C14 HW RKJ
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 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.
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 the bank has sufficient reserves and immediately marketable assets to meet withdrawal demands.
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.
Banks serve essential functions in an economy, but their fragility arises from the fact that
banks provide liquidity to depositors.
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.
The government provides deposit insurance which protects
depositors for up to $250,000 should a bank fail.
Governments supervise banks mainly to do each of the following, except which one?
eliminate all risk faced by depositors and investors.
Contagion is the
failure of one bank spreading to other banks through depositors withdrawing of funds.
Empirical evidence points to the fact that financial crises
have a negative impact on economic growth for years.
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.
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.
It is difficult for depositors to know the true health of banks because
most of the information on bank loans is private and based on sophisticated models.
The CAMELS ratings are
not made public.
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.
Depositors of a failed bank generally would 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.
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 of a 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.
Bank failures tend to occur most often during periods of
recessions 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
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.
Which one of the following is not involved in regulating savings banks and savings and loans?
the Federal Reserve System
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.
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.
