Accounting
Anthropology
Archaeology
Art History
Banking
Biology & Life Science
Business
Business Communication
Business Development
Business Ethics
Business Law
Chemistry
Communication
Computer Science
Counseling
Criminal Law
Curriculum & Instruction
Design
Earth Science
Economic
Education
Engineering
Finance
History & Theory
Humanities
Human Resource
International Business
Investments & Securities
Journalism
Law
Management
Marketing
Medicine
Medicine & Health Science
Nursing
Philosophy
Physic
Psychology
Real Estate
Science
Social Science
Sociology
Special Education
Speech
Visual Arts
Banking
Q:
The reasons for the government to get involved in the financial system include each of the following, except: A. to protect the bank's monopoly position.B. to protect investors.C. to ensure the stability of the financial system.D. to protect bank customers from monopolistic exploitation.
Q:
Recession can cause widespread bank crises for all of the following reasons except: A. there is less business investment as banks make fewer loans.B. borrowers' default rates increase.C. bank capital increases.D. the negative effect on banks' balance sheets.
Q:
Deflation can cause widespread bank crises for all of the following reasons except: A. a decline in the value of borrowers' net worth but not their liabilities.B. borrowers' default rates increase.C. bank balance sheets deteriorate as the level of economic activity decreases.D. information asymmetry problems decrease during deflationary periods.
Q:
Bank panics have often begun as a result of: A. rumors only.B. real economic events only.C. both rumors and real economic events.D. neither rumors nor economic events.
Q:
Bank failures tend to occur most often during periods of: A. stock market run ups when, like many companies, banks tend to be overvalued.B. high inflation when the fixed rate loans of many banks cause their real returns to decrease.C. recessions when many borrowers have a difficult time repaying loans and lending activity slows.D. wars and other civil unrest.
Q:
The reason that a run on a single bank can turn into a bank panic that threatens the entire financial system is: A. information asymmetries.B. moral hazard.C. the lack of regulation.D. the increased reliance on web-based funds transfers.
Q:
It is difficult for depositors to know the true health of banks because: A. regulations prohibit banks making their financial statements publicly available.B. the financial statements of banks are too difficult for most people to understand.C. most of the information on bank loans is private and based on sophisticated models.D. banking is competitive and financial records of banks are not divulged to prevent competitor banks from having an advantage.
Q:
When healthy banks fail due to widespread bank panics, those who are likely to be hurt are: A. government regulators.B. households and small businesses.C. the FDIC.D. the Federal Reserve.
Q:
The federal government is concerned about the health of the banking system for many reasons, the most important of which may be: A. banks are where government bonds are traded.B. a significant number of people are employed in the banking industry.C. many people earn the majority of their income from interest on bank deposits.D. banks are of great importance in enabling the economy to operate efficiently.
Q:
A bank run involves: A. illegal activities on the part of the bank's officers.B. a bank being forced into bankruptcy.C. a large number of depositors withdrawing their funds during a short time span.D. a bank's return on assets being below the acceptable level.
Q:
Contagion is: A. the failure of one bank spreading to other banks through depositors withdrawing of funds.B. the phenomenon that if one bank loan defaults it will cause other bank loans to default.C. the rapid contraction of investment spending that occurs when interest rates are increased by the Federal Reserve.D. the rapid inflation that results from the printing of money.
Q:
What matters most during a bank run is: A. the number of loans outstanding.B. the solvency of the bank.C. the liquidity of the bank.D. the size of the bank's assets.
Q:
Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because: A. customers will not want to obtain loans from this bank.B. equity investors will not be able to sell the bank's stock.C. regulators will scrutinize the bank heavily looking for something wrong.D. depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have sufficient liquid assets on hand.
Q:
Empirical evidence points to the fact that financial crises: A. are newsworthy but have no impact on economic growth.B. have a negative impact on economic growth only for the year of the crisis.C. have a negative impact on economic growth for years.D. can have a positive impact on economic growth as weak borrowers are weeded out.
Q:
Discuss the case for a "super-regulator" in the context of what you have learned about "regulatory competition."
Q:
The FDIC used to charge all banks the same rate for insurance on deposits. From what you have learned, what problems did this create for not only the FDIC but for well-run banks?
Q:
We saw in the text that regulations, specifically deposit insurance and the Basel Accord (of 1988), can create moral hazard. Explain.
Q:
Discuss the ramifications of the FDIC reducing deposit insurance limits to $25,000.
Q:
What is meant by the problem of time consistency in the conduct of financial system policy?
Q:
The CAMELS criteria to evaluate the health of banks by supervisors is not made public. Make a case for one making this information public and a case for keeping it private.
Q:
Define the components of the CAMELS criteria and explain how a CAMELS rating is calculated.
Q:
Identify at least two problems a borrower would face if banks were not required to disclose the information that they are currently required to make available.
Q:
What were the positive effects of the 1988 Basel Accord? What were its shortcomings?
Q:
What was the primary motivation behind the creation of the 1988 Basel Accord?
Q:
If we lived in an economy where interest rates were highly volatile, would you expect the maximum asset to capital ratio that a regulator would allow to increase or decrease and why?
Q:
Why are banks restricted in the assets that they can own? For example, why do you think banks are prohibited from owning common stock?
Q:
Explain how bank regulators seem to face a bit of a paradox regarding preventing monopoly power by banks and spurring competition.
Q:
Besides regulating banks, the government also regulates nondepository financial institutions, such as insurance companies. Consider a property casualty insurance company; why would the government need to regulate them?
Q:
What potential problems are created by regulatory competition?
Q:
What three strategies are employed by government officials to ensure that the risks created by the government safety net are contained?
Q:
What is the link between the safety net provided by the government to the financial industry and the relatively heavy regulation of the same industry by the government?
Q:
You are the head of finance for a very large corporation located in a relatively small town. At a local chamber of commerce meeting, the president of the local bank asks you why you keep the corporation's bank accounts in a very large mid-western bank and not in his local bank. From a risk reduction perspective, how could you answer his question?
Q:
Explain why the ratio of assets to capital increased dramatically for commercial banks from the 1920s to the present.
Q:
Imagine a situation where the deposits at state chartered banks would be insured by a state insurance fund and deposits at nationally chartered banks would be insured by FDIC. How would you expect both depositors and banks would react?
Q:
You have a retirement account in a bank that has failed. The balance in your account is $330,000. Does it make a difference to you if FDIC uses the payoff method or the purchase-and-assumption method for resolving this insolvency? Explain.
Q:
How does the lender of last resort potentially create a moral hazard problem?
Q:
Does the lender of last resort function guarantee an end to bank runs? Explain.
Q:
In 1873, British economist Walter Bagehot proposed that the central bank function as the lender of last resort. Specifically, he suggested the central bank lend freely to banks which have good collateral at high rates of interest. Why the requirements of good collateral and a high rate of interest?
Q:
Explain why depository institutions receive a disproportionate amount of attention from government regulators (compared to most other industries).
Q:
Briefly describe the combination of strategies used by government officials to protect investors and ensure the stability of the financial system.
Q:
Why is the financial industry inherently more unstable than most other industries?
Q:
How do banks potentially make economic downturns more severe and how do economic downturns contribute to the increased failure of banks?
Q:
Why is it that a run on a single bank can turn into a widespread financial panic, or what the text identified as contagion?
Q:
What is the difference between a bank that is insolvent and one that is illiquid?
Q:
Why do bank runs usually have people rushing to their bank instead of waiting for the lines to taper off so they do not have to wait so long?
Q:
Why might there be a trade-off between a bank's profitability and its safety?
Q:
The text points out that there is an inverse relationship between the fiscal cost of a bank crisis and real GDP growth. What are some of the reasons that can explain this inverse relationship?
Q:
Which of the following is not a goal of the Dodd-Frank Act of 2010? A. To anticipate and prevent financial crises by limiting systemic riskB. To end "too big to fail"C. To promote competitionD. To reduce moral hazard
Q:
Which of the following is not an important addition made to the Basel Accords by Basel III in 2010? A. It supplements capital requirements based on risk-weighted assets with restrictions on leverage.
B. It introduces three buffers over and above capital requirements itself.
C. It adds a liquidity requirement that compels banks to hold a quantity of high-quality liquid assets.
D. It ends the too-big-to-fail problem.
Q:
In the United Kingdom, regulation of the financial system is concentrated in two agencies. They are: A. The Federal Deposit Insurance Conglomerate and the Bank of England.B. The Financial Conduct Authority and the Bank of England.C. The Financial Conduct Authority and English Banking Authority.D. The Bank of England and the U.K. Treasury.
Q:
The financial crisis of 2007-2009 has made which of the following regulatory goals a top priority for government: A. disclosure of accounting information.B. minimum capital requirements.C. avoidance of systemic risk.D. promotion of competition.
Q:
In today's world, the goal of financial stability means: A. no institution should fail.B. competition should be eliminated.C. preventing large-scale financial catastrophes.D. creating one mega regulatory agency.
Q:
Regulators and supervisors of banks are challenged by all of the following, except: A. globalization of financial services.B. the use of new financial instruments that shift risk without shifting ownership.C. technological innovation.D. reinforcement by Congress of functional and geographic barriers in banking.
Q:
A bank supervisor examines the bank's portfolio of loans to see if the loans are being repaid in a timely manner. In terms of the acronym CAMELS, this would be part of rating the bank's: A. asset quality.B. losses.C. management.D. earnings.
Q:
The CAMELS ratings are: A. made public monthly to the financial markets so people can judge the relative quality of banks.B. published once a quarter in banking journals issued by the Federal Reserve.C. included in the annual report of publicly owned banks.D. not made public.
Q:
The acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes the following, except: A. asset quality.B. losses.C. management.D. earnings.
Q:
One reason a bank's officer may be reluctant to write off a past-due loan is that it will: A. increase the bank's liabilities.B. decrease the bank's assets and capital.C. increase the bank's liabilities and assets, requiring more capital to be held.D. make the bank's accounts less transparent.
Q:
Prior to the financial crisis of 2007-2009 banks did all but which of the following to bulk up their profit: A. bought or sponsored hedge funds.B. traded securities for customers.C. purchased equities for their own account.D. colluded to fix benchmark interest rates.
Q:
The supervision of banks includes: A. requiring bank officers to attend classes on an annual basis.B. on-site examinations of the bank.C. extensive background checks of all bank officers.D. requiring banks to file monthly reports on their revenues, expenses and profits.
Q:
Banks are required to disclose certain information. This disclosure is done for all of the following reasons except: A. to enable regulators to more easily assess the financial condition of banks.B. to allow financial market participants to penalize banks that carry additional risk.C. to allow customers to more easily compare prices for services offered by banks.D. create uniform prices for standard bank services.
Q:
Which of the following is not a pillar of the latest Basel Accord? A. A revised set of minimum capital requirementsB. It includes liquidity requirements in addition to capital requirementsC. It supplements capital requirements based on risk-weighted assets with restrictions on leverageD. Uniform international laws for bank regulation
Q:
Which of the following is not a positive effect of the Basel Accord? A. It forced regulators to change the way they thought about bank capital.B. It promoted a more uniform international system.C. It provided a framework that less developed countries could use to improve the regulation of their banks.D. It provided a system to differentiate between bonds based on their systemic risk.
Q:
The original Basel Accord was: A. the basic set of guidelines the Federal Reserve applies in regulating domestic banks.B. a set of guidelines for basic capital requirements for internationally active banks.C. an agreement between state and federal regulators to try to have one standard set of guidelines for all banks.D. a set of guidelines applied only to international banks operating with U.S. boundaries.
Q:
Financial regulators set capital requirements for banks. One characteristic about these requirements is: A. every bank will have to hold the same level.B. the riskier the asset holdings of a bank, the more capital it will be required to have.C. the more branches a bank has, the more capital it must have.D. the amount of capital required is inversely related to the amount of assets the bank owns.
Q:
One reason that financial regulations restrict the assets that banks can own is to: A. combat the moral hazard that government safety nets provide.B. limit the growth rate of banks.C. prevent banks from being too profitable.D. keep banks from spending lavishly on perks for executives.
Q:
Considering the government-sponsored enterprises like Freddie Mac, Fannie Mae, and others, do you see any indication that the managers of these agencies are creating a moral hazard? Explain.
Q:
Evaluate the pros and cons of the repeal of the Glass-Steagall Act of
Q:
Explain why a large equipment provider that sells to many of its commercial customers on account may use a finance company.
Q:
How might Freddie Mac and Fannie Mae have contributed to the financial crisis experienced in the United States in 2007-2009?
Q:
From a transaction cost perspective, discuss why a firm may contract with an investment bank to underwrite or place an issue.
Q:
Why do you think Congress and the President are reluctant to fix the problems (identified in the text) with the Social Security System?
Q:
In what way(s) can a pension plan be seen as the opposite of life insurance?
Q:
Explain the difference between a pension fund that is a defined-contribution plan from one that is a defined-benefit.
Q:
Explain why the decoding of the human genome has interesting implications for the life insurance industry.
Q:
Why do insurance companies often find it necessary to purchase re-insurance?
Q:
Why do you think most health insurance policies require the first $100 or so of every claim and a percentage of the bill after that to be paid by the insured?
Q:
A very controversial issue in many states currently is whether or not insurance companies should be allowed to use a person's credit history as a tool in determining the individual's automobile and homeowner insurance premium. Without getting into the legal or ethical issues, what do you think the insurance companies' motives might be for wanting to use the credit report?
Q:
Within the insurance industry a common saying is that insurance works because of the "law of large numbers". What do you think is meant by this?
Q:
Which insurance companies, life or property and casualty, would you think would invest more in long-term assets? Explain.
Q:
Many insurance companies sell group policies that cover all of the employees at a particular firm, or all of the members of a particular organization. How could this policy help to overcome the problem of adverse selection?