Q&A Hero

Q: The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers becauseA)regulators initially attempted to downplay the seriousness of problems within the thrift industry.B)politicians who received generous campaign contributions from the savings and loan industry hoped that the problems in the industry would ease over time.C)Congress did not wait long enough for many of the problems in the thrift industry to correct themselves.D)all of the above.E)only A and B of the above.

Q: The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers becauseA)of regulators' initial attempts to downplay the seriousness of problems within the thrift industry.B)politicians who received generous campaign contributions from the savings and loan industry, like regulators, hoped that the problems in the industry would ease over time.C)Congress encouraged, and thrift regulators acceded to, a policy of regulatory forbearance.D)all of the above.E)only A and B of the above.

Q: Examiners from the Federal Home Loan Bank Board of San Francisco recommended that Lincoln Savings and Loan be seized when they discovered thatA)officials at the thrift had attempted to mislead them.B)it had exceeded the 10 percent limit on equity investments by $600 million.C)its owner, Charles Keating, had been convicted of embezzlement ten years before he purchased the thrift.D)all of the above.E)both A and B of the above.

Q: Charles KeatingA)was allowed to acquire Lincoln Savings and Loan of Irvine, California, even though he had been accused of fraud by the SEC only four and a half years earlier.B)fired Lincoln's conservative lending officers and internal auditors, even though he had promised regulators he would keep them.C)enlisted the help of five senators to delay the seizure of Lincoln's assets.D)did all of the above.

Q: "Bureaucratic gambling" refers toA)the belief of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of the 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)none of the above.

Q: That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained byA)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)prohibitions against onerous regulatory restrictions against S&Ls as mandated in the Competitive Equality in Banking Act.D)all of the above.E)only A and B of the above.

Q: That taxpayers were poorly served by thrift regulators in the 1980s is now quite clear. This poor performance cannot be explained byA)regulators' desire to escape blame for poor performance, leading to a perverse strategy of "regulatory 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)any of the above.

Q: That taxpayers were poorly served by thrift regulators in the 1980s is now quite clear. This poor performance is explained byA)regulators' desire to escape blame for poor performance, leading to a perverse strategy of "regulatory 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 unwillingness to appropriate sufficient funds to permit regulators to examine the many thrift institutions that needed monitoring.D)all of the above.E)only A and B of the above.

Q: The political economy of the S&L crisis shows that the principal-agent problem occurs in politics. In this instance, the agent-regulators did not act to protect the principal-taxpayers becauseA)regulators wanted to escape blame, hoping the situation would improve before others discovered the problem.B)regulators responded to pressure to pursue regulatory forbearance from politicians who had accepted campaign donations from owners of S&Ls.C)Congress was unwilling to allocate the necessary funds regulators needed to close insolvent S&Ls.D)all of the above.E)only A and B of the above.

Q: An analysis of the political economy of the savings and loan crisis helps one to understandA)why politicians aided the efforts of thrift regulators, raising regulatory appropriations and encouraging closing of insolvent thrifts.B)why thrift regulators were 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)all of the above.

Q: An analysis of the political economy of the savings and loan crisis helps one to understandA)why politicians hampered the efforts of thrift regulators, cutting regulatory appropriations and encouraging regulatory forbearance.B)why thrift regulators were reluctant to admit that any problem even existed in the thrift industry.C)why thrift regulators willingly acceded to pressures placed upon them by members of Congress.D)all of the above.E)only A and B of the above.

Q: The major provisions of the Competitive Equality in Banking Act of 1987 includedA)abolishing the Federal Home Loan Bank Board and the FSLIC.B)transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift Supervision, a bureau within the U.S. Treasury Department.C)establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership.D)all of the above.E)none of the above.

Q: The major provisions of the Competitive Equality in Banking Act of 1987 includedA)expanding the responsibilities of the FDIC, which is now the sole administrator of the federal deposit insurance system.B)establishing 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)all of the above.E)only A and B of the above.

