Bank operations “sequential service constraint”

Depositors lack of information about the quality of bank assets can lead to ________.A) bank panicsB) bank boomsC) sequencingD) asset transformation

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The fact that banks operate on a “sequential service constraint” means thatA) all depositors share equally in the bank’s funds during a crisis.B) depositors arriving last are just as likely to receive their funds as those arriving first.C) depositors arriving first have the best chance of withdrawing their funds.D) banks randomly select the depositors who will receive all of their funds.

Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on aA) last-in, first-out constraint.B) sequential service constraint.C) double-coincidence of wants constraint.D) everyone-shares-equally constraint.

Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is theA) too-big-to-fail effect.B) moral hazard problem.C) adverse selection problem.D) contagion effect.

The contagion effect refers to the fact thatA) deposit insurance has eliminated the problem of bank failures.B) bank runs involve only sound banks.C) bank runs involve only insolvent banks.D) the failure of one bank can hasten the failure of other banks.

During the boom years of the 1920s, bank failures were quiteA) 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.

To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance.A) FDICB) SECC) Federal ReserveD) ATM

The primary difference between the “payoff” and the “purchase and assumption” methods of handling failed banks isA) 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.

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

When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem ofA) moral hazard.B) split incentives.C) ex ante shirking.D) pre-contractual opportunism.

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

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

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Deposit insurance is only one type of government safety net. All of the following are types of government support for troubled financial institutions exceptA) 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.

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

A system of deposit insuranceA) 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.

The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry.A) an adverse selectionB) a moral hazardC) a lemonsD) a revenue

Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk.A) adverse selection; littleB) adverse selection; muchC) moral hazard; littleD) moral hazard; much

Acquiring information on a bank’s activities in order to determine a bank’s risk is difficult for depositors and is another argument for government ________.A) regulationB) ownershipC) recallD) forbearance

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insuranceA) 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.

In May 1991, the FDIC announced that it would sell the government’s final 26% stake in Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental IllinoisA) was a good investment opportunity for the government.B) could be the Chicago branch of a new governmentally-owned interstate banking system.C) was too big to fail.D) would become the center of the new midwest region central bank system.

Federal deposit insurance covers deposits up to $100,000, but as part of a doctrine called “too-big-to-fail” the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses theA) “payoff” method.B) “purchase and assumption” method.C) “inequity” method.D) “Basel” method.

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; largeB) payoff; noC) purchase and assumption; largeD) purchase and assumption; no

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely.A) small; fewerB) small; greaterC) big; fewerD) big; greater

A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.A) increases; moral hazardB) decreases; moral hazardC) decreases; adverse selectionD) increases; adverse selection

The too-big-to-fail policyA) reduces 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) allows small banks to take on more risk than large banks.

Regulators attempt to reduce the riskiness of banks’ asset portfolios byA) limiting the amount of loans in particular categories or to individual borrowers.B) encouraging banks to hold risky assets such as common stocks.C) establishing a minimum interest rate floor that banks can earn on certain assets.D) requiring collateral for all loans.

A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.A) more; moreB) more; lessC) less; moreD) less; less

A bank failure is less likely to occur whenA) 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.

The leverage ratio is the ratio of a bank’sA) 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.

To be considered well capitalized, a bank’s leverage ratio must exceed ________.A) 10%B) 8%C) 5%D) 3%

Off-balance-sheet activitiesA) 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.

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

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%

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 selectionB) 2; credit riskC) 4; adverse selectionD) 4; credit risk

The practice of keeping high-risk assets on a bank’s books while removing low-risk assets with the same capital requirement is know asA) competition in laxity.B) depositor supervision.C) regulatory arbitrage.D) a dual banking system.

Banks engage in regulatory arbitrage byA) 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.

Because banks engage in regulatory arbitrage, the Basel Accord on risk-based capital requirements may result inA) reduced risk taking by banks.B) reduced supervision of banks by regulators.C) increased fraudulent behavior by banks.D) increased risk taking by banks.

