first in line to withdraw funds over those last in line.
A. It decreases the likelihood contagious runs.
Why are credit unions less affected by financial crises experienced by other thrifts such as savings associations? A. They hold almost 30 percent of their assets in government securities. B. They hold relatively high amounts of residential mortgages. C. Less than 10 percent of their assets are in small consumer loans. D. They are more diversified than other DIs. E. Their customers have no other options for their banking needs.
A. They hold almost 30 percent of their assets in government securities.
Moral hazard at FIs may A. result when actions and consequences are separated. B. occur when interest rates are very high and volatile. C. occur when commodity prices are very high and volatile. D. be a consequence of strict regulatory supervision. E. be a consequence of an erosion of family values.
A. result when actions and consequences are separated.
What does a high proportion of brokered deposits indicate? A. Total risk-based capital ratio of the DI is less than 10 percent. B. Above average risk, and thus an increased potential for failure. C. Less informed savers are protected against a reduction in wealth. D. Reduced insolvency risk as brokered deposits are covered under deposit insurance. E. Lower levels of credit risk.
B. Above average risk, and thus an increased potential for failure.
How is the cost of a systemic risk exemption to the least-cost resolution of bank failures shared among banks? A. It is shared equally among all other insured banks. B. Additional deposit insurance premiums are imposed on FIs based on their size as measured by their total deposits and borrowed funds excluding subordinated debt. C. Additional deposit insurance premiums are imposed on FI based on their size as measured by their total deposits and borrowed funds including subordinated debt. D. It is shared equally among all other insured banks based on the profits earned by the FI during the year. E. The cost is borne by the bank whose run was responsible for the contagion.
B. Additional deposit insurance premiums are imposed on FIs based on their size as measured by their total deposits and borrowed funds excluding subordinated debt.
Which of the following methods was NOT a method used to replenish the FDIC's deposit insurance reserve fund during the most recent financial crisis? A. A special assessment was imposed on participating FIs in early 2009. B. Individual depositor insurance coverage was increased to $250,000. C. Deposit insurance premiums were increased. D. Participating institutions were required to pre-pay insurance premiums. E. A special assessment was imposed on participating FIs during the fall of 2009.
B. Individual depositor insurance coverage was increased to $250,000.
Which of the following is not a Least-Cost Resolution (LCR) requirement under FDICIA? A. Consider and evaluate all possible resolution alternatives by computing and comparing their costs on a present value basis, using realistic discount rates. B. Place a bank or thrift into receivership as soon as its capital falls below some positive book value level. C. Document the evaluation and the assumption on which it is based. D. Retain documentation for at least five years. E. Select the least costly alternative based on the evaluation.
B. Place a bank or thrift into receivership as soon as its capital falls below some positive book value level.
Which of the following refers to mandatory actions that have to be taken by regulators as a DI's capital ratio falls. A. Capital forbearance. B. Prompt corrective action. C. Risk-based deposit insurance. D. Too-big-to-fail. E. Regulatory oversight.
B. Prompt corrective action.
Which of the following considerations was not imposed by FDICIA in an attempt to increase regulatory discipline? A. The act required improved accounting standards for banks. B. The act forbids the use of brokered deposits. C. The act required an annual on-site examination of every bank. D. The act gave private accountants a greater role in monitoring a bank's performance. E. The act produced prompt corrective action capital zones based on observable rules rather than discretion of examiners.
B. The act forbids the use of brokered deposits.
During the 1980s, which of the following was NOT a change in the financial environment that had an inverse impact on U.S. banks and thrifts? A. The effects of significant interest rate changes. B. The failure of the FSLIC. C. The deterioration of real estate prices. D. The collapse of the energy industry. E. Significant deterioration in the agricultural economy.
B. The failure of the FSLIC.
The changes implemented by the Fed in January 2003 to its discount window lending A. decreased the cost of borrowing. B. eased the terms of borrowing. C. terms of borrowing became less flexible. D. resulted in reduction of outstanding discount loan volumes. E. None of the above.
B. eased the terms of borrowing.
The system of flat deposit insurance premium formerly used in the U.S. A. enhances bank safety and soundness because it discourages bank risk taking. B. reduces bank safety and soundness because it encourages bank risk taking. C. has no impact on bank safety and soundness. D. places banks that are considered "too big to fail" at a disadvantage. E. provides unfair advantage to small community banks.
B. reduces bank safety and soundness because it encourages bank risk taking.
Bank risk taking can be controlled by increasing A. stockholder discipline by charging stockholders a surcharge. B. stockholder discipline by setting risk adjusted deposit insurance premiums. C. depositor discipline by increasing the ceiling for deposit insurance coverage. D. regulatory discipline by increasing the budgets of the regulatory agencies. E. depositor discipline by expanding the doctrine of "too big to fail."
