Q&A Hero

Banking

Q: The discount window at the Federal Reserve is a suitable substitute for deposit insurance and a possible method of preventing bank runs.
Q: The introduction of prompt corrective action capital zones by FDICIA was an attempt to place greater decision-making power at the discretion of regulators rather than on objective, measurable rules.
Q: FDICIA imposed additional regulatory discipline as a substitute for increased stockholder and depositor discipline.
Q: The insured depositor transfer method of least-cost bank failure resolution requires the FDIC to employ the method that imposes the highest amount of failure costs on uninsured depositors.
Q: The 1993 Depositor Protection legislation gives equal claim to the value of liquidated assets less the amount of insured deposits to foreign uninsured depositors, domestic uninsured depositors, and the FDIC.
Q: The "too big to fail" policy doctrine prevalent through the 1980s and most of the 1990s is remised on the separation of small depositors who would receive deposit insurance and large depositors who would not receive the benefits of deposit insurance.
Q: The FIRREA prohibited all insured financial institutions from accepting brokered deposits or paying interest rates that are significantly higher than existing market rates.
Q: During the 1980s, a high proportion of brokered deposits at a DI became an early warning signal of its risk for failure.
Q: The employment of deposit brokers allows individual depositors to receive deposit insurance coverage on total asset balances well in excess of $250,000 at any given bank.
Q: Insured depositors can be covered for more than $250,000 at any given FI under current FDIC regulations.
Q: Critics of the current FDIC insurance programs often argue that only uninsured depositors have any incentive to discipline riskier banks.
Q: One of the overall objectives in using subordinated debt in addition to common stock for a DI's capital base is to improve market discipline of a DI's risk structure.
Q: The use of subordinated debt as a replacement for common stock has been proposed as a method of increasing stockholder discipline.
Q: The ability of the FDIC to place a bank into receivership even though the book value of capital remains positive is an attempt to institute increased stockholder discipline.
Q: The prompt corrective action program of the FDIC Improvement Act allows a bank or thrift to be placed into receivership when the book value of capital to assets falls below 2 percent.
Q: Risk-based capital supports risk-based deposit insurance premiums by increasing the cost risk taking for DI stockholders.
Q: The policy of forbearance practiced by the FSLIC in the late 1980s allowed many commercial banks to remain open even in the face of continuing losses and insolvency.
Q: The regulatory practice of excessive capital forbearance is a method of reducing the short-run and long-run costs to deposit insurance funds.
Q: Requiring higher capital ratios often is proposed as method to reduce the incentive to take excessive risk because the moral-hazard risk-taking incentives are thought to decrease as the amount of net worth increases.
Q: Statistical credit scoring models have been suggested for use in measuring the risk of DIs for the purpose of assigning deposit insurance premiums.
Q: The Designated Reserve Ratio is a rule that stipulates that highly-rated DIs would not pay deposit insurance premiums if this ratio was above 1.25 percent.
Q: The improved financial health of the FDIC during the 1990s resulted in a considerable reduction in deposit insurance premiums.
Q: The initial risk-based deposit insurance program implemented on January 1, 1993 was based on capital adequacy and supervisory judgments involving asset quality, loan underwriting standards and other operating risks.
Q: The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) required the FDIC to establish risk-based premiums for deposit insurance coverage at banks.
Q: The cost of insolvency of an FI to the FDIC is offset in part by the deposit insurance premiums paid by the bank.
Q: The use of the option pricing model to determine the actuarially fair premium is difficult to apply in practice because the asset values and risks are difficult to determine.
Q: The use of the option pricing model to determine the actuarially fair premium for deposit insurance indicates that the cost of the insurance should rely on both the asset quality and level of leverage of the DI.
Q: Pricing deposit insurance premiums to reflect increases in risk-taking by financial institutions is one method to reduce incentives to take risks.
Q: Currently in the U.S., deposit insurance premiums increase with the amount of risk of the institution.
Q: Because deposit insurance premiums were not priced in an actuarially fair manner during the period from 1933-1980s, instability was created in the credit and monetary system.
Q: Pricing insurance premiums in an actuarially fair manner involves assessing the risk-taking profile of the financial institution.
Q: Moral hazard provides an incentive for bank owners to accept greater asset risks because they have less to lose, and potentially more to gain.
Q: Explicit deposit insurance premiums applied by regulators can involve restricting and more closely monitoring the risky activities of banks.
Q: If regulators provide more protection against bank runs, the incidence of moral hazard is likely to increase.
Q: The risk of moral hazard increases when capital levels are low.
Q: Moral hazard encourages the FI to take on more, rather than less, risk.
