FIN 341 Chapter 18
a. any firm that accepts deposits from underwriting stocks and bonds of corporations.
10. The Glass-Steagall Act of 1933 prevented a. any firm that accepts deposits from underwriting stocks and bonds of corporations. b. any firm that accepts deposits from underwriting general obligation bonds of states and municipalities. c. any firm that accepts deposits from holding any corporate bonds in its asset portfolio. d. state-chartered banks from offering commercial loans.
d. allowance of interstate banking for depository institutions in most states
11. Which of the following is not a main deregulatory provision of Depository Institutions Deregulation and Monetary Control Act of 1980? a. phase-out of deposit rate ceilings b. allowance of checkable deposits for all depository institutions c. new lending flexibility of depository institutions d. allowance of interstate banking for depository institutions in most states
a. prevent another credit crisis.
12. The Financial Reform Act was intended to: a. prevent another credit crisis. b. reduce capital ratios. c. impose interest rate ceilings on deposits. d. prevent banks from offering securities services.
a. permitted depository institutions to offer money market deposit accounts.
13. The Garn-St. Germain Act of 1982 a. permitted depository institutions to offer money market deposit accounts. b. prevented depository institutions from acquiring problem institutions across geographical boundaries. c. required the Fed to explicitly charge depository institutions for its services. d. allowed the Fed to provide check clearing to depository institutions at no charge.
b. dollar value of fixed assets
14. Which of the following is not a specific criterion the FDIC uses to monitor banks? a. capital adequacy b. dollar value of fixed assets c. asset quality d. earnings e. sensitivity to financial market conditions
a. systemic
15. The potential risk that financial problems can spread through financial institutions and the financial system is referred to as: a. systemic b. systematic c. unsystematic d. market
d. risk-weighted assets
16. The Basel framework recommends capital requirements in proportion to: a. mortgages b. commercial paper c. liabilities d. risk-weighted assets
b. forces banks with greater risk to maintain more capital.
17. The Basel Accord a. forces banks with greater risk to maintain more deposits. b. forces banks with greater risk to maintain more capital. c. forces banks with greater risk to maintain less capital. d. none of the above
c. In general, the VAR model does not lend itself to determine capital requirements.
19. Which of the following statements is incorrect? a. The validity of a bank's estimated VAR is assessed with backtests in which the actual daily trading gains or losses are compared to the estimated VAR over a particular period. b. Some banks supplement the VAR estimate with stress tests. c. In general, the VAR model does not lend itself to determine capital requirements. d. All of the statements above are correct.
d. guarantees backing commercial paper issued by firms
20. Which of the following is an "off-balance-sheet commitment?" a. long-term debt b. additional paid-in capital c. notes payable d. guarantees backing commercial paper issued by firms
e. excessive borrowing by banks from outside sources, such as the discount window.
21. The liquidity component of the CAMELS rating refers to a. regulators' concern about how a bank's earnings would change if economic conditions change. b. how well the bank's management would detect its own financial problems. c. a bank's sensitivity to financial market conditions. d. monitoring the type of loans that are given, the bank's process for deciding whether to provide loans, and the credit rating of debt securities that it purchases. e. excessive borrowing by banks from outside sources, such as the discount window.
e. All of the above are possible corrective actions taken by bank regulators.
22. Which of the following is not a corrective action taken by regulators when a bank is identified as a problem bank? a. Regulators may examine such banks frequently and thoroughly. b. Regulators may request that a bank boost its capital level or delay its plans to expand. c. Regulators can require that additional financial information be periodically updated to allow continued monitoring. d. Regulators have the authority to take legal action against a problem bank if the bank does not comply with their suggested remedies. e. All of the above are possible corrective actions taken by bank regulators.
d. based on the risk of the bank.
23. The fee banks pay to the FDIC for deposit insurance is now a. a fixed dollar amount for all banks. b. a fixed percentage of the bank's deposit level for all banks. c. a fixed percentage of the bank's loan volume for all banks. d. based on the risk of the bank.
c. causes less concern about the safety of the banking system than the failure of large banks.
24. Generally, the failure of small banks a. causes more widespread concern about the safety of the banking system than the failure of large banks. b. causes equal concern about the safety of the banking system as the failure of large banks. c. causes less concern about the safety of the banking system than the failure of large banks. d. Either A or B can be true, depending on the type of business cycle that exists while the failures occur.
d. Bank B is perceived as safer according to capital, but more risky according to asset quality.
