Q&A Hero

Q: World Bank research on the effects of deposit insurance concludes that A) adoption of deposit insurance will promote stability and efficiency in the banking systems of emerging-market economies. B) adoption of explicit government deposit insurance is associated with a higher incidence of banking crises. C) adoption of deposit insurance has the greatest benefits in countries that have weaker institutional environments. D) none of the above are true.

Q: What accounts for the problems facing China's four largest banks? A) large loans to inefficient, state-owned enterprises B) closing of unprofitable branches and laying off unproductive employees C) selling shares in the bank overseas to raise capital D) all of the above

Q: What did Verizon Communications and Vodafone expect to get out of the business alliance?

Q: Why do you believe Conocos stock fell immediately following the announcement?

Q: Which of the following is least likely to accompany financial consolidation and the development of large, complex banking organizations? A) More financial institutions will be considered too big to fail. B) The government safety net will be extended to include nonbanking activities. C) Moral hazard problems will become less important. D) Banks will have greater incentives and opportunities to take on more risk.

Q: Do you believe that Conoco gained an effective say in Lukoils operations following its investment? Explain your answer.

Q: The Federal Deposit Insurance Corporation Improvement Act of 1991 A) instructed the FDIC to come up with risk-based deposit insurance premiums. B) expanded the FDIC's ability to use the "too-big-to-fail" policy. C) instructed the FDIC to wait longer before intervening when a bank gets into trouble. D) did all of the above.

Q: Describe the operational and managerial challenges facing the two partners.

Q: The Federal Deposit Insurance Corporation Improvement Act of 1991 A) reduced the scope of deposit insurance in several ways. B) limited the FDIC's ability to use the "too-big-to-fail" policy. C) requires the FDIC to intervene earlier when a bank gets into trouble. D) did all of the above.

Q: What types of mechanisms could be used other than litigation to resolve such differences once they arise?

Q: The Federal Deposit Insurance Corporation Improvement Act of 1991 A) reduced the scope of deposit insurance in several ways. B) eliminated restrictions on nationwide banking. C) allowed well-capitalized banks to do some securities underwriting. D) did only A and B of the above. E) did only A and C of the above.

Q: What could these companies have done before forming the alliance to have mitigated the problems that arose after the alliance was formed? Why do you believe they may have avoided addressing these issues at the outset?

Q: The Federal Deposit Insurance Corporation Improvement Act of 1991 A) increased the FDIC's ability to borrow from the Treasury to deal with failed banks. B) reduced the scope of deposit insurance in several ways. C) eliminated governmentally administered deposit insurance. D) did only A and B of the above.

Q: Why do you believe Bridgestone chose to invest in Firestone rather than pursue another option?

Q: Moral hazard and adverse selection problems increased in prominence in the 1980s A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk. 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) because of all of the above. E) because of only A and B of the above.

Q: What other options for entering the United States could Bridgestone have considered?

Q: Moral hazard and adverse selection problems increased in prominence in the 1980s A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk. 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 an increase in federal deposit insurance from $40,000 to $100,000. D) because of all of the above. E) because of only A and B of the above.

Q: Why do you believe that General Motors may have wanted to limit initially its investment to 20%?

Q: An impact of the Garn-St. Germain Act of 1982 has been to A) put savings and loans at a competitive disadvantage. B) make the banking system more competitive. C) give money market mutual funds a competitive advantage. D) do both A and B of the above. E) do both A and C of the above.

Q: What other motives may General Motors have had in making this investment?

Q: As a way of stemming the decline in the number of savings and loans and mutual savings banks, the Garn-St. Germain Act of 1982 allowed A) money market certificates. B) money market mutual funds. C) money market deposit accounts. D) negotiable order of withdrawal accounts.

Q: In your judgment, do these alliances deliver real value to the consumer? Explain your answer.

Q: The Depository Institutions Deregulation and Monetary Control Act of 1980 A) approved NOW accounts nationwide. B) imposed uniform reserve requirements. C) mandated the phase out of interest-rate ceilings on deposits. D) did all of the above. E) did only A and B of the above.

Q: In what way do these alliances represent a convergence of bricks and clicks?

Q: The Depository Institutions Deregulation and Monetary Control Act of 1980 A) approved NOW accounts nationwide. B) restricted the use of ATS accounts. C) imposed interest rate ceilings on bank loans. D) did all of the above.

Q: What are the elements that each alliance has in common? Of these, which do you believe are the most important?

Q: The legislation that separated commercial banking from the securities industry is known as the ________. A) National Bank Act B) Federal Reserve Act C) Glass-Steagall Act D) McFadden Act

Q: What factors may have contributed to the decision to discontinue efforts to implement the joint venture? Consider control, scope, financial, and resource contribution issues.

