Financial Markets and Institutions, 8e (Mishkin)
1) During the boom years of the 1920s, bank failures were quite
A) uncommon, averaging less than 30 per year.
B) uncommon, averaging less than 100 per year.
C) common, averaging about 600 per year.
D) common, averaging about 2,000 per year.
2) When one party to a transaction has incentives to engage in activities detrimental to the other
party, there exists a problem of
A) moral hazard.
B) split incentives.
C) ex ante shirking.
D) precontractual opportunism.
3) Moral hazard is an important consequence of insurance arrangements because the existence of
insurance
A) provides increased incentives for risk taking.
B) impedes efficient risk taking.
C) causes the private cost of the insured activity to increase.
D) does both A and B of the above.
E) does both B and C of the above.
4) The existence of deposit insurance can increase the likelihood that depositors will need
deposit protection, as banks with deposit insurance
A) 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.
5) Although the FDIC was created to prevent bank failures, its existence encourages banks to
A) take too much risk.
B) hold too much capital.
C) open too many branches.
D) buy too much stock.
6) When bad drivers line up to purchase collision insurance, automobile insurers are subject to
the
A) moral hazard problem.
B) adverse selection problem.
C) assigned risk problem.
D) ill queue problem.
7) Deposit insurance
A) attracts risk-prone entrepreneurs to the banking industry.
B) encourages bank managers to take on greater risks than they otherwise would.
C) reduces the incentives of depositors to monitor the riskiness of their banks’ asset portfolios.
D) does all of the above.
E) does only A and B of the above.
8) The possibility that the failure of one bank can hasten the failure of other banks is called the
A) bank run effect.
B) moral hazard effect.
C) contagion effect.
D) adverse selection effect.
9) 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; large
B) payoff; no
C) purchase and assumption; large
D) purchase and assumption; no
10) If the FDIC uses the purchase and assumption method to handle a failed bank,
A) all deposits will suffer losses.
B) small deposits will be paid in full but deposits over the insurance limit will not.
C) all deposits will be paid in full.
D) none of the above will occur.
11) One problem of the too-big-to–fail policy is that it ________ the incentives for ________ by
big banks.
A) reduces; moral hazard by big banks
B) increases; moral hazard by big banks
C) reduces; adverse selection by big banks
D) increases; adverse selection by big banks
12) The result of the too-big-to–fail policy is that ________ banks will take on ________ risks,
making bank failures more likely.
A) small; fewer
B) small; greater
C) large; fewer
D) large; greater
13) The too-big-to-fail policy
A) exacerbates 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) does only A and C of the above.
14) Which of the following solutions have been proposed to solve the too-big-to–fail problem?
A) Break up large, systemically important financial institutions.
B) Impose higher capital requirements on large, systemically important financial institutions.
C) Do nothing, since Dodd-Frank effectively eliminated the problem.
D) All of the above have been proposed.
15) Some view that Dodd-Frank eliminated the too-big-to-fail problem. How did it achieve this?
A) By making it harder for the Federal Reserve to bail out financial institutions
B) By eliminating the Volcker rule
C) By reducing the regulation of SIFIs
D) All of the above.
16) The primary difference between the “payoff” and the “purchase and assumption” methods of
handling failed banks is that the FDIC
A) guarantees all deposits, not just those under the $250,000 limit, when it uses the “payoff”
method.
B) guarantees all deposits, not just those under the $250,000 limit, when it uses the “purchase
and assumption” method.
C) 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) does both A and B of the above.
E) does both B and C of the above.
17) The primary difference between the “payoff” and the “purchase and assumption” methods of
handling failed banks is that the FDIC
A) guarantees all deposits, not just those under the $250,000 limit, when it uses the “payoff”
method.
B) guarantees all deposits, not just those under the $250,000 limit, when it uses the “purchase
and assumption” method.
C) is less 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) does both A and B of the above.
E) does both B and C of the above.
18) Regulators attempt to reduce the riskiness of banks‘ asset portfolios by
A) limiting the amount of loans in particular categories or to individual borrowers.
B) prohibiting banks from holding risky assets such as common stocks.
C) establishing a minimum interest rate floor that banks can earn on certain assets.
D) doing all of the above.
E) doing only A and B of the above.
19) One way for bank regulators to assure depositors that a bank is not taking on too much risk is
to require the bank to
A) diversify its loan portfolio.
B) reduce its equity capital.
C) reduce the size of its loan portfolio.
D) do both A and B of the above.
E) do both B and C of the above.
20) Banks do not want to hold too much capital because
A) they do not bear fully the costs of bank failures.
B) higher returns on equity are earned when bank capital is smaller, all else equal.
C) higher capital levels attract the scrutiny of regulators.
D) all of the above.
E) only A and B of the above.
21) When regulators engage in microprudential regulation, they focus on ________.
A) the safety and soundness of individual financial institutions
B) the credit standards of individual loans
C) the safety and soundness of each customer of a financial institution
D) the safety and soundness of each asset the financial institution holds
22) When regulators engage in macroprudential regulation, they focus on ________.
A) the safety and soundness of the entire financial institution
B) the credit standards of all loans held by the financial institution
C) the safety and soundness of the financial system in aggregate
D) the safety and soundness of each liability of the financial institution
23) The increased integration of financial markets across countries and the need to make the
playing field equal for banks from different countries led to the Basel Accord agreement to
A) standardize bank capital requirements internationally.
B) reduce, across the board, bank capital requirements in all countries.
C) sever the link between risk and capital requirements.
D) do all of the above.
24) Under the Basel plan,
A) assets and off-balance sheet activities are assigned to various categories to reflect the degree
of credit risk.
B) a bank’s total capital must equal or exceed 8 percent of total