B. stockholder discipline by setting risk adjusted deposit insurance premiums.
When risk-taking is not actuarially fairly priced into deposit insurance premiums A. depositors are required to pay the shortfall in funds collected. B. there is an increase in the incentives for owners of DIs to take additional risk. C. deposit insurance premiums are more costly than economically justified. D. depositors will be unprotected should the DI become insolvent and fail. E. the insurance provider is forced to find other sources of funds to continue coverage for the institution.
B. there is an increase in the incentives for owners of DIs to take additional risk.
Which of the following is a drawback of charging flat deposit insurance premiums? A. The FDIC acts more like a private property-casualty insurer when charging flat premiums. B. It discourages banks from taking risks. C. Both high risk and low risk banks are charged the same premium rate. D. High risk banks will be charged an unreasonably high premium rate. E. Premiums reflect the expected private costs or losses to the insurer from the provision of deposit insurance.
C. Both high risk and low risk banks are charged the same premium rate.
How can the regulators reduce the effects of moral hazard in the absence of depositor discipline? A. By allowing DIs to undertake high-risk high-return asset investments. B. By basing deposit insurance premiums on a DI's deposit size. C. By charging explicit deposit insurance premiums and implicit premiums on DIs. D. By exhibiting excessive capital forbearance. E. By implementing prompt corrective action capital zones based on rules rather than discretion.
C. By charging explicit deposit insurance premiums and implicit premiums on DIs.
Which of the following contributed the least to the collapse of the FSLIC/FDIC deposit insurance funds? A. An increase in interest rate volatility. B. Enhanced investment powers granted to thrifts. C. Fraudulent behavior induced by the greed of the decade of the 80s. D. Fraudulent behavior induced by ineffective regulatory incentives. E. The extension of deposit insurance to uninsured depositors.
C. Fraudulent behavior induced by the greed of the decade of the 80s.
The federal safety net to minimize bank failures includes all of the following EXCEPT A. deposit insurance. B. reserve requirements. C. contagious runs. D. minimum capital requirements. E. the discount window of the Federal Reserve Bank.
C. contagious runs.
Under the option pricing model of deposit insurance, the cost of the insurance A. decreases as the insured deposit base increases. B. decreases as the period over which the insurance coverage extends is increased. C. increases with the level of risk of the assets held by the DI increase. D. decreases with market interest rates. E. increase as the level of leverage used by the DI decreases.
C. increases with the level of risk of the assets held by the DI increase.
The contagion effect A. stems from the positive correlation in FI returns. B. results when interest rate risk increases credit risk and liquidity risk exposures. C. occurs when liquidity risk problems at bad banks damages well-run banks. D. occurs when a computer virus infects the computerized electronics payments systems. E. is completely eliminated by government provided deposit insurance against bank runs
C. occurs when liquidity risk problems at bad banks damages well-run banks
The contagion effect A. stems from the positive correlation in FI returns. B. results when interest rate risk increases credit risk and liquidity risk exposures. C. occurs when liquidity risk problems at bad banks damages well-run banks. D. occurs when a computer virus infects the computerized electronics payments systems Fedwire and CHIPS. E. is completely eliminated by government provided deposit insurance against bank runs.
C. occurs when liquidity risk problems at bad banks damages well-run banks.
The FDIC establishes risk-based deposit insurance premiums by considering all of the following EXCEPT A. the deposit insurer's revenue needs. B. different categories and concentrations of assets. C. the frequency of examinations. D. different categories and concentrations of liabilities. E. other factors that affect the probability of loss.
C. the frequency of examinations.
The provision of deposit insurance by the FDIC is similar to having the FDIC ________ on the assets of the bank that buys the deposit insurance. A. write a call option B. buy a call option C. write a put option D. having a secondary lien E. enter into a swap agreement
C. write a put option
Which of the following is NOT a differentiation between deposit insurance and state guaranty funds for the insurance industry? A. The required contributions provided by surviving insurers differs widely across states. B. The annual pro rata contributions often are legally capped for each insurer as a percent of premium income. C. A permanent guaranty fund does not exist for the insurance industry. D. Contributions by surviving firms into the guaranty fund occur before an insurance company has failed. E. The programs that are sponsored by state insurance regulators are administered by private insurance companies.
D. Contributions by surviving firms into the guaranty fund occur before an insurance company has failed.
What was the objective of the FDIC Improvement Act (FDICIA) of 1991? A. Returning the banking industry to record profit levels. B. Restructure the savings association deposit insurance fund and transfer its management to FDIC. C. To deny deposit insurance coverage to funds obtained through deposit brokers. D. To restructure the bank deposit insurance fund and prevent its potential insolvency. E. To enforce the capital standards on insured depository institutions.
D. To restructure the bank deposit insurance fund and prevent its potential insolvency.
The insured depositor transfer method of failure resolution A. results in the closure of the failed bank. B. results in the merger of the failed bank into a stronger entity. C. keeps the failed bank operating for a short period of time. D. minimizes the FDIC's out of pocket costs of resolving a failed DI. E. forces insured depositors to bear some losses.