One of the criticisms of Basel 2 is that it is procyclical. That means thatA) banks may be required to hold more capital during times when capital is short.B) banks may become professional at a cyclical response to economic conditions.C) banks may be required to hold less capital during times when capital is short.D) banks will not be required to hold capital during an expansion

Overseeing who operates banks and how they are operated is called ________.A) prudential supervisionB) hazard insuranceC) regulatory interferenceD) loan loss reserves

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem.A) adverse selection; adverse selectionB) adverse selection; moral hazardC) moral hazard; adverse selectionD) moral hazard; moral hazard

The chartering process is similar to ________ potential borrowers and the restriction of risk assets by regulators is similar to ________ in private financial markets.A) screening; restrictive covenantsB) screening; branching restrictionsC) identifying; branching restrictionsD) identifying; credit rationing

Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for ________.A) liabilitiesB) liquidityC) loansD) leverage

The federal agencies that examine banks includeA) the Federal Reserve System.B) the Internal Revenue Service.C) the SEC.D) the U.S. Treasury.

Banks are required to file ________ usually quarterly that list information on the bank’s assets and liabilities, income and dividends, and so forth.A) call reportsB) balance reportsC) regulatory sheetsD) examiner updates

Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry.A) moral hazardB) adverse selectionC) ex post shirkingD) post-contractual opportunism

The current supervisory practice toward risk managementA) focuses on the quality of a bank’s balance sheet.B) determines whether capital requirements have been met.C) evaluates the soundness of a bank’s risk-management process.D) focuses on eliminating all risk.

Regulations designed to provide information to the marketplace so that investors can make informed decisions are calledA) disclosure requirements.B) efficient market requirements.C) asset restrictions.D) capital requirements.

With ________, firms value assets on their balance sheet at what they would sell for in the market.A) mark-to-market accountingB) book-value accountingC) historical-cost accountingD) off-balance sheet accountingA

During times of financial crisis, mark-to-market accountingA) requires that a financial firms’ assets be marked down in value which can worsen the lending crisis.B) leads to an increase in the financial firms’ balance sheets since they can now get assets at bargain prices.C) leads to an increase in financial firms’ lending.D) results in financial firms’ assets increasing in value

Consumer protection legislation includes legislation toA) reduce discrimination in credit markets.B) require banks to make loans to everyone who applies.C) reduce the amount of interest that bank’s can charge on loans.D) require banks to make periodic reports to the Better Business Bureau.

An important factor in producing the subprime mortgage crisis wasA) lax consumer protection regulation.B) onerous rules placed on mortgage originators.C) weak incentives for mortgage brokers to use complicated mortgage products.D) strong incentives for the mortgage brokers to verify income information

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

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

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.

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.

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.

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, LuxembourgB) 100, MonacoC) 70, MonacoD) 100, Luxembourg

Agreements such as the ________ are attempts to standardize international banking regulations.A) Basel AccordB) UN Bank AccordC) GATT AccordD) WTO Accord

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) restrictB) encourageC) renegotiateD) enhance

Depositors lack of information about the quality of bank assets can lead to ________.A) bank panicsB) bank boomsC) sequencingD) asset transformation

The fact that banks operate on a “sequential service constraint” means thatA) all depositors share equally in the bank s funds during a crisis.B) depositors arriving last are just as likely to receive their funds as those arriving first.C) depositors arriving first have the best chance of withdrawing their funds.D) banks randomly select the depositors who will receive all of their funds.

The primary difference between the payoff and the purchase and assumption methods of handling failed banks isA) 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

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

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

Deposit insurance is only one type of government safety net. All of the following are types of government support for troubled financial institutions exceptA) 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.

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

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A system of deposit insuranceA) 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 assetportfolio.D) increases the likelihood of bank runs.

The government safety net creates ________ problem because risk -loving entrepreneurs might find banking an attractive industry.A) an adverse selectionB) a moral hazardC) a lemonsD) a revenue

Acquiring information on a bank s activities in order to determine a bank s risk is difficult for depositors and is another argument for government ________.A) regulationB) ownershipC) recallD) forbearance

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insuranceA) 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.

Federal deposit insurance covers deposits up to $100,000, but as part of a doctrine called too-big-to-fail the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses theA) payoff method.B) purchase and assumption method.C) inequity method.D) Basel method.

