Quiz 11: Economic Analysis of Financial Regulation

The Economics of Money, Banking, and Financial Markets

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104
Questions
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True/False
101
Choices
3
Essay
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Questions

Q1
Free

Depositors lack of information about the quality of bank assets can lead to ________.

Multiple Choice
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A) bank panics
B) bank booms
C) sequencing
D) asset transformation
Answer:
A) bank panics
Q2
Free

The fact that banks operate on a ʺsequential service constraintʺ means that

Multiple Choice
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A) all depositors share equally in the bankʹs funds during a crisis.
B) depositors arriving last are just as likely to receive their funds as those arriving first.
C) depositors arriving first have the best chance of withdrawing their funds.
D) banks randomly select the depositors who will receive all of their funds.
Answer:
C) depositors arriving first have the best chance of withdrawing their funds.
Q3
Free

Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a

Multiple Choice
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A) last-in, first-out constraint.
B) sequential service constraint.
C) double-coincidence of wants constraint.
D) everyone-shares-equally constraint.
Answer:
B) sequential service constraint.
Q4

Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the

Multiple Choice
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A) too-big-to-fail effect.
B) moral hazard problem.
C) adverse selection problem.
D) contagion effect.
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Q5

The contagion effect refers to the fact that

Multiple Choice
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A) deposit insurance has eliminated the problem of bank failures.
B) bank runs involve only sound banks.
C) bank runs involve only insolvent banks.
D) the failure of one bank can hasten the failure of other banks.
Answer:

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Q6

During the boom years of the 1920s, bank failures were quite

Multiple Choice
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A) uncommon, averaging less than 30 per year.
B) uncommon, averaging less than 100 per year.
C) common, averaging about 600 per year.
D) common, averaging about 1000 per year.
Answer:

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Q7

To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance.

Multiple Choice
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A) FDIC
B) SEC
C) Federal Reserve
D) ATM
Answer:

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Q8

The primary difference between the ʺpayoffʺ and the ʺpurchase and assumptionʺ methods of handling failed banks is

Multiple Choice
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A) that the FDIC guarantees all deposits when it uses the ʺpayoffʺ method.
B) that the FDIC guarantees all deposits when it uses the ʺpurchase and assumptionʺ method.
C) that the FDIC is more likely to use the ʺpayoffʺ method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures.
D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions.
Answer:

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Q9

Deposit insurance has not worked well in countries with

Multiple Choice
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A) a weak institutional environment.
B) strong supervision and regulation.
C) a tradition of the rule of law.
D) few opportunities for corruption.
Answer:

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Q10

When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of

Multiple Choice
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A) moral hazard.
B) split incentives.
C) ex ante shirking.
D) pre-contractual opportunism.
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Q11

Moral hazard is an important concern of insurance arrangements because the existence of insurance

Multiple Choice
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A) provides increased incentives for risk taking.
B) is a hindrance to efficient risk taking.
C) causes the private cost of the insured activity to increase.
D) creates an adverse selection problem but no moral hazard problem.
Answer:

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Q12

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the

Multiple Choice
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A) moral hazard problem.
B) adverse selection problem.
C) assigned risk problem.
D) ill queue problem.
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Q13

Deposit insurance is only one type of government safety net. All of the following are types of government support for troubled financial institutions except

Multiple Choice
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A) forgiving tax debt.
B) lending from the central bank.
C) lending directly from the governmentʹs treasury department.
D) nationalizing and guaranteeing that all creditors will be repaid their loans in full.
Answer:

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Q14

Although the FDIC was created to prevent bank failures, its existence encourages banks to

Multiple Choice
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A) take too much risk.
B) hold too much capital.
C) open too many branches.
D) buy too much stock.
Answer:

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Q15

A system of deposit insurance

Multiple Choice
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A) attracts risk-taking entrepreneurs into the banking industry.
B) encourages bank managers to decrease risk.
C) increases the incentives of depositors to monitor the riskiness of their bankʹs asset portfolio.
D) increases the likelihood of bank runs.
Answer:

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Q16

The government safety net creates ________ problem because risk -loving entrepreneurs might find banking an attractive industry.

Multiple Choice
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A) an adverse selection
B) a moral hazard
C) a lemons
D) a revenue
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Q17

Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk.

Multiple Choice
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A) adverse selection; little
B) adverse selection; much
C) moral hazard; little
D) moral hazard; much
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Q18

Acquiring information on a bankʹs activities in order to determine a bankʹs risk is difficult for depositors and is another argument for government ________.