Q: Deposit insurance is often blamed for the deterioration in depositor discipline that allowed FIs to accept more risk in the asset selection process.
Q: A major reason for the deterioration of the deposit insurance funds in the 1980s was the downturn in the technology, manufacturing, and real estate industries.
Q: A major cause of the FSLIC insolvency in the 1980s was the dramatic rise in interest rates in 1979-82 that created extensive duration mismatches of assets and liabilities in the savings and loan industry.
Q: As a result of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), the deposit insurance fund for the savings and loan industry has been combined with the deposit insurance fund for the commercial banking industry.
Q: The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) restructured the savings association deposit insurance fund and transferred its management to the FDIC.
Q: After nearly failing, the FDIC's Bank Insurance Fund (BIF) achieved record levels of reserves during the 1990s.
Q: Since its inception, the FDIC deposit insurance fund has never fallen to a negative balance.
Q: During the financial crisis of 2008-2009, deposit balances at DIs increased.
Q: The average cost to the FDIC of each bank failure during the decade of the 1980s was larger than the total cost of all bank failures during the period 1933-79.
Q: The number of bank failures in the period of 1933-79 was less than the number of failures from 1980-1989.
Q: The Federal safety net to protect the integrity of the payments system consists of deposit insurance and social welfare.
Q: The adverse effects of a contagious run include the restrictions on the ability of individuals to transfer wealth through time and a negative impact on the level or rate of savings.
Q: A run on a bank is not necessarily a bad occurrence.
Q: Contagious runs on bank deposits are directed at FIs, whether they are failing or healthy.
Q: One cost of demand deposits to DIs is the reserve requirement placed on the bank by the Federal Reserve.
Q: If the fees charged on demand deposit accounts do not cover the cost of providing demand deposit services, the bank receives a subsidy or implicit interest payment.
Q: Implicit interest involves the process of crediting the interest payment directly to a deposit account as opposed to sending an explicit interest check to the customer.
Q: Deposits with low withdrawal risk typically are the lowest cost deposits for a DI.
Q: Demand deposits are a costless source of funds and have a high degree of withdrawal risk.
Q: Funding costs generally are positively related to the period of time the liability remains on the balance sheet.
Q: Managing liabilities as a means of managing liquidity risk involves the tradeoff between lower funding cost and higher risk of withdrawals.
Q: Excessive amounts of liquid asset holdings can penalize the earnings of a DI.
Q: Federal Reserve primary credit loans available to DIs are generally at rates lower than the federal funds target rate.
Q: The Fed discount window is an appropriate place to borrow reserve shortfalls because of its lower than market rates.
Q: Up to six percent of excess reserves may be carried forward to the next reserve maintenance period.
Q: The interbank funds market is a potential source for increasing reserves to meet required reserves.
Q: One method of increasing reserves to meet a reserve target is to sell liquid assets.
Q: The penalty for undershooting the minimum reserve requirements may include explicit interest rate charges as well as implicit costs in the form of more frequent monitoring and examinations.
Q: Currently the reserve maintenance period begins 30 days after the end of the reserve computation period.
Q: The contemporaneous reserve accounting system requires the maintenance period to occur simultaneously with the computation period.
Q: A strategy to increase reservable deposits on a Friday and decrease reservable deposits on the following Monday is called the weekend game.
Q: A strategy to lower deposits on Fridays can lower reserve requirements for a bank.
Q: The minimum average daily reserves required in a maintenance period is a percentage of the daily average demand deposits held by a bank during the computation period.
Q: Under contemporaneous reserve accounting, there is a seven day reserve maintenance period.
Q: The reserve computation period for determining required reserves covers the 14 days of a two-week period that runs from Monday to Monday.
Q: By definition, all transaction accounts at U.S. FIs allow account holders to make unlimited withdrawals.
Q: Managing a bank's reserve position requires knowing only the target reserve ratio and the period over which reserves must be maintained.
Q: In the U.S., cash reserves necessary to meet deposit reserve requirements typically include vault cash and cash deposits at the Federal Reserve Bank.
Q: Regulators in the U.S. do not allow government securities to perform the role of a required reserve.
Q: In most countries, assets used to satisfy the liquid assets ratio may include liquid government securities.
Q: In the U.S., excess reserves held at the central bank pay interest to the DI.
Q: In most countries, regulators often set minimum liquid reserve requirements on FIs.
Q: The establishment of minimum required reserves by regulators is a method of extracting taxes from FIs.
Q: Excessive illiquidity can result in an FI's inability to meet required payments on liability claims and, at the extreme, in insolvency.
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