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely.A) small; fewerB) small; greaterC) big; fewerD) big; greater

The too-big-to-fail policyA) reduces 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 largebanks.D) allows small banks to take on more risk than large banks.

Regulators attempt to reduce the riskiness of banks asset portfolios byA) limiting the amount of loans in particular categories or to individual borrowers.B) encouraging banks to hold risky assets such as common stocks.C) establishing a minimum interest rate floor that banks can earn on certain assets.D) requiring collateral for all loans.

A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.A) more; moreB) more; lessC) less; moreD) less; less

The leverage ratio is the ratio of a bank sA) 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.

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

Off-balance-sheet activitiesA) 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.

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

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%

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

Banks engage in regulatory arbitrage byA) keeping high-risk assets on their books while removing low-risk assets with the samecapital requirement.B) keeping low-risk assets on their books while removing high-risk assets with the samecapital requirement.C) hiding risky assets from regulators.D) buying risky assets from arbitragers.

Overseeing who operates banks and how they are operated is called ________.A) prudential supervisionB) hazard insuranceC) regulatory interferenceD) loan loss reserves

Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for ________.A) liabilitiesB) liquidityC) loansD) leverage

The federal agencies that examine banks includeA) the Federal Reserve System.B) the Internal Revenue Service.C) the SEC.D) the U.S. Treasury.

Banks are required to file ________ usually quarterly that list information on the bank s assets and liabilities, income and dividends, and so forth.A) call reportsB) balance reportsC) regulatory sheetsD) examiner updates

The current supervisory practice toward risk managementA) focuses on the quality of a bank s balance sheet.B) determines whether capital requirements have been met.C) evaluates the soundness of a bank s risk-management process.D) focuses on eliminating all risk.

During times of financial crisis, mark-to-market accountingA) requires that a financial firms assets be marked down in value which can worsen thelending crisis.B) leads to an increase in the financial firms balance sheets since they can now get assets atbargain prices.C) leads to an increase in financial firms lending.D) results in financial firms assets increasing in value.

Consumer protection legislation includes legislation toA) reduce discrimination in credit markets.B) require banks to make loans to everyone who applies.C) reduce the amount of interest that bank s can charge on loans.D) require banks to make periodic reports to the Better Business Bureau.

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

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

Agreements such as the ________ are attempts to standardize international banking regulations.A) Basel AccordB) UN Bank AccordC) GATT AccordD) WTO Accord

During the 1960s, 1970s, and early 1980s, traditional bank profitability declined because ofA) 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.

Moral hazard problems increased in prominence in the 1980sA) 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.

The evidence from banking crises in other countries indicates thatA) 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.

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

All of the following would reduce the agency problems of the originate-to-distribute model exceptA) encouraging more complex mortgage products.B) more stringent licensing requirements.C) clearer disclosure of mortgage terms.D) discouraging borrowers from getting in over their head.

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 CDsC) EurodollarsD) Federal funds

Investment banks that are part of ________ are regulated and supervised like banks.A) bank holding companiesB) insurance companiesC) Freddie MacD) Fannie Mae

The inaccurate ratings provided by credit-rating agenciesA) meant that investors did not have the information they needed to make informed choicesabout 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..

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

Moral hazard and adverse selection problems increased in prominence in the 1980sA) 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.

One of the problems experienced by the savings and loan industry during the 1980s wasA) 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.

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 forbearanceB) regulatory kindnessC) ostrich reasoningD) ignorance reasoning

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

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; taxpayersB) taxpayers; politician/regulatorsC) taxpayers; bank managersD) bank managers; politicians/regulators

The Resolution Trust Corporation was created by the FIRREA in order toA) 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.

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 TreasuryB) Senate Finance Committee ChairpersonC) President of the United StatesD) Governor of the state in which the failed bank is located

The directive of prompt corrective action means thatA) 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.

FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk.A) increased; decreasedB) increased; increasedC) decreased; decreasedD) decreased; increased

As in the United States, an important factor in the banking crises in Norway, Sweden, and Finland was theA) 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.