Q&A Hero

Q: Losses in asset values due to adverse changes in interest rates are borne initially by the A. equity holders of an FI. B. liability holders of an FI. C. regulatory authorities. D. taxpayers. E. insured depositors.

Q: Under market value accounting methods, FIs A. must write down the value of their assets to fully reflect market values. B. have a great deal of discretion in timing the write downs of problem loans. C. must conform to regulatory write-down schedules. D. have an incentive to fully reflect problem assets as they become known. E. are required to invest in expensive computerized bookkeeping systems.

Q: Each of the following is a function of capital EXCEPT A. funding the branch and other real investments to provide financial services. B. protecting the insurance fund and the taxpayers. C. assuring the highest possible return on equity for the shareholders. D. protecting uninsured depositors in the event of insolvency and liquidation. E. absorbing losses in a manner that allows the FI to continue as a going concern.

Q: Regulatory-defined capital and required leverage ratios are based in whole or in part on A. market value accounting concepts. B. book value accounting concepts. C. the net worth concept. D. the economic meaning of capital. E. None of the above.

Q: The difference between the market value of assets and liabilities is the definition of the A. accounting value of capital. B. regulatory value of capital. C. economic value of capital. D. book value of net worth. E. adjusted book value of net worth.

Q: In the property-casualty insurance model, risk-based capital is a function of six different risk categories.

Q: A life insurance company that is a parent company is not required to hold an equivalent amount of risk-based capital to protect against financial downturns of affiliates.

Q: In the life insurance model, the ratio of total surplus and capital to the risk-based capital calculation must be greater than or equal to 1.0 for the insurance company to be satisfactorily capitalized.

Q: In the life insurance model, morbidity risk differs from mortality risk by the circumstances surrounding the actual death event.

Q: The risk-based capital model in the life insurance industry includes asset risk, business risk, insurance risk, and interest rate risk.

Q: Broker-dealers make very few adjustments to the book value net worth to reach an approximate market value net worth.

Q: The capital requirements for broker-dealers include a net worth market value to assets ratio of at least 2 percent.

Q: The risk-based capital ratio does account for loans made to companies with different credit ratings.

Q: The risk-based capital ratio fails to take into account the effects of diversification in the credit portfolio.

Q: The Standardized Approach in calculating capital to cover operational risk requires DIs to separate activities into business units from which a capital charge is determined based on the amount of operational risk in each unit.

Q: The Basic Indicator Approach in calculating capital to cover operational risk requires banks to hold 12 percent of total assets in capital to cover operational risk exposure.

Q: Operational risk has increased to a point that the Bank for International Settlements (BIS) will require DIs to account for it in the capital adequacy standards under Basel II.

Q: A deficiency of the risk-based capital ratio is that it measures the ability of a bank to meet both the on- and off-balance-sheet credit risk, but not the interest rate or market risks.

Q: In evaluating the risk-adjusted asset value of foreign exchange forward contracts, the value of the current exposure can be either positive or zero.

Q: Determining risk-adjusted asset values for OBS market contracts requires multiplying the notional values by the appropriate risk weights.

Q: The risk-adjusted asset values of OBS market contracts or derivative instruments are determined in a manner similar to the risk-adjusted asset values of contingent guarantee claims.

Q: Counterparty credit risk is more prevalent for exchange-traded derivatives than over-the-counter (OTC) contracts because the bank has more control of its OTC contracts.

Q: Counterparty credit risk is the risk that the other party of a contract will default on contract obligations.

Q: Basel III guidelines for determining credit risk-adjusted on-balance-sheet assets relies more heavily on credit agency ratings than did Basel I.

Q: In determining the risk-adjusted value of the on-balance-sheet credit equivalent amounts of the contingent guaranty contracts, the risk weights are determined by the credit rating of the underlying counterparty of the off-balance-sheet activity.

Q: As a result of loan write-offs, Bank A has to be liquidated by the regulators. The book value of the assets and liabilities of the bank is presented below (in millions of dollars). The market value of the loans has been estimated at $240 million.What is the cost to the FDIC if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure? A. $0.B. $20 million.C. $30 million.D. $40 million.E. $60 million.

Q: As a result of loan write-offs, Bank A has to be liquidated by the regulators. The book value of the assets and liabilities of the bank is presented below (in millions of dollars). The market value of the loans has been estimated at $240 million.What is the cost to the uninsured depositors if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure? A. $0.B. $20 million.C. $30 million.D. $40 million.E. $60 million.

Q: As a result of loan write-offs, Bank A has to be liquidated by the regulators. The book value of the assets and liabilities of the bank is presented below (in millions of dollars). The market value of the loans has been estimated at $240 million.What is the cost to the insured depositors if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure? A. $0.B. $100 millionC. $30 million.D. $40 million.E. $60 million.

Q: As a result of loan write-offs, Bank A has to be liquidated by the regulators. The book value of the assets and liabilities of the bank is presented below (in millions of dollars). The market value of the loans has been estimated at $240 million.What is the current net worth (market value) of the bank? A. +$40 million.B. $0 million.C. -$40 million.D. -$60 million.E. -$100 million.

Q: The following market value balance sheet of a failed bank ($ millions)If the insured depositor transfer resolution method is utilized, what is the cost to the FDIC of bank failure resolution? A. $0.B. -$200 million.C. $67 million.D. $133 million.E. $200 million.

Q: The following market value balance sheet of a failed bank ($ millions)If the insured depositor transfer resolution method is utilized, what is the cost to uninsured depositors of bank failure resolution? A. $0.B. -$200 million.C. $67 million.D. $133 million.E. $200 million.

Q: The following market value balance sheet of a failed bank ($ millions)If the insured depositor transfer resolution method is utilized, what is the cost to insured depositors of bank failure resolution? A. $0.B. -$200 million.C. $67 million.D. $133 million.E. $200 million.

Q: The following market value balance sheet of a failed bank ($ millions)What is the market value of capital? A. $200 million.B. -$200 million.C. $0.D. $400 million.E. $600 million.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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."

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: From January 2008 to December 2009, there were a total of ____ FDIC insured bank failures, which cost the FDIC approximately ____ billion to resolve. A. 26; $17 B. 140; $39 C. 166; $56 D. 211; $69 E. 234; $72

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: The deficit realized by the PBGC in 1992 was a result of risk-taking by fund administrators.

Q: The Pension Benefit Guaranty Corporation (PBGC) insures pension benefits against the under-funding of pension plans by corporations.

Q: The deposit insurance programs of the National Credit Union Administration (NCUA) is modeled after the programs offered by the FDIC.

Q: The National Credit Union Administration (NCUA) is an independent federal agency that insures credit union deposits.

Q: The FDIC deposit insurance program is also available to credit unions.

Q: The required contribution from surviving insurers to protect policyholders of failed insurance companies usually is on a pro rata amount based on the relative asset size of the surviving company.

Q: State guaranty funds for insurance companies are sponsored by state insurance regulators rather than by a federal agency such as the FDIC.

Q: By decreasing the use of the discount window as a source of funding for a DI, the Federal Reserve hopes to reduce volatility in the fed funds market.

Q: Interest rates charged to healthy banks that use the Federal Reserve discount window are typically set one percent below the fed funds target interest rate.