Q: The Competitive Equality in Banking Act of 1987A)provided insufficient funds to the FSLIC to close down insolvent S&Ls.B)actually directed S&L regulators to continue to pursue regulatory forbearance, further delaying the closing of insolvent S&Ls.C)created a new agency, the Resolution Trust Corporation, to manage insolvent thrifts.D)did all of the above.E)did only A and B of the above.

Q: The Competitive Equality in Banking Act of 1987A)discouraged regulators from pursuing regulatory forbearance.B)directed regulators to close "zombie S&Ls" as quickly as administratively possible.C)encouraged regulators to continue their policy of regulatory forbearance.D)did both A and B of the above.

Q: According to the text, the Competitive Equality in Banking Act of 1987A)turned the thrift industry around by providing the necessary funds to close the "zombie S&Ls."B)lowered the cost of bailing out the S&Ls by quickly closing "zombie S&Ls" before they could cause other thrifts to fail.C)failed to provide the funds necessary to close ailing S&Ls, and actually encouraged regulators to continue to pursue regulatory forbearance.D)did both A and B of the above.

Q: "Zombie S&Ls"A)paid above market interest rates to attract deposits to fuel their lending boom.B)offered loans at below market interest rates to expand their lending.C)drove down the profitability of solvent S&Ls, threatening to turn them into "zombies" too.D)did all of the above.E)did only A and B of the above.

Q: Examples of the huge risks that "zombie S&Ls" undertook includeA)building shopping centers in the desert.B)buying manufacturing plants to convert manure to methane.C)purchasing billions of dollars of junk bonds.D)all of the above.E)only A and B of the above.

Q: Which of the following are reasons that explain why regulators pursued a policy of regulatory forbearance toward thrifts in the early 1980s?A)Regulators knew that the FSLIC did not have sufficient funds to close insolvent S&Ls and pay off their depositors.B)Regulators were probably too close to the people they were supposed to be regulating to close down thrifts and put them out of business.C)Regulators preferred to sweep the problems that thrifts were suffering under the rug in the hope that they would go away as the economy improved.D)All of the above explain regulatory forbearance.E)Only A and B of the above explain regulatory forbearance.

Q: The policy of regulatory forbearanceA)meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s.B)benefited "zombie S&Ls" at the expense of healthy S&Ls, as healthy institutions lost deposits to insolvent institutions.C)had the advantage of benefiting healthy S&Ls by giving them the opportunity to attract deposits that began to leave the "zombie S&Ls."D)both A and B of the above.E)both A and C of the above.

Q: The policy of regulatory forbearanceA)meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s.B)benefited "zombie S&Ls" at the expense of healthy S&Ls, as healthy institutions lost deposits to insolvent institutions.C)contributed to declining profitability in the S&L industry and an increase in the number of "zombie S&Ls."D)all of the above.E)only A and B of the above.

Q: Which of the following reasons explain why federal regulators adopted a policy of regulatory forbearance toward insolvent financial institutions in the early 1980s?A)The FSLIC lacked sufficient funds to cover insured deposits in the insolvent S&Ls.B)The regulators were reluctant to close the firms that justified their regulatory existence.C)The Federal Home Loan Bank Board and the FSLIC were reluctant to admit that they were in over their heads with problems.D)All of the above.E)Only A and B of the above.

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 hazardB)regulatory forbearance; adverse selectionC)regulatory stringency; moral hazardD)regulatory stringency; adverse selection

Q: When nearly half of the S&Ls in the United States had a negative net worth and were thus insolvent by the end of 1982, regulators adopted a policy of _________, which amounted to _________ capital requirements.A)regulatory forbearance; raisingB)regulatory forbearance; loweringC)regulatory stringency; raisingD)regulatory stringency; lowering

Q: The government granted thrifts greater powers in the early 1980s in hopes of turning the industry's problems around. These powersA)required greater expertise in managing risk than many thrift managers possessed.B)encouraged thrifts to expand lending rapidly in real estate, increasing their exposure to risk.C)expanded the scope and complexity of thrift lending activities that went beyond what regulators could effectively monitor, given their limited resources.D)did all of the above.E)did only A and B of the above.