Multiple Choice
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A) regulation
B) ownership
C) recall
D) forbearance
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Q19

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance

Multiple Choice
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A) are likely to take on greater risks than they otherwise would.
B) are likely to be too conservative, reducing the probability of turning a profit.
C) are likely to regard deposits as an unattractive source of funds due to depositorsʹ demands for safety.
D) are placed at a competitive disadvantage in acquiring funds.
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Q20

In May 1991, the FDIC announced that it would sell the governmentʹs final 26% stake in Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois

Multiple Choice
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A) was a good investment opportunity for the government.
B) could be the Chicago branch of a new governmentally-owned interstate banking system.
C) was too big to fail.
D) would become the center of the new midwest region central bank system.
Answer:

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Q21

If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.

Multiple Choice
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A) payoff; large
B) payoff; no
C) purchase and assumption; large
D) purchase and assumption; no
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Q22

Federal deposit insurance covers deposits up to $100,000, but as part of a doctrine called ʺtoo-big-to-failʺ the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses the

Multiple Choice
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A) ʺpayoffʺ method.
B) ʺpurchase and assumptionʺ method.
C) ʺinequityʺ method.
D) ʺBaselʺ method.
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Q23

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely.

Multiple Choice
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A) small; fewer
B) small; greater
C) big; fewer
D) big; greater
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Q24

A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.

Multiple Choice
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A) increases; moral hazard
B) decreases; moral hazard
C) decreases; adverse selection
D) increases; adverse selection
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Q25

The too-big-to-fail policy

Multiple Choice
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A) reduces moral hazard problems.
B) puts large banks at a competitive disadvantage in attracting large deposits.
C) treats large depositors of small banks inequitably when compared to depositors of large banks.
D) allows small banks to take on more risk than large banks.
Answer:

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Q26

Regulators attempt to reduce the riskiness of banksʹ asset portfolios by

Multiple Choice
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A) limiting the amount of loans in particular categories or to individual borrowers.
B) encouraging banks to hold risky assets such as common stocks.
C) establishing a minimum interest rate floor that banks can earn on certain assets.
D) requiring collateral for all loans.
Answer:

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Q27

A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.

Multiple Choice
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A) more; more
B) more; less
C) less; more
D) less; less
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Q28

A bank failure is less likely to occur when

Multiple Choice
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A) a bank holds less U.S. government securities.
B) a bank suffers large deposit outflows.
C) a bank holds fewer excess reserves.
D) a bank has more bank capital.
Answer:

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Q29

The leverage ratio is the ratio of a bankʹs

Multiple Choice
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A) assets divided by its liabilities.
B) income divided by its assets.
C) capital divided by its total assets.
D) capital divided by its total liabilities.
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Q30

To be considered well capitalized, a bankʹs leverage ratio must exceed ________.

Multiple Choice
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A) 10%
B) 8%
C) 5%
D) 3%
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Q31

Off-balance-sheet activities

Multiple Choice
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A) generate fee income with no increase in risk.
B) increase bank risk but do not increase income.
C) generate fee income but increase a bankʹs risk.
D) generate fee income and reduce risk.
Answer:

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Q32

The Basel Accord, an international agreement, requires banks to hold capital based on

Multiple Choice
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A) risk-weighted assets.
B) the total value of assets.
C) liabilities.
D) deposits.
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Q33

The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets.

Multiple Choice
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A) 10%
B) 8%
C) 5%
D) 3%
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Q34

Under the Basel Accord, assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________.

Multiple Choice
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A) 2; adverse selection
B) 2; credit risk
C) 4; adverse selection
D) 4; credit risk
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Q35

The practice of keeping high-risk assets on a bankʹs books while removing low-risk assets with the same capital requirement is know as

Multiple Choice
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A) competition in laxity.
B) depositor supervision.
C) regulatory arbitrage.
D) a dual banking system.
Answer:

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Q36

Banks engage in regulatory arbitrage by

Multiple Choice
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A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement.
B) keeping low-risk assets on their books while removing high-risk assets with the same capital requirement.
C) hiding risky assets from regulators.
D) buying risky assets from arbitragers.
Answer:

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Q37

Because banks engage in regulatory arbitrage, the Basel Accord on risk-based capital requirements may result in

Multiple Choice
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A) reduced risk taking by banks.
B) reduced supervision of banks by regulators.
C) increased fraudulent behavior by banks.
D) increased risk taking by banks.
Answer:

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Q38

One of the criticisms of Basel 2 is that it is procyclical. That means that

Multiple Choice
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A) banks may be required to hold more capital during times when capital is short.
B) banks may become professional at a cyclical response to economic conditions.
C) banks may be required to hold less capital during times when capital is short.
D) banks will not be required to hold capital during an expansion.
Answer:

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Q39

Overseeing who operates banks and how they are operated is called ________.

