ECON 2035 Chapter 11.4

15) Shadow banks ________ borrow short-term funds that are not federally insured and use them for long-term investment, and therefore ________ to runs similar to those that occurred during the financial crisis. A) continue to; are vulnerable B) continue to; are no longer vulnerable C) no longer; are vulnerable D) no longer; are no longer vulnerable

A) continue to; are vulnerable

9) Which of the following was the main reason for increased counterparty risk in the shadow banking system prior to the financial crisis of 2007-2009? A) increased leverage B) government insuring money market deposits C) many firms borrowing long term for short-term investments D) trading of derivatives on exchanges

A) increased leverage

11) The resolution plans of an investment bank that "must describe the company's strategy for rapid and orderly resolution in the event of material financial distress or failure of the company" is called a A) living will. B) golden parachute. C) prospectus. D) reorganization plan.

A) living will.

8) Which of the following is likely to be more of a problem after the introduction of deposit insurance? A) moral hazard B) adverse selection C) contagion D) bank runs

A) moral hazard

3) What was the primary reason that Congress initiated deposit insurance in the 1930s? A) protect the deposits of individual savers B) provide more of an incentive for depositors to monitor bank activities C) reduce systemic risk to the financial system D) reduce information problems in the banking system

A) protect the deposits of individual savers

6) What regulatory change did Congress approve in 2010 to reduce counterparty risk in the shadow banking system? A) push more trading of derivatives onto exchanges B) required investment banks to follow the same rules on leverage as commercial banks C) required increased collateral for those trading derivatives D) banned trading of mortgage-backed securities

A) push more trading of derivatives onto exchanges

5) Which government agency regulates futures markets? A) SEC B) Commodity Futures Trading Commission C) Board of Trade D) the Federal Futures Agency

B) Commodity Futures Trading Commission

2) Which agency did Congress create in the 1930s to reduce information costs in financial markets? A) FDIC B) SEC C) Federal Reserve D) Consumer Financial Protection Agency

B) SEC

12) As a result of the financial crisis of 2007-2009, the size of the shadow banking system A) became smaller than the commercial banking system. B) became larger than the commercial banking system. C) declined, but remained larger than the commercial banking system. D) increased, but remained smaller than the commercial banking system.

C) declined, but remained larger than the commercial banking system.

13) "Nonbank" financial institutions include all of the following EXCEPT A) investment banks. B) hedge funds. C) the Federal Reserve. D) mutual funds.

C) the Federal Reserve.

7) Which of the following is NOT a reason that firms in the shadow banking system were more vulnerable than commercial banks during the financial crisis of 2007-2009? A) They could invest in riskier assets. B) Investors had no insurance against loss of principal. C) They made investments that would lose value if housing prices decline. D) They were more heavily regulated than commercial banks, making them less able to adjust to changing market conditions.

D) They were more heavily regulated than commercial banks, making them less able to adjust to changing market conditions.

4) Which of the following is NOT a form of a short-term loan in the shadow banking system? A) repurchase agreements B) commercial paper C) money market mutual fund shares D) bank deposits

D) bank deposits

14) The FDIC ________ short-term borrowing by shadow banks, and shadow banks are normally ________ to receive loans from the Fed when they suffer liquidity problems. A) insures; eligible B) insures; not eligible C) does not insure; eligible D) does not insure; not eligible

D) does not insure; not eligible

1) The shadow banking system refers to A) commercial banks. B) community banks. C) pawn shops and institutions that offer payday loans. D) nonbank financial institutions such as investment banks and hedge funds.

D) nonbank financial institutions such as investment banks and hedge funds.

10) All of the following are new rules affecting the shadow banking system as a result of the Dodd-Frank Act EXCEPT A) some trading of derivatives are required to take place on exchanges. B) large hedge funds are required to register with the SEC. C) firms selling mortgage-backed securities and similar assets are required to hold 5% of the credit risk. D) securitized loans must now be insured.

D) securitized loans must now be insured.