Q: In the 1980s, thrift institutions, which had been almost entirely restricted to making loans for home mortgages only, were allowed by regulators toA)finance acquisitions in commercial real estate.B)extend consumer loans.C)purchase junk bonds.D)do all of the above.E)do only A and B of the above.

Q: Savings and loans lost a total of $10 billion in 1981-1982 due to a combination of rising interest rates in 1979-1981 andA)the recession of 1981-1982 that reduced real estate prices enough to cause significant loan defaults.B)the regulatory restrictions enacted by Congress in 1981 and 1982.C)the loss of market share to commercial banks that were allowed to compete directly with thrifts in the real estate market.D)the acceleration of inflation in 1981-1982 that caused thrifts to lose additional funds to money market mutual funds.

Q: In the early stages of the 1980s banking crisis, financial institutions were especially harmed byA)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)all of the above.

Q: The Riegle-Neal Act of 1994A)required all banks to become universal banks.B)removed ceilings on bank deposit interest rates.C)allowed banks to underwrite insurance and securities and engage in real estate activities.D)overturned prohibitions on interstate banking and branching.

Q: The prohibition against banks underwriting corporate securities and engaging in brokerage, real estate, and insurance activities was repealed by theA)Gramm-Leach-Bliley Financial Services Modernization Act.B)Competitive Equality in Banking Act.C)Depositary Institution Deregulation and Monetary Control Act.D)Glass-Steagall Act.

Q: The legislation that separated investment banking from commercial banking was theA)National Bank Act.B)Federal Reserve Act.C)Glass-Steagall Act.D)McFadden Act.

Q: Which of the following is not expected to result from bank consolidation in the U.S.?A)Disappearance of small community banksB)Acceleration of the decline in the number of banksC)Banks will be more efficientD)Banks will be less likely to fail

Q: Although it has a population about half that of the United States, Japan hasA)many more banks.B)about 10 percent of the number of banks.C)about 5 percent of the number of banks.D)about 1 percent of the number of banks.

Q: As a result of restrictive banking regulations, the United StatesA)has too few banks when compared to other industrialized countries.B)has banks that are quite large relative to those in other countries.C)has too many banks when compared to other industrialized countries.D)both A and B of the above.

Q: The only country without a true national banking system in which banks have branches throughout the nation isA)Canada.B)Japan.C)the United Kingdom.D)the United States.

Q: A bank with a large credit-card customer base can market other financial products to these customers at a low cost. This is an example ofA)economies of scale.B)economies of scope.C)becoming a superregional bank.D)none of the above.

Q: The McFadden Act's prohibition against interstate branchingA)was weakened by the introduction of shared electronic banking facilities that provide banking services nationwide.B)was weakened by regional compacts that allowed banks to own banks in other states in their region.C)impeded banks' ability to diversify their loans and take advantage of economies of scale.D)all of the above.

Q: As a result of shared electronic banking facilities,A)barriers to branching have become less burdensome.B)banking has become less competitive.C)both of the above have occurred.D)neither of the above has occurred.

Q: Which of the following are true statements concerning bank holding companies?A)Bank holding companies own almost all large banks.B)Bank holding companies have experienced dramatic growth in the past twenty-five years.C)Through a loophole in the McFadden Act, bank holding companies have successfully evaded interstate branching restrictions.D)All of the above are true.E)Only A and B of the above are true.

Q: So-called fallen angels differ from junk bonds in thatA)junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds which have had their credit ratings fall below Baa.B)junk bonds refer to previously issued bonds which have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings.C)junk bonds have ratings below Baa, whereas fallen angels have ratings below C.D)fallen angels have ratings below Baa, whereas junk bonds have ratings below C.

Q: So-called fallen angels differ from junk bonds in thatA)junk bonds refer to previously issued bonds which have had their credit ratings fall below Baa.B)fallen angels refer to newly issued bonds with low credit ratings.C)junk bonds refer to newly issued bonds with low credit ratings.D)both A and B of the above.