26. Bank A has a 10 percent capital ratio and uses a significant proportion of its assets to invest in very highly-rated bonds. Bank B has an 12 percent capital ratio and uses a significant proportion of its assets to invest in highly leveraged transactions. How would Bank A rate versus Bank B using the capital and asset quality criteria? a. Bank A is perceived as safer by both criteria. b. Bank B is perceived as safer by both criteria. c. Bank A is perceived as safer according to capital, but more risky according to asset quality. d. Bank B is perceived as safer according to capital, but more risky according to asset quality.
b. detect problems of a bank in time to correct them.
27. The key reason for regulatory examinations (such as CAMELS ratings) is to a. rate past performance. b. detect problems of a bank in time to correct them. c. check for embezzlement. d. monitor reserve requirements.
d. Garn-St. Germain Act
29. Which banking act allowed banks to cross state lines in order to acquire a failing institution? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St. Germain Act
a. may; are
3. Commercial banks that are not members of the Federal Reserve System ____ borrow from the Fed, and ____ subject to the Fed's reserve requirements. a. may; are b. may; are not c. may not; are not d. may not; are
c. DIDMCA
30. Which banking act allowed for the creation of NOW accounts? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St. Germain Act
a. Reigle-Neal Interstate Banking and Branching Efficiency Act
31. Which banking act allowed interstate banking? a. Reigle-Neal Interstate Banking and Branching Efficiency Act b. Glass-Steagall Act c. DIDMCA d. Sarbanes-Oxley Act
c. Financial Reform Act
32. Which banking act permanently increased FDIC insurance up to $250,000? a. DIDMCA b. Sarbanes-Oxley Act c. Financial Reform Act d. Garn-St. Germain Act
c. DIDMCA
33. Which banking act removed deposit rate ceilings? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St. Germain Act
a. economies of scale.
34. The argument that interstate banking would allow banks to grow and more fully achieve a reduction in operating costs per unit of output as output increases is based on a. economies of scale. b. financial leverage. c. diseconomies of scale. d. capital adequacy theory.
b. was created in 1933.
35. Federal deposit insurance a. existed since the 1800s. b. was created in 1933. c. was created after World War II. d. was created in 1960.
b. Current stock price
36. ____ is not a characteristics used by the Federal Deposit Insurance Corporation (FDIC) to rate banks. a. Capital adequacy b. Current stock price c. Asset quality d. Management e. All of the above are used by the FDIC to rate banks.
d. set at a percentage of assets that is based on the bank's risk level.
37. The moral hazard problem is minimized when deposit insurance premiums are a. zero (not imposed by the FDIC). b. the same percentage of assets for all banks. c. set at a fixed percentage of assets for large banks, and is zero for small banks. d. set at a percentage of assets that is based on the bank's risk level.
a. It complemented the Glass-Steagall Act.
38. Which of the following statements is incorrect with respect to the Financial Services Modernization Act of 1999? a. It complemented the Glass-Steagall Act. b. It enabled commercial banks to more easily pursue securities and insurance activities. c. It gave securities firms and insurance companies the right to acquire banks. d. The Act requires that commercial banks must have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities. e. All of the above are true.
a. Bank Insurance Fund
39. The ____ is the fund used to cover insured depositors. a. Bank Insurance Fund b. Federal Deposit Insurance Corporation (FDIC) c. money market mutual fund d. growth fund e. none of the above
b. Off-balance sheet financing
40. ____ is not a rating criterion used by the FDIC. a. Capital adequacy b. Off-balance sheet financing c. Asset quality d. Management e. Liquidity
c. retaining earnings and issuing common stock.
41. The uniform global capital requirements mandated a minimum level of Tier 1 capital, which primarily consists of funds obtained from a. issuing commercial paper and bonds. b. retaining earnings and issuing commercial paper. c. retaining earnings and issuing common stock. d. issuing bonds and common stock.
d. Troubled Asset Relief Program (TARP)
42. During the 2008-2010 period, the ____ was implemented to alleviate the financial problems experienced by banks and other financial institutions with excessive exposure to mortgages or mortgage-backed securities. a. Riegle Program b. Sarbanes-Oxley Program c. FDIC Program d. Troubled Asset Relief Program (TARP)
b. allowed financial institutions to offer a diversified set of financial services without being subjected to stringent constraints.