Q: Regular bank examinations and restrictions on asset holdings indirectly help to ________ the adverse selection problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be ________ from entering the banking industry. A) increase; encouraged B) increase; discouraged C) reduce; encouraged D) reduce; discouraged

Q: Do you think it is likely that the new company will become highly entrepreneurial and innovative? Why? / Why not? What can the parents do to stimulate the development of this type of an environment within the new company?

Q: Regular bank examinations and restrictions on asset holdings indirectly help to reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry. A) moral hazard B) adverse selection C) ex post shirking D) post-contractual opportunism

Q: Why do you think the parents opted to form a 50/50 distribution of ownership? What are some of the possible challenges of operating the new company with this type of an ownership arrangement? What can the parents do to overcome these challenges?

Q: The chartering process is especially designed to deal with the ________ problem, and restrictions on asset holdings help to reduce the ________ problem. A) adverse selection; adverse selection B) adverse selection; moral hazard C) moral hazard; adverse selection D) moral hazard; moral hazard

Q: The parents estimate that the new company will add at least $1.5-$2.0 billion to their market values. How do you think this estimated incremental value was determined?

Q: The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem. A) adverse selection; adverse selection B) adverse selection; moral hazard C) moral hazard; adverse selection D) moral hazard; moral hazard

Q: Why do you think the parents selected a limited liability company structure for the new company? What are the advantages and disadvantages of this structure over alternative legal structures?

Q: Ways in which bank regulations reduce the adverse selection and moral hazard problems in banking include A) a chartering process designed to prevent crooks from getting control of a bank. B) restrictions that prevent banks from acquiring certain risky assets, such as common stocks. C) high bank capital requirements to increase the cost of bank failure to the owners. D) all of the above. E) only A and B of the above.

Q: In your opinion, what were the motivating factors for the Coke and P&G business alliance?

Q: Which of the following is not true regarding the Basel 2 proposal to reform the original 1988 Basel Accord? A) It attempts to link capital requirements more closely to actual risk by expanding the number of risk categories. B) It focuses on assessing the quality of risk management in banking institutions. C) It attempts to improve market discipline by requiring increased disclosure of pertinent information about banks. D) It has been well received by banks and national regulatory agencies.

Q: What does the reaction of the stock market and credit rating agencies tell you about how investors value the contribution of the two partners to the partnership? Do you think investors may have over-reacted?

Q: Of the following assets, the one which has the highest capital requirement under the Basel Accord is A) municipal bonds. B) residential mortgages. C) commercial paper. D) securities issued by industrialized countries' governments.

Q: How does the dissolution of the partnership leave Disney vulnerable? What could Disney have done to protect itself from these vulnerabilities in the original negotiations? (Hint: Consider scope of the agreement, management and control, dispute resolution mechanisms, valuation of tangible and intangible assets, ownership of partnership assets following dissolution, performance criteria)

Q: Under the Basel plan, A) assets and off-balance sheet activities are assigned to various categories to reflect the degree of credit risk. B) a bank's total capital must equal or exceed 8 percent of total risk-weighted assets. C) both of the above occur. D) none of the above occur.

Q: What happened since 1995 that might have contributed to the break-up? (Hint: Consider partner objectives, perceived relative contribution and in-house capabilities.)

Q: The increased integration of financial markets across countries and the need to make the playing field equal for banks from different countries led to the Basel Accord agreement to A) standardize bank capital requirements internationally. B) reduce, across the board, bank capital requirements in all countries. C) sever the link between risk and capital requirements. D) do all of the above.

Q: In your opinion, what were the motivations for forming the Disney-Pixar partnership in 1995? Which partner do you believe had the greatest leverage in these negotiations? Explain your answer.

Q: Describe the disadvantages of the supply agreement to Garmin?

Q: Banks do not want to hold too much capital because A) they do not bear fully the costs of bank failures. B) higher returns on equity are earned when bank capital is smaller, all else equal. C) higher capital levels attract the scrutiny of regulators. D) all of the above. E) only A and B of the above.

Q: One way for bank regulators to assure depositors that a bank is not taking on too much risk is to require the bank to A) diversify its loan portfolio. B) reduce its equity capital. C) reduce the size of its loan portfolio. D) do both A and B of the above. E) do both B and C of the above.

Q: Describe the advantages of the supply agreement to Garmin compared to outright acquisition of Tele Atlas?

Q: Regulators attempt to reduce the riskiness of banks' asset portfolios by A) limiting the amount of loans in particular categories or to individual borrowers. B) prohibiting banks from holding risky assets such as common stocks. C) establishing a minimum interest rate floor that banks can earn on certain assets. D) doing all of the above. E) doing only A and B of the above.

Q: Why do you believe that SAB and Coors agreed to equal board representation and voting rights in the new JV? What types of governance issues might arise in view of the governance structure of MillersCoors? What mechanisms might have been put in place by the partners prior to closing to resolve possible governance issues? Be specific.

Q: How do you believe the ownership distribution for MillersCoors was determined?.