Q: "Stripping" a Treasury bondA)means selling each of its future payments as a separate zero-coupon bond.B)decreases the total present discounted value of future payments.C)both A and B.D)none of the above.

Q: Which of the following is an example of a financial innovation introduced to avoid regulations?A)SecuritizationB)Junk bondC)Debit cardD)Sweep account

Q: Which of the following is not a financial innovation stimulated by information technology?A)Credit cardB)Debit cardC)Adjustable-rate mortgageD)Electronic banking

Q: A smart-card is a form ofA)stored-value card.B)credit card.C)debit card.D)e-cash card.

Q: The entry of Sears, AT&T and GM into the credit card business is an indication ofA)government's efforts to deregulate the provision of financial services.B)the rising profitability of credit card operations.C)the reduction in costs of credit card operations since 1990.D)the sale of unprofitable operations by Bank of America and Citicorp.

Q: A firm issuing credit cards earns income fromA)loans it makes to credit card holders.B)payments made to it by stores on credit card purchases.C)payments made to it by manufacturers of the products sold in stores on credit card purchases.D)all of the above.E)only A and B of the above.

Q: Credit cards date back toA)prior to World War II.B)just after World War II.C)the early 1950s.D)the late 1950s.

Q: Examples of financial services that became practical realities as the result of new computer technology includeA)credit cards.B)electronic banking facilities.C)checking accounts.D)all of the above.E)only A and B of the above.

Q: The most important source of the changes in supply conditions that stimulate financial innovation has been theA)aging of the baby-boomer generation.B)dramatic increase in the volatility of interest rates.C)improvement in information technology.D)dramatic increase in competition from foreign banks.E)deregulation of financial institutions.

Q: Adjustable-rate mortgagesA)benefit homeowners when interest rates are falling.B)reduce financial institutions' interest-rate risk.C)reduce households' risk of having to pay higher mortgage payments when interest rates rise.D)do only A and B of the above.

Q: Adjustable-rate mortgagesA)protect households against higher mortgage payments when interest rates rise.B)keep financial institutions' earnings high even when interest rates are falling.C)have many attractive attributes, explaining why so few households now seek fixed-rate mortgages.D)do only A and B of the above.E)none of the above.

Q: The most significant change in the economic environment that changed the demand for financial products since 1970 has beenA)the aging of the baby-boomer generation.B)the dramatic increase in the volatility of interest rates.C)the dramatic increase in competition from foreign banks.D)the deregulation of financial institutions.

Q: In the 1950s the interest rate on three-month Treasury bills fluctuated between 1.0% and 3.5%. In the 1980s, the three-month Treasury bill rate ranged from 5% to over 15%. From this one could predict that in the 1980s interest-rate risk was _________ and the demand for financial innovation was _________.A)greater; lowerB)greater; greaterC)lower; lowerD)lower; greater

Q: Large fluctuations in interest rates lead toA)substantial capital gains and losses to owners of securities.B)greater uncertainty about returns on investments.C)greater interest-rate risk.D)all of the above.

Q: Rising interest-rate risk _________ the _________ financial innovation.A)increased; cost ofB)increased; demand forC)reduced; cost ofD)reduced; demand for

Q: New computer technology hasA)increased the cost of financial innovation.B)increased the demand for financial innovation.C)reduced the cost of financial innovation.D)reduced the demand for financial innovation.

Q: Which of the following are important factors in determining the degree and timing of financial innovation?A)Changes in technologyB)Changes in financial market conditionsC)Changes in regulationD)All of the aboveE)Only A and B of the above

Q: Which of the following statements concerning bank regulation in the United States are true?A)The Office of the Comptroller of the Currency has the primary responsibility for state banks that are members of the Federal Reserve System.B)The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System.C)The Office of the Comptroller of the Currency has sole regulatory responsibility over bank holding companies.D)All of the above are true.E)Only A and B of the above are true.