D. minimizes the FDIC's out of pocket costs of resolving a failed DI.
The least cost resolution strategy of FDICIA requires failure resolution alternatives for all banks to be evaluated on a A. historical cost basis. B. opportunity cost basis. C. market value basis. D. present value basis. E. replacement cost basis.
D. present value basis.
The costs to the bank of borrowing at the discount window do NOT include A. an explicit rate of interest on the borrowings. B. the market value of collateral to be pledged against the loans. C. the negative signal the use of such borrowings sends to regulators about the insurer's financial condition. D. the negative signal the use of such borrowings sends to the market about the bank's financial condition. E. the possibility of greater regulatory scrutiny and examination.
D. the negative signal the use of such borrowings sends to the market about the bank's financial condition.
To address the decreasing balance of the FDIC deposit insurance fund during the financial crisis of 2007-2008 A. deposit insurance programs were suspended for a period of three months. B. the FDIC increased individual depositor insurance coverage from $100,000 to $250,000. C. the FDIC announced that it would no longer honor deposit insurance coverage of some failing DIs. D. two special assessments were levied on institutions participating in the FDIC insurance programs. E. the U.S. Treasury had to take over management of the FDIC.
D. two special assessments were levied on institutions participating in the FDIC insurance programs.
Access to the discount window of the Federal Reserve is unlikely to deter bank runs because A. discount loans are meant to provide temporary liquidity for inherently solvent banks. B. borrowing is not automatic, that is, banks gain access only on a "need to borrow" basis. C. a bank needs high-quality liquid assets to pledge as collateral. D. discount window advances to undercapitalized banks that eventually fail requires the Federal Reserve to compensate the FDIC for incremental losses caused by keeping the bank open for an additional period of time. E. All of the above.
E. All of the above.
Deposit insurance contracts can be structured to reduce moral hazard behavior by A. increasing depositor discipline. B. increasing stockholder discipline. C. increasing regulator discipline. D. reducing owner incentives to take risks. E. All of the above.
E. All of the above.
Discount window loans from the Federal Reserve are used as A. Non-permanent short-term funds. B. Funds to meet seasonal liquidity needs. C. Funds to meet unexpected deposit drain. D. Funds to meet reserve requirement. E. All of the above.
E. All of the above.
The insolvency of the FSLIC occurred because of A. declining real estate values. B. risky lending. C. asset liability mismatch. D. insider lending. E. All of the above.
E. All of the above.
All of the following are associated with contagious runs EXCEPT A. liability holders not distinguishing between good and bad FIs. B. liability holders seeking to quickly turn their liabilities into cash or safe securities. C. a contractionary effect on the supply of credit. D. negative social welfare effects. E. an expansionary effect on the regional money supply.
E. an expansionary effect on the regional money supply.
The FDICIA of 1991 strengthened the role of regulators to monitor bank asset quality by the following measures EXCEPT A. requiring improved accounting standards for banks. B. giving private accountants an increased role in monitoring bank performances. C. requiring an annual on-site examination by regulators. D. requiring banks to work on achieving market value accounting. E. disallowing independent audits.
E. disallowing independent audits.
T/F A major cause of the FSLIC insolvency in the 1980s was the dramatic rise in interest rates in 1979-82 that created extensive duration mismatches of assets and liabilities in the savings and loan industry.
True
T/F After nearly failing, the FDIC's Bank Insurance Fund has achieved record levels of reserves during the decade of the 1990s.
True
T/F Contagious runs on bank deposits are directed at FIs, whether they are failing or healthy
True
T/F Deposit insurance is often blamed for the deterioration in depositor discipline that allowed FIs to accept more risk in the asset selection process.
True
T/F If regulators provide more protection against bank runs, the incidence of moral hazard is likely to increase.
True
T/F In the U.S. currently, deposit insurance premiums increase with the amount of risk.
True
T/F Moral hazard encourages the FI to take on more risk rather than less risk.
True
T/F Moral hazard is encouraged when capital levels are low.
True
T/F Moral hazard provides an incentive for bank owners to accept greater asset risks because they have less to lose.
True
T/F Pricing insurance premiums in an actuarial fair manner involves assessing the risk- taking profile of the financial institution.
True
T/F Pricing insurance premiums to reflect increases in risk-taking by financial institutions is one method to reduce the incentives to take risks.
True
T/F The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) restructured the savings association fund and transferred its management to the FDIC
True
T/F The adverse effects of a contagious run include the restrictions on the ability of individuals to transfer wealth through time and a negative impact on the level or rate of savings.
True
T/F The average cost to the FDIC of each bank failure during the decade of the 1980s was larger than the total cost of all bank failures during the period 1933-79.
True
T/F The number of bank failures in the period of 1933-79 was less than the number of failures during the decade of the 1980s.
True