Q: The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC A) guarantees all deposits, not just those under the $250,000 limit, when it uses the "payoff" method. B) guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method. C) is less likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) does both A and B of the above. E) does both B and C of the above.

Q: How did the combination of the U.S. operations of SABMiller and MolsonCoors meet the needs of the two parties? Why was a JV viewed as preferable to a merger of the two firms global operations?

Q: The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC A) guarantees all deposits, not just those under the $250,000 limit, when it uses the "payoff" method. B) guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method. C) is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) does both A and B of the above. E) does both B and C of the above.

Q: What tactics do you think Anheuser might employ to exploit the predicted confusion during the integration of the SABMiller and Coors operations?

Q: The too-big-to-fail policy A) exacerbates 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) does only A and C of the above.

Q: How can BP best protect their interests in the JV with Rosneft in the highly uncertain political and economic environment of Russia?

Q: The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely. A) small; fewer B) small; greater C) large; fewer D) large; greater

Q: One problem of the too-big-to-fail policy is that it ________ the incentives for ________ by big banks. A) reduces; moral hazard by big banks. B) increases; moral hazard by big banks. C) reduces; adverse selection by big banks. D) increases; adverse selection by big banks.

Q: How would you estimate the market capitalization for Rosneft based on the terms of the share exchange? Show your work.

Q: If the FDIC uses the purchase and assumption method to handle a failed bank, A) all deposits will suffer losses. B) small deposits will be paid in full but deposits over the insurance limit will not. C) all deposits will be paid in full. D) none of the above will occur.

Q: Why would you expect the publicly traded Rosneft shares not to reflect the true value of the firm?

Q: If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses. A) payoff; large B) payoff; no C) purchase and assumption; large D) purchase and assumption; no

Q: Would you expect the share exchange to be dilutive to BP shareholders in the short-run? In the long-run. Explain your answer.

Q: What is the purpose of the 2-year lockup period during which neither partner can sell its stock? How might the lock-up period impact the value of each firms holdings?

Q: The possibility that the failure of one bank can hasten the failure of other banks is called the A) bank run effect. B) moral hazard effect. C) contagion effect. D) adverse selection effect.

Q: Speculate as to the purpose of the share swap between BP and Resnoft.

Q: Deposit insurance A) attracts risk-prone entrepreneurs to the banking industry. B) encourages bank managers to take on greater risks than they otherwise would. C) reduces the incentives of depositors to monitor the riskiness of their banks' asset portfolios. D) does all of the above. E) does only A and B of the above.

Q: Autos R Us and Pre-owned Inc represent used car dealers that compete in the same city. These competitors each invest $15 million to form a new, jointly owned company, Real Value Inc, that will sell cars in a nearby city. The new firm is best described by which of the following terms: a. Merger b. Acquisition c. Leveraged buyout d. Joint venture e. Consolidation

Q: When bad drivers line up to purchase collision insurance, automobile insurers are subject to the A) moral hazard problem. B) adverse selection problem. C) assigned risk problem. D) ill queue problem.

Q: Which of the following is generally true about financing JVs and partnerships? a. Lenders rarely require guarantees from the parents b. Bank loans are commonly used to meet short-term cash requirements c. Participants must agree on an appropriate financial structure for the organization d. Contributions by the partners of intangible assets are usually easy to value e. Corporations are an uncommon form of legal structure

Q: Although the FDIC was created to prevent bank failures, its existence encourages banks to A) take too much risk. B) hold too much capital. C) open too many branches. D) buy too much stock.

Q: Which of the following is generally not true of a business alliance? a. Tax considerations are often the primary motivation for forming the alliance b. The events triggering dissolution of the alliance are generally spelled out c. Remaining partners have a right of first refusal if one partner chooses to exit the partnership d. One partner is generally responsible for day-to-day operations e. Allocation of profits and losses follow from the allocation of shares or partnership interests

Q: The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance 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 depositors' demands for safety. D) are placed at a competitive disadvantage in acquiring funds.

Q: If one party chooses to exit an alliance, the remaining party or parties often have the contractual right to a. First offer their ownership interests to the other partners b. Sell their ownership interests to the highest bidder c. Put their interests to a third party that has no relationship to the alliance d. Require that the other parties to the alliance buy them out e. Dissolve the partnership

Q: Moral hazard is an important consequence of insurance arrangements because the existence of insurance A) provides increased incentives for risk taking. B) impedes efficient risk taking. C) causes the private cost of the insured activity to increase. D) does both A and B of the above. E) does both B and C of the above.

Q: Termination provisions in alliances commonly include all but which of the following: a. Buyout provisions enabling one party to purchase anothers ownership interests b. Predetermined prices at which the buyouts may take place c. Breakup payments payable to the remaining partners d. How assets and liabilities will be divided among the partners e. What will happen to patents and licenses owned by the alliance

Q: When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of A) moral hazard. B) split incentives. C) ex ante shirking. D) precontractual opportunism.