Q&A Hero

Q: Bank holding companies that rival money center banks in size, but are not located in money center cities are A) superregional banks. B) bank clearing houses. C) international banks. D) local banks.

Q: The primary reason for the recent reduction in the number of banks is A) bank failures. B) re-regulation of banking. C) restrictions on interstate branching. D) mergers and acquisitions.

Q: What financial innovations helped banks to get around the bank branching restrictions of the McFadden Act?

Q: Financial innovations that grew out of the bank branching restrictions were A) bank holding companies and automatic teller machines. B) bank holding companies and securitization. C) automatic teller machines and sweep accounts. D) automatic teller machines and bank credit cards.

Q: ATMs were developed because of breakthroughs in technology and as a A) means of avoiding restrictive branching regulations. B) means of avoiding paying interest to corporate customers. C) way of concealing transactions from the SEC. D) increasing the competition from foreign banks.

Q: A financial innovation that developed as a result of banks avoidance of bank branching restrictions was A) money market mutual funds. B) commercial paper. C) junk bonds. D) bank holding companies.

Q: Which of the following is a true statement concerning bank holding companies? A) Bank holding companies own few large banks. B) Bank holding companies have experienced dramatic growth in the past three decades. C) The McFadden Act has prevented bank holding companies from establishing branch banks. D) Bank holding companies can own only banks.

Q: Lack of competition in the United States banking industry can be attributed to A) the fact that competition does not benefit consumers. B) the fact that branching has eliminated competition. C) recent legislation restricting competition. D) nineteenth-century populist sentiment.

Q: The large number of banks in the United States is an indication of A) vigorous competition within the banking industry. B) lack of competition within the banking industry. C) only efficient banks operating within the United States. D) consumer preference for local banks.

Q: The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the A) McFadden Act. B) National Bank Act. C) Glass-Steagall Act. D) Garn-St.Germain Act.

Q: The McFadden Act of 1927 A) effectively prohibited banks from branching across state lines. B) required that banks maintain bank capital equal to at least 6 percent of their assets. C) effectively required that banks maintain a correspondent relationship with large money center banks. D) separated the commercial banks and investment banks.

Q: The presence of so many commercial banks in the United States is most likely the result of A) consumers' strong desire for dealing with only local banks. B) adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks. C) prior regulations that restricted the ability of these financial institutions to open branches. D) consumers' preference for state banks.

Q: Why did the interest rate volatility of the 1970s spur financial innovation?

Q: The decline in traditional banking internationally can be attributed to A) increased regulation. B) improved information technology. C) increasing monopoly power of banks over depositors. D) increased protection from competition.

Q: Banks have attempted to maintain adequate profit levels by A) making fewer riskier loans, such as commercial real estate loans. B) pursuing new off-balance-sheet activities. C) increasing reserve deposits at the Fed. D) decreasing capital accounts..

Q: The most important developments that have reduced banks' income advantages in the past thirty years include: A) the increase in off-balance sheet activities. B) the growth of securitization. C) the elimination of Regulation Q ceilings. D) the competition from money market mutual funds.

Q: The most important developments that have reduced banks cost advantages in the past thirty years include: A) the growth of the junk bond market. B) the competition from money market mutual funds. C) the growth of securitization. D) the growth in the commercial paper market.

Q: One factor contributing to the decline in cost advantages that banks once had is the A) decline in the importance of checkable deposits from over 60 percent of banks' liabilities to 2 percent today. B) decline in the importance of savings deposits from over 60 percent of banks' liabilities to under 15 percent today. C) decline in the importance of checkable deposits from over 40 percent of banks' liabilities to 15 percent today. D) decline in the importance of savings deposits from over 40 percent of banks' liabilities to under 20 percent today.

Q: Banks responded to disintermediation by A) supporting the elimination of interest rate regulations, enabling them to better compete for funds. B) opposing the elimination of interest rate regulations, as this would increase their cost of funds. C) demanding that interest rate regulations be imposed on money market mutual funds. D) supporting the elimination of interest rate regulations, as this would reduce their cost of funds.

Q: Banking crises have occurred throughout the world. What similarities do we find when we look at the different countries?

Q: China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas. A) state B) domestic investor C) depositor D) domestic corporate

Q: The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S. in the 1980s. A) regulatory forbearance B) policy antagonism C) regulatory ignorance D) policy renewal

Q: When comparing the banking crisis in the United States to the crises in Latin America, cost to the taxpayers of the government bailouts was A) higher in Latin American than in the United States. B) higher in the United States than in Latin America. C) about the same in both Latin America and the United States. D) positive in Latin America but negative in the United States.

Q: The Argentine banking crisis of 2001 resulted from Argentina's banks being required to A) purchase large amounts of government debt. B) pay back the value of failed loans. C) make risky real estate loans. D) make loans to only state-owned businesses.

Q: As in the United States, an important factor in the banking crises in Latin America was the A) financial liberalization that occurred in the 1980s. B) decline in real interest rates that occurred in the 1980s. C) high inflation that occurred in the 1980s. D) sluggish economic growth that occurred in the 1980s.

Q: As in the United States, an important factor in the banking crises in Norway, Sweden, and Finland was the A) financial liberalization that occurred in the 1980s. B) decline in real interest rates that occurred in the 1980s. C) high inflation that occurred in the 1980s. D) sluggish economic growth that occurred in the 1980s.

Q: FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk. A) increased; decreased B) increased; increased C) decreased; decreased D) decreased; increased

Q: The directive of prompt corrective action means that A) the FDIC will intervene earlier and more vigorously when a bank gets into trouble. B) the banks must take actions quickly to resolve reserve disputes. C) bank failures cannot occur. D) there must be an immediate response to an increase in interest rates.

