Q&A Hero

Q: The _________ established to Public Company Oversight Board to regulate public accounting firms that audit publicly-traded companies. a. Riegle-Neal Interstate Banking and Branching Efficiency Act b. Competitive Equality Banking Act c. Financial Institutions Reform, Recovery and Enforcement Act d. Sarbanes-Oxley Act e. Depository Institutions Deregulation and Monetary Control Act

Q: Before 1863 A. federally-chartered banks had regulatory advantages not granted to state-chartered banks. B. the number of federally-chartered banks grew at a much faster rate than at any other time since the end of the Civil War. C. banks acquired funds by issuing banknotes. D. banks were required to maintain 100% of their deposits as reserves.

Q: The _________ repealed the Glass-Steagall Act. a. Riegle-Neal Interstate Banking and Branching Efficiency Act b. Gramm-Leach-Bliley Act c. Financial Institutions Reform, Recovery and Enforcement Act d. Federal Deposit Insurance Corporation Improvement Act e. Depository Institutions Deregulation and Monetary Control Act

Q: The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of A. the National Bank Charter Amendments of 1918. B. the Garn-St. Germain Act of 1982. C. the National Bank Act of 1863. D. Federal Reserve Act of 1913.

Q: The _________ requires disclosure of a bank's privacy policy. a. Riegle-Neal Interstate Banking and Branching Efficiency Act b. Gramm-Leach-Bliley Act c. Financial Institutions Reform, Recovery and Enforcement Act d. Federal Deposit Insurance Corporation Improvement Act e. Depository Institutions Deregulation and Monetary Control Act

Q: To eliminate the abuses of the state-chartered banks, the ________ created a new banking system of federally chartered banks, supervised by the ________. A. National Bank Act of 1863; Office of the Comptroller of the Currency B. Federal Reserve Act of 1863; Office of the Comptroller of the Currency C. National Bank Act of 1863; Office of Thrift Supervision D. Federal Reserve Act of 1863; Office of Thrift Supervision

Q: Transaction banking emphasizes the personal relationship between the banker and customer.

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

Q: Securitization refers to the process of splitting a single loan into several smaller loans.

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

Q: The Federal Reserve may prevent the formation of a financial holding company if one of its insured depository institution subsidiaries is not well capitalized.

Q: Taxpayers were served poorly by thrift regulators in the 1980s. This poor performance cannot be explained by A. regulators' desire to escape blame for poor performance, leading to a perverse strategy of "bureaucratic gambling." B. regulators' 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. Congress's dogged determination to protect taxpayers from the unsound banking practices of managers at many of the nation's savings and loans. D. politicians strong incentives to act in their own interests rather than the interests of the taxpayers.

Q: Financial holding company and bank holding company are different names for the same type of entity.

Q: An analysis of the political economy of the savings and loan crisis helps one to understand 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. E.

Q: It is more difficult for multibank holding companies to realize economies of scale if they allow subsidiary banks to retain key decision-making authority.

Q: The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers because A. of regulators' 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 didn't care if they did a good job or not.

Q: Thrifts are supervised by the Office of Thrift Supervision.

Q: That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by A. Congress's unwillingness to allocate the necessary funds to thrift regulators. B. regulators' reluctance to find the specific problem thrifts that they knew existed. C. slower growth in lending meant that less regulation was needed. D. Congress's unwillingness to listen to campaign contributors.

Q: An independent bank operates a single organization that accepts deposits and makes loans.

Q: "Bureaucratic gambling" refers to 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.

Q: During the past 20 years, the number of distinct U.S. banking organizations has increased.

Q: 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 ________. A. politicians/regulators; taxpayers B. taxpayers; politician/regulators C. taxpayers; bank managers D. bank managers; politicians/regulators

Q: Super-regional banks typically have limited global operations.

Q: Community banks tend to operate in a limited geographic region.

Q: The major provisions of the Competitive Equality Banking Act of 1987 include 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.

Q: Regulatory forbearance A. meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s. B. had the advantage of benefiting healthy S&Ls at the expense of "zombie S&Ls," 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.

Q: In 2008, the U.S. Treasury committed over $50 trillion dollars in financial support for financial institutions.

Q: The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency. A. regulatory forbearance; moral hazard B. regulatory forbearance; adverse hazard C. regulatory agnosticism; moral hazard D. regulatory agnosticism; adverse hazard

Q: Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following EXCEPT 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.

Q: Savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called A. goodwill. B. salvation. C. kindness. D. retribution.

Q: When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them, they were pursuing a policy of A. regulatory forbearance. B. regulatory kindness. C. ostrich reasoning. D. ignorance reasoning.

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

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

Q: Prior to the 1980s, S&Ls and mutual savings banks were restricted almost entirely to A. commercial real estate loans. B. home mortgages. C. education loans. D. vacation loans.

Q: The Depository Institutions Deregulation and Monetary Control Act of 1980 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.

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

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

Q: 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. A. two B. three C. five D. ten

Q: The Basel Committee ruled that regulators in other countries can ________ the operations of a foreign bank if they believe that it lacks effective oversight. A. restrict B. encourage C. renegotiate D. enhance

Q: Banks engage in regulatory arbitrage by 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.

Q: The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is known as A. competition in laxity. B. depositor supervision. C. regulatory arbitrage. D. a dual banking system.