Q: Which of the following statements concerning bank regulation in the United States are true?A)The Office of the Comptroller of the Currency has the primary responsibility for national banks.B)The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System.C)The Fed has sole regulatory responsibility over bank holding companies.D)All of the above are true.E)Only A and B of the above are true.

Q: Which regulatory body charters national banks?A)The Federal ReserveB)The Federal Deposit Insurance CorporationC)The Comptroller of the CurrencyD)None of the above

Q: Which of the following statements is false?A)Checkable deposits are usually the lowest cost source of bank funds.B)Checkable deposits are the primary source of bank funds.C)Checkable deposits are payable on demand.D)Checkable deposits include NOW accounts.

Q: Checkable deposits and money market deposit accounts areA)payable on demand.B)liabilities of the banks.C)assets of the banks.D)only A and B of the above.E)only A and C of the above.

Q: The share of checkable deposits in total bank liabilities hasA)expanded moderately over time.B)expanded dramatically over time.C)shrunk over time.D)remained virtually unchanged since 1960.

Q: Which of the following are reported as liabilities on a bank's balance sheet?A)Discount loansB)Cash items in the process of collectionC)State government securitiesD)All of the aboveE)Only B and C of the above

Q: Which of the following are reported as liabilities on a bank's balance sheet?A)ReservesB)Checkable depositsC)LoansD)Deposits with other banks

Q: A bank's balance sheetA)shows that total assets equal total liabilities plus equity capital.B)lists sources and uses of bank funds.C)indicates whether or not the bank is profitable.D)does all of the above.E)does only A and B of the above.

Q: Which of the following statements is false?A)A bank's assets are its uses of funds.B)A bank issues liabilities to acquire funds.C)A bank's assets provide the bank with income.D)Bank capital is an asset on the bank balance sheet.

Q: Which of the following statements is true?A)A bank's assets are its uses of funds.B)A bank's assets are its sources of funds.C)A bank's liabilities are its uses of funds.D)Only B and C of the above are true.

Q: Which of the following statements are true?A)A bank's assets are its sources of funds.B)A bank's liabilities are its uses of funds.C)A bank's balance sheet shows that total assets equal total liabilities plus equity capital.D)Each of the above.

Q: Owners cannot write checks on non-transaction deposits, but the interest rate paid on these deposits are usually higher than those on checkable deposits.

Q: The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board (PCAOB), overseen by the SEC, to supervise accounting firms and ensure that audits are independent and controlled for quality.

Q: A requirement in the bond indenture that the firm pay off a portion of the bond issue each year is calledA)a sinking fund.B)a call provision.C)a restrictive covenant.D)a shelf registration.

Q: Call provisions will be exercised when interest rates _________ and bond values _________.A)rise; riseB)fall; riseC)rise; fallD)fall; fall

Q: (I) Restrictive covenants often limit the amount of dividends that firms can pay the stockholders.(II) Most corporate indentures include a call provision, which states that the issuer has the right to force the holder to sell the bond back.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.

Q: Restrictive covenants canA)limit the amount of dividends the firm can pay.B)limit the ability of the firm to issue additional debt.C)restrict the ability of the firm to enter into a merger agreement.D)do all of the above.E)do only A and B of the above.

Q: Typically, the interest rate on corporate bonds will be _________ the more restrictions are placed on management through restrictive covenants, because _________.A)higher; corporate earnings will be limited by the restrictionsB)higher; the bonds will be considered safer by bondholdersC)lower; the bonds will be considered safer by buyersD)lower; corporate earnings will be higher with more restrictions in place

Q: Policies that limit the discretion of managers as a way of protecting bondholders' interests are calledA)restrictive covenants.B)debentures.C)sinking funds.D)bond indentures.

Q: The bond contract that states the lender's rights and privileges and the borrower's obligations is called theA)bond syndicate.B)restrictive covenant.C)bond covenant.D)bond indenture.

Q: (I) Most corporate bonds have a face value of $1000, pay interest semi-annually, and can be redeemed anytime the issuer wishes. (II) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.