Multiple Choice
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A) prudential supervision
B) hazard insurance
C) regulatory interference
D) loan loss reserves
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Q40

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem.

Multiple Choice
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A) adverse selection; adverse selection
B) adverse selection; moral hazard
C) moral hazard; adverse selection
D) moral hazard; moral hazard
Answer:

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Q41

The chartering process is similar to ________ potential borrowers and the restriction of risk assets by regulators is similar to ________ in private financial markets.

Multiple Choice
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A) screening; restrictive covenants
B) screening; branching restrictions
C) identifying; branching restrictions
D) identifying; credit rationing
Answer:

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Q42

Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for ________.

Multiple Choice
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A) liabilities
B) liquidity
C) loans
D) leverage
Answer:

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Q43

The federal agencies that examine banks include

Multiple Choice
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A) the Federal Reserve System.
B) the Internal Revenue Service.
C) the SEC.
D) the U.S. Treasury.
Answer:

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Q44

Banks are required to file ________ usually quarterly that list information on the bankʹs assets and liabilities, income and dividends, and so forth.

Multiple Choice
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A) call reports
B) balance reports
C) regulatory sheets
D) examiner updates
Answer:

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Q45

Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry.

Multiple Choice
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A) moral hazard
B) adverse selection
C) ex post shirking
D) post-contractual opportunism
Answer:

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Q46

The current supervisory practice toward risk management

Multiple Choice
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A) focuses on the quality of a bankʹs balance sheet.
B) determines whether capital requirements have been met.
C) evaluates the soundness of a bankʹs risk-management process.
D) focuses on eliminating all risk.
Answer:

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Q47

Regulations designed to provide information to the marketplace so that investors can make informed decisions are called

Multiple Choice
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A) disclosure requirements.
B) efficient market requirements.
C) asset restrictions.
D) capital requirements.
Answer:

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Q48

With ________, firms value assets on their balance sheet at what they would sell for in the market.

Multiple Choice
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A) mark-to-market accounting
B) book-value accounting
C) historical-cost accounting
D) off-balance sheet accounting
Answer:

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Q49

During times of financial crisis, mark-to-market accounting

Multiple Choice
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A) requires that a financial firmsʹ assets be marked down in value which can worsen the lending crisis.
B) leads to an increase in the financial firmsʹ balance sheets since they can now get assets at bargain prices.
C) leads to an increase in financial firmsʹ lending.
D) results in financial firmsʹ assets increasing in value.
Answer:

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Q50

Consumer protection legislation includes legislation to

Multiple Choice
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A) reduce discrimination in credit markets.
B) require banks to make loans to everyone who applies.
C) reduce the amount of interest that bankʹs can charge on loans.
D) require banks to make periodic reports to the Better Business Bureau.
Answer:

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Q51

An important factor in producing the subprime mortgage crisis was

Multiple Choice
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A) lax consumer protection regulation.
B) onerous rules placed on mortgage originators.
C) weak incentives for mortgage brokers to use complicated mortgage products.
D) strong incentives for the mortgage brokers to verify income information.
Answer:

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Q52

Competition between banks

Multiple Choice
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A) encourages greater risk taking.
B) encourages conservative bank management.
C) increases bank profitability.
D) eliminates the need for government regulation.
Answer:

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Q53

Regulations that reduced competition between banks included

Multiple Choice
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A) branching restrictions.
B) bank reserve requirements.
C) the dual system of granting bank charters.
D) interest-rate ceilings.
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Q54

The ________ that required separation of commercial and investment banking was repealed in 1999.

Multiple Choice
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A) the Federal Reserve Act.
B) the Glass-Steagall Act.
C) the Bank Holding Company Act.
D) the Monetary Control Act.
Answer:

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Q55

Which of the following is not a reason financial regulation and supervision is difficult in real life?

Multiple Choice
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A) Financial institutions have strong incentives to avoid existing regulations.
B) Unintended consequences may happen if details in the regulations are not precise.
C) Regulated firms lobby politicians to lean on regulators to ease the rules.
D) Financial institutions are not required to follow the rules.
Answer:

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Q56

Who has regulatory responsibility when a bank operates branches in many countries?

Multiple Choice
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A) It is not always clear.
B) The WTO.
C) The U.S. Federal Reserve System.
D) The first country to submit an application.
Answer:

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Q57

The collapse of the Bank of Credit and Commerce International, BCCI, showed the difficulty of international banking regulation. BCCI operated in more than ________ countries and was supervised by the small country of ________.

Multiple Choice
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A) 70, Luxembourg
B) 100, Monaco
C) 70, Monaco
D) 100, Luxembourg
Answer:

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Q58

Agreements such as the ________ are attempts to standardize international banking regulations.

Multiple Choice
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A) Basel Accord
B) UN Bank Accord
C) GATT Accord
D) WTO Accord
Answer:

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Q59

The Basel Committee ruled that regulators in other countries can ________ the operations of a foreign bank if they believe that it lacks effective oversight.

Multiple Choice
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A) restrict
B) encourage
C) renegotiate
D) enhance
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Q60

The government safety net creates both an adverse selection problem and a moral hazard problem. Explain.

Essay
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Answer:

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Q61

In the ten year period 1981-1990, 1202 commercial banks were closed, with a peak of 206 failures in 1989. This rate of failures was approximately ________ times greater than that in the period from 1934 to 1980.

Multiple Choice
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A) two
B) three
C) five
D) ten
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Q62

During the 1960s, 1970s, and early 1980s, traditional bank profitability declined because of

Multiple Choice
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A) financial innovation that increased competition from new financial institutions.
B) a decrease in interest rates to fight the inflation problem.
C) a decrease in deposit insurance.
D) increased regulation that prohibited banks from making risky real estate loans.
Answer:

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Q63

Moral hazard problems increased in prominence in the 1980s

Multiple Choice
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A) as deregulation required savings and loans and mutual savings banks to be more cautious.
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking.
C) following a decrease in federal deposit insurance from $100,000 to $40,000.
D) as interest rates were sharply decreased to bring down inflation.
Answer:

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Q64

The Depository Institutions Deregulation and Monetary Control Act of 1980

Multiple Choice
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A) restricted thrift institutions to making loans for home mortgages.
B) restricted the use of ATS accounts.
C) imposed restrictive interest-rate ceilings on large agricultural loans.
D) increased deposit insurance from $40,000 to $100,000.
Answer:

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Q65

How did the increase in the interest rates in the early 80s contribute to the S&L crisis?

Essay
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Answer:

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Q66

The evidence from banking crises in other countries indicates that

Multiple Choice
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A) deposit insurance is to blame in each country.
B) a government safety net for depositors need not increase moral hazard.
C) regulatory forbearance never leads to problems.
D) deregulation combined with poor regulatory supervision raises moral hazard incentives.
Answer:

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Q67

A common element in all of the banking crisis episodes in different countries is

Multiple Choice
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A) the existence of a government safety net.
B) deposit insurance.
C) increased regulation.
D) lack of competition.
Answer:

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Q68

Banking crises have occurred throughout the world. What similarities do we find when we look at the different countries?

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Answer:

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Q69

All of the following would reduce the agency problems of the originate-to-distribute model except

Multiple Choice
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A) encouraging more complex mortgage products.
B) more stringent licensing requirements.
C) clearer disclosure of mortgage terms.
D) discouraging borrowers from ʺgetting in over their head.ʺ
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Q70

Higher capital requirements will reduce the problems incurred when troubled ________ which had been off-balance sheet activities come back on the balance sheet.

Multiple Choice
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A) structured investment vehicles (SIVs)
B) negotiable CDs
C) Eurodollars
D) Federal funds
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Q71

Currently, Fannie Mae and Freddie Mac are

Multiple Choice
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A) privately owned government-sponsored enterprises.
B) privately owned enterprises with no government sponsorship.
C) government agencies.
D) government departments.
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Q72

Investment banks that are part of ________ are regulated and supervised like banks.

Multiple Choice
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A) bank holding companies
B) insurance companies
C) Freddie Mac
D) Fannie Mae
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Q73

The inaccurate ratings provided by credit-rating agencies

Multiple Choice
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A) meant that investors did not have the information they needed to make informed choices about their investments.
B) were irrelevant since no one pays any attention to them anyway.
C) meant that investors actually took on less risk.
D) will not be a problem when determining capital requirements under Basel 2..
Answer:

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Q74

The subprime financial crisis showed the need for increased financial regulation, however, too much or poorly designed regulation could

Multiple Choice
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A) choke off financial innovation.
B) increase the efficiency of the financial system.
C) increase economic growth.
D) increase international financial integration.
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Q75

Moral hazard and adverse selection problems increased in prominence in the 1980s

Multiple Choice
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A) as deregulation required savings and loans and mutual savings banks to be more cautious.
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking.
C) following a decrease in federal deposit insurance from $100,000 to $40,000.
D) as interest rates were sharply decreased to bring down inflation.
Answer:

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Q76

The Depository Institutions Deregulation and Monetary Control Act of 1980

Multiple Choice
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A) separated investment banks and commercial banks.
B) restricted the use of ATS accounts.
C) imposed restrictive usury ceilings on large agricultural loans.
D) increased deposit insurance from $40,000 to $100,000.
Answer:

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Q77

One of the problems experienced by the savings and loan industry during the 1980s was

Multiple Choice
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A) managers lack of expertise to manage risk in new lines of business.
B) heavy regulations in the new areas open to S&Ls.
C) slow growth in lending.
D) close monitoring by the FSLIC.
Answer:

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Q78

In the early stages of the 1980s banking crisis, financial institutions were especially harmed by

Multiple Choice
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A) declining interest rates from late 1979 until 1981.
B) the severe recession in 1981-82.
C) the disinflation from mid 1980 to early 1983.
D) the increase in energy prices in the early 80s.
Answer:

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Q79

When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them, they were pursuing a policy of ________.

Multiple Choice
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A) regulatory forbearance
B) regulatory kindness
C) ostrich reasoning
D) ignorance reasoning
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Q80

Savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called

Multiple Choice
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A) goodwill.
B) salvation.
C) kindness.
D) retribution.
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Q81

Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following except

Multiple Choice
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A) they had insufficient funds to close all of the insolvent S&Ls.
B) they were friends with the S&L owners.
C) they hoped the problem would go away.
D) they did not have the authority to close the insolvent S&Ls.
Answer:

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Q82

The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.

Multiple Choice
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A) regulatory forbearance; moral hazard
B) regulatory forbearance; adverse hazard
C) regulatory agnosticism; moral hazard
D) regulatory agnosticism; adverse hazard
Answer:

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Q83

Regulatory forbearance

Multiple Choice
expand_more
A) meant delaying the closing of ʺzombie S&Lsʺ as their losses mounted during the 1980s.
B) had the advantage of benefiting healthy S&Ls at the expense of ʺzombie S&Lsʺ, as insolvent institutions lost deposits to health institutions.
C) had the advantage of permitting many insolvent S&Ls the opportunity to return to profitability, saving the FSLIC billions of dollars.
D) increased adverse selection dramatically.
Answer:

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Q84

The major provisions of the Competitive Equality Banking Act of 1987 include

Multiple Choice
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A) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal deposit insurance system.
B) the establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership.
C) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance.
D) prompt corrective action when a bank gets in trouble.
Answer:

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Q85

The S&L Crisis can be analyzed as a principal-agent problem. The agents in this case, the ________, did not have the same incentive to minimize cost to the economy as the principals, the ________.

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A) politicians/regulators; taxpayers
B) taxpayers; politician/regulators
C) taxpayers; bank managers
D) bank managers; politicians/regulators
Answer:

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Q86

ʺBureaucratic gamblingʺ refers to

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A) the strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of thrift regulators.
B) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s.
C) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve.
D) the risk that regulators took in going to Congress to ask for additional funds.
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Q87

That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by

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A) Congressʹs unwillingness to allocate the necessary funds to thrift regulators.
B) regulatorsʹ reluctance to find the specific problem thrifts that they knew existed.
C) slower growth in lending meant that less regulation was needed.
D) Congressʹs unwillingness to listen to campaign contributors.
Answer:

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Q88

The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers because

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A) of regulatorsʹ initial attempts to downplay the seriousness of problems within the thrift industry.
B) politicians listened to the taxpayers rather than the S&L lobbyists.
C) Congress did not wait long enough for many of the problems in the thrift industry to correct themselves.
D) regulators could not be fired, therefore, they didnʹt care if they did a good job or not.
Answer:

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Q89

An analysis of the political economy of the savings and loan crisis helps one to understand

Multiple Choice
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A) why politicians aided the efforts of thrift regulators, raising regulatory appropriations and encouraging closing of insolvent thrifts.
B) why thrift regulators were so quick to inform Congress of the problems that existed in the thrift industry.
C) why thrift regulators willingly acceded to pressures placed upon them by members of Congress.
D) why politicians listened so closely to the taxpayers they represented.
Answer:

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Q90

Taxpayers were served poorly by thrift regulators in the 1980s. This poor performance cannot be explained by

Multiple Choice
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A) regulatorsʹ desire to escape blame for poor performance, leading to a perverse strategy of ʺbureaucratic gambling.ʺ
B) regulatorsʹ incentives to accede to pressures imposed by politicians, who sought to keep regulators from imposing tough regulations on institutions that were major campaign contributors.
C) Congressʹs dogged determination to protect taxpayers from the unsound banking practices of managers at many of the nations savings and loans.
D) politicians strong incentives to act in their own interests rather than the interests of the taxpayers.
Answer:

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Q91

The Federal Home Loan Bank Board and the FSLIC, both of which failed in their regulatory tasks, were abolished by the

Multiple Choice
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A) Competitive Equality Banking Act of 1987.
B) Financial Institutions Reform, Recovery and Enforcement Act of 1989.
C) Office of Thrift Supervision.
D) Office of the Comptroller of the Currency.
Answer:

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Q92

The Resolution Trust Corporation was created by the FIRREA in order to

Multiple Choice
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A) manage and resolve insolvent S&Ls.
B) build up trust in government regulation.
C) regulate the S&L industry.
D) purchase large amounts of government debt.
Answer:

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Q93

FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to

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A) 8%.
B) 5%
C) 10%
D) 25%
Answer:

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Q94

The Federal Deposit Insurance Corporation Improvement Act of 1991

Multiple Choice
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A) increased the FDICʹs ability to borrow from the Treasury to deal with failed banks.
B) increased the FDICʹs ability to use the too-big-to-fail doctrine.
C) eliminated governmentally-administered deposit insurance.
D) eliminated restrictions on nationwide banking.
Answer:

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Q95

The ability to use the too-big-to-fail policy was curtailed by the passage of the FDICIA. To use this action today, the FDIC must get approval of a two-thirds majority of both the Board of Governors of the Federal Reserve and the directors of the FDIC and also the approval of the ________.

Multiple Choice
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A) Secretary of the Treasury
B) Senate Finance Committee Chairperson
C) President of the United States
D) Governor of the state in which the failed bank is located
Answer:

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Q96

The directive of prompt corrective action means that

Multiple Choice
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A) the FDIC will intervene earlier and more vigorously when a bank gets into trouble.
B) the banks must take actions quickly to resolve reserve disputes.
C) bank failures cannot occur.
D) there must be an immediate response to an increase in interest rates.
Answer:

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Q97

FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk.

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A) increased; decreased
B) increased; increased
C) decreased; decreased
D) decreased; increased
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Q98

As in the United States, an important factor in the banking crises in Norway, Sweden, and Finland was the

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A) financial liberalization that occurred in the 1980s.
B) decline in real interest rates that occurred in the 1980s.
C) high inflation that occurred in the 1980s.
D) sluggish economic growth that occurred in the 1980s.
Answer:

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Q99

As in the United States, an important factor in the banking crises in Latin America was the

Multiple Choice
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A) financial liberalization that occurred in the 1980s.
B) decline in real interest rates that occurred in the 1980s.
C) high inflation that occurred in the 1980s.
D) sluggish economic growth that occurred in the 1980s.
Answer:

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The Argentine banking crisis of 2001 resulted from Argentinaʹs banks being required to

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A) purchase large amounts of government debt.
B) pay back the value of failed loans.
C) make risky real estate loans.
D) make loans to only state-owned businesses.
Answer:

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When comparing the banking crisis in the United States to the crises in Latin America, cost to the taxpayers of the government bailouts was

Multiple Choice
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A) higher in Latin American than in the United States.
B) higher in the United States than in Latin America.
C) about the same in both Latin America and the United States.
D) positive in Latin America but negative in the United States.
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The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S. in the 1980s.

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A) regulatory forbearance
B) policy antagonism
C) regulatory ignorance
D) policy renewal
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China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas.

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A) state
B) domestic investor
C) depositor
D) domestic corporate
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The evidence from banking crises in other countries indicates that

Multiple Choice
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A) deposit insurance is to blame in each country.
B) a government safety net for depositors need not increase moral hazard.
C) regulatory forbearance never leads to problems.
D) deregulation combined with poor regulatory supervision raises moral hazard incentives.
Answer:

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