Q: 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 ________. A. 2; adverse selection B. 2; credit risk C. 4; adverse selection D. 4; credit risk

Q: The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets. A. 10% B. 8% C. 5% D. 3%

Q: The Basel Accord, an international agreement, requires banks to hold capital based on A. risk-weighted assets. B. the total value of assets. C. liabilities. D. deposits.

Q: Off-balance-sheet activities 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 bank's risk. D. generate fee income and reduce risk.

Q: The FDIC must take steps to close down banks whose equity capital is less than ________ of assets. A. 4% B. 3% C. 2% D. 1%

Q: To be considered well capitalized, a bank's leverage ratio must exceed A. 10%. B. 8%. C. 5%. D. 3%.

Q: The leverage ratio is the ratio of a bank's 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.

Q: A bank failure is less likely to occur when 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.

Q: A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities. A. more; more B. more; less C. less; more D. less; less

Q: The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry. A. an adverse selection B. a moral hazard C. a lemons D. a revenue

Q: A system of deposit insurance 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 bank's asset portfolio. D. increases the likelihood of bank runs.

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: Deposit insurance is only one type of government safety net. All of the following are types of government support for troubled financial institutions EXCEPT A. forgiving tax debt. B. lending from the central bank. C. lending directly from the government's treasury department. D. nationalizing and guaranteeing that all creditors will be repaid their loans in full.

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

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. pre-contractual opportunism.

Q: Deposit insurance has not worked well in countries with A. a weak institutional environment. B. strong supervision and regulation. C. a tradition of the rule of law. D. few opportunities for corruption.

Q: The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is A. that the FDIC guarantees all deposits when it uses the "payoff" method. B. that the FDIC guarantees all deposits when it uses the "purchase and assumption" method. C. that the FDIC 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. 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.

Q: To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance. A. FDIC B. SEC C. Federal Reserve D. ATM

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

Q: For a given return on assets, the lower is bank capital A. the lower is the return for the owners of the bank. B. the higher is the return for the owners of the bank. C. the lower is the credit risk for the owners of the bank. D. the lower the possibility of bank failure.

Q: The amount of assets per dollar of equity capital is called the A. asset ratio. B. equity ratio. C. equity multiplier. D. asset multiplier.

Q: Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A. return on assets. B. return on capital. C. return on equity. D. return on investment.

Q: Net profit after taxes per dollar of assets is a basic measure of bank profitability called A. return on assets. B. return on capital. C. return on equity. D. return on investment.

Q: Holding large amounts of bank capital helps prevent bank failures because A. it means that the bank has a higher income. B. it makes loans easier to sell. C. it can be used to absorb the losses resulting from bad loans. D. it makes it easier to call in loans.

Q: A bank is insolvent when A. its liabilities exceed its assets. B. its assets exceed its liabilities. C. its capital exceeds its liabilities. D. its assets increase in value.

Q: A bank failure occurs whenever A. a bank cannot satisfy its obligations to pay its depositors and other creditors. B. a bank suffers a large deposit outflow. C. a bank has to call in a large volume of loans. D. a bank refuses to make new loans.

Q: Modern liability management has resulted in A. increased sales of negotiable CDs to raise funds. B. increase importance of deposits as a source of funds. C. reduced borrowing by banks in the overnight loan market. D. failure by banks to coordinate management of assets and liabilities.

Q: Banks that actively manage liabilities will most likely meet a reserve shortfall by A. calling in loans. B. borrowing federal funds. C. selling municipal bonds. D. seeking new deposits.

Q: Which of the following has NOT resulted from more active liability management on the part of banks? A. increased bank holdings of cash items B. aggressive targeting of goals for asset growth by banks C. increased use of negotiable CDs to raise funds D. an increased proportion of bank assets held in loans

Q: Which of the following would a bank NOT hold as insurance against the highest cost of deposit outflow-bank failure? A. excess reserves B. secondary reserves C. bank capital D. mortgages

Q: The high growth rate in China in the last twenty years has similarities to the high growth rate of ________ during the 1950s and 1960s. A) the United States B) the Soviet Union C) Brazil D) Mexico

Q: One reason China has been able to grow so rapidly even though its financial development is still in its early stages is A) the high savings rate of around 40%. B) the shift of labor to the agricultural sector. C) the stringent enforcement of financial contracts. D) the ease of obtaining high-quality information about creditors.

Q: In developing countries, it can be expensive and time-consuming for the poor to legalize their property ownership. Without legal title, the property cannot be used as ________ to borrow funds. A) collateral B) points C) interest D) restrictive covenants

Q: Because of the weak systems of property rights in many developing and transition economies, the financial system is unable to use collateral effectively worsening the ________ problem. A) adverse selection B) moral hazard C) principal/agent D) diversification

Q: One reason financial systems in developing and transition countries are underdeveloped is A) they have weak links to their governments. B) they make loans only to nonprofit entities. C) the legal system may be poor making it difficult to enforce restrictive covenants. D) the accounting standards are too stringent for the banks to meet.

Q: One possible reason for slower growth in developing and transition countries is A) capital may not be directed to its most productive use. B) strict accounting standards are too stringent for the banks to meet. C) the weak link between government and financial intermediaries. D) the lack of adverse selection and moral hazard problems.

Q: A key finding of the economic analysis of financial structure is that A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. B) while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets. C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets. D) economists do not have a very good explanation for why securities markets are so heavily regulated.

Q: Solutions to the moral hazard problem include A) low net worth. B) monitoring and enforcement of restrictive covenants. C) greater reliance on equity contracts and less on debt contracts. D) greater reliance on debt contracts than financial intermediaries.