47. The Financial Services Modernization Act of 1999 a. gave banks and other financial service firms less freedom to merge. b. allowed financial institutions to offer a diversified set of financial services without being subjected to stringent constraints. c. offers very few benefits to a financial institution's clients. d. increased the reliance of financial institutions on the demand for the single service they offer.
c. Banks and other financial service firms were given more freedom to merge, but were forced to divest some of the financial services that they acquired.
48. Which of the following is not true regarding the Financial Services Modernization Act of 1999? a. It provided more momentum for the consolidation of financial services. b. Financial institutions were finally able to offer a diversified set of financial services without being subjected to stringent constraints on the form or amount of financial services that they could offer. c. Banks and other financial service firms were given more freedom to merge, but were forced to divest some of the financial services that they acquired. d. Financial institutions no longer had to search for loopholes or monitor their business to ensure that the degree of financial services offered remained within the regulatory constraints that were previously imposed. e. all of the above are true
b. FDIC insurance on deposits.
5. All Fed member banks must hold a. private insurance on deposits. b. FDIC insurance on deposits. c. both FDIC and private insurance on deposits. d. none of the above
b. Off-balance sheet financing
59. ____ is not a rating criterion used by the Federal Deposit Insurance Corporation (FDIC). a. Capital adequacy b. Off-balance sheet financing c. Asset quality d. Management e. Liquidity
b. are; are not
6. Commercial banks ____ restricted to a maximum percentage of their capital to loan to a single customer, and ____ allowed to use borrowed or deposited funds to purchase common stock. a. are; are b. are; are not c. are not; are d. are not; are not
a. Comptroller of the Currency.
60. A federal bank charter is issued by the a. Comptroller of the Currency. b. Securities and Exchange Commission. c. U.S. Treasury. d. Federal Reserve. e. none of the above
d. all of the above
61. Bank regulations typically: a. involve a tradeoff between the safety of the banking system and the efficiency of bank operations. b. impose restrictions on the types of assets in which banks can invest. c. set requirements for the minimum amount of capital that banks must hold. d. all of the above
b. selling assets.
64. A bank can increase its capital ratio by: a. buying back shares of its stock from shareholders. b. selling assets. c. increasing its dividend to encourage more investors to purchase its stock. d. increasing its off-balance sheet activities.
c. increased capital requirements and liquidity requirements for banks.
65. The Basel III framework proposes: a. lower capital requirements for banks to enable them to generate higher earnings to make up for their losses during the credit crisis. b. relying on the rating agencies to assess the risk of bank assets. c. increased capital requirements and liquidity requirements for banks. d. using the gap ratio to set the capital ratio.
d. the Supreme Court ruled that the Federal Reserve had exceeded its authority by assisting Bear Stearns because Bear was a securities firm and not a commercial bank.
66. During the credit crisis, all of the following occurred except: a. some securities firms were allowed to become bank holding companies. b. the Federal Reserve rescued American International Group, an insurance company. c. the Treasury injected funds into financial institutions. d. the Supreme Court ruled that the Federal Reserve had exceeded its authority by assisting Bear Stearns because Bear was a securities firm and not a commercial bank.
c. sets limits on banks' proprietary trading.
67. The Volcker rule, named for a former Fed chair: a. is intended to increase the powers of the Fed. b. states that the U.S. government will rescue certain large banks if necessary to reduce systemic risk in the financial system. c. sets limits on banks' proprietary trading. d. requires all banks to undergo annual stress tests.
b. set requirements for the Deposit Insurance Fund's reserves.
68. The Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010: a. ended the system of risk-based insurance premiums. b. set requirements for the Deposit Insurance Fund's reserves. c. raised the limit for insured deposits to $750,000 per depositor. d. allowed large insurance companies such as American International Group to compete with the FDIC to insure bank deposits.
a. standby letter of credit.
8. An "off-balance-sheet commitment" that provides the bank's guarantee on the financial obligations of a borrower to a specific party is a a. standby letter of credit. b. federal funds agreement. c. repurchase agreement. d. discount window agreement.
c. interest rates on savings deposits.
9. The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own a. reserve requirements. b. capital ratios. c. interest rates on savings deposits. d. corporate loan interest rates.