Q: The ability to use the too-big-to-fail policy was curtailed by the passage of the FDICIA. To use this action today, the FDIC must get approval of a two-thirds majority of both the Board of Governors of the Federal Reserve and the directors of the FDIC and also the approval of the A) Secretary of the Treasury. B) Senate Finance Committee Chairperson. C) President of the United States. D) Governor of the state in which the failed bank is located.

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) increased the FDIC's ability to use the too-big-to-fail doctrine. C) eliminated governmentally-administered deposit insurance. D) eliminated restrictions on nationwide banking.

Q: FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to A) 8%. B) 5% C) 10% D) 25%

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: 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: 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 nations savings and loans. D) politicians strong incentives to act in their own interests rather than the interests of the taxpayers.

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.

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: 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: "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: 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: 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: 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: 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: 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: The global financial crisis showed the need for increased financial regulation, however, too much or poorly designed regulation could A) choke off financial innovation. B) increase the efficiency of the financial system. C) increase economic growth. D) increase international financial integration.

Q: The inaccurate ratings provided by credit-rating agencies A) meant that investors did not have the information they needed to make informed choices about their investments. B) were irrelevant since no one pays any attention to them anyway. C) meant that investors actually took on less risk. D) will not be a problem when determining capital requirements under Basel 2..

Q: Currently, Fannie Mae and Freddie Mac are A) privately owned government-sponsored enterprises. B) privately owned enterprises with no government sponsorship. C) government agencies. D) government departments.

Q: Higher capital requirements will reduce the problems incurred when troubled ________ which had been off-balance sheet activities come back on the balance sheet. A) structured investment vehicles (SIVs) B) negotiable CDs C) Eurodollars D) Federal funds

Q: The Volcker Rule addresses the off-balance-sheet problem involving A) trading risks. B) selling loans. C) loan guarantees. D) interest rate risks.

Q: Firms that are designated as systemically important financial institutions (SIFIs) are subject to all of the following additional Federal Reserve regulations except A) higher capital standards. B) stricter liquidity requirements. C) providing a plan for orderly liquidation if necessary. D) interest rate ceilings on time deposits.

Q: The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to A) $40,000. B) $100,000. C) $200,000. D) $250,000.

Q: The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within A) the Treasury Department. B) the Federal Reserve. C) the SEC. D) the IRS.

Q: In order to ensure that borrowers have an ability to repay residential mortgages, the new consumer protection legislation requires lenders to do all of the following except A) verify the income of the borrower. B) verify the borrower's job status. C) check the credit history of the borrower. D) verify that the borrower can read and understand a loan contract.

Q: Banking crises have occurred throughout the world. What similarities do we find when we look at the different countries?

Q: A common element in all of the banking crisis episodes in different countries is A) the existence of a government safety net. B) deposit insurance. C) increased regulation. D) lack of competition.

Q: All of the following are common to banking crises in different countries except A) financial liberalization or innovation. B) weak bank regulatory systems. C) a government safety net. D) a dual banking system.

Q: The evidence from banking crises in other countries indicates that A) deposit insurance is to blame in each country. B) a government safety net for depositors need not increase moral hazard. C) regulatory forbearance never leads to problems. D) deregulation combined with poor regulatory supervision raises moral hazard incentives.

Q: How did the increase in the interest rates in the early 80s contribute to the S&L crisis?

Q: The Depository Institutions Deregulation and Monetary Control Act of 1980 A) restricted thrift institutions to making loans for home mortgages. B) restricted the use of ATS accounts. C) imposed restrictive interest-rate ceilings on large agricultural loans. D) increased deposit insurance from $40,000 to $100,000.

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: Moral hazard 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: 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: 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 government safety net creates both an adverse selection problem and a moral hazard problem. Explain.

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: Agreements such as the ________ are attempts to standardize international banking regulations. A) Basel Accord B) UN Bank Accord C) GATT Accord D) WTO Accord

Q: The collapse of the Bank of Credit and Commerce International, BCCI, showed the difficulty of international banking regulation. BCCI operated in more than ________ countries and was supervised by the small country of ________. A) 70, Luxembourg B) 100, Monaco C) 70, Monaco D) 100, Luxembourg

Q: Who has regulatory responsibility when a bank operates branches in many countries? A) It is not always clear. B) The WTO. C) The U.S. Federal Reserve System. D) The first country to submit an application.

Q: Which of the following is not a reason financial regulation and supervision is difficult in real life? A) Financial institutions have strong incentives to avoid existing regulations. B) Unintended consequences may happen if details in the regulations are not precise. C) Regulated firms lobby politicians to lean on regulators to ease the rules. D) Financial institutions are not required to follow the rules.

Q: Macroprudential supervision policies try to prevent a leverage cycle by changing capital requirements so that they ________ during an expansion and ________ during a downturn. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease

Q: Microprudential supervision does all of the following except A) checking capital ratios of a bank. B) checking a bank's compliance with disclosure requirements. C) assessing the riskiness of an individual bank's activities. D) focusing on financial system liquidity.

Q: Microprudential supervision focuses on the safety and soundness of A) individual financial institutions. B) the financial system as a whole. C) the shadow banking system. D) government credit agencies.

Q: The ________ that required separation of commercial and investment banking was repealed in 1999. A) the Federal Reserve Act. B) the Glass-Steagall Act. C) the Bank Holding Company Act. D) the Monetary Control Act.

Q: Regulations that reduced competition between banks included A) branching restrictions. B) bank reserve requirements. C) the dual system of granting bank charters. D) interest-rate ceilings.

Q: Competition between banks A) encourages greater risk taking. B) encourages conservative bank management. C) increases bank profitability. D) eliminates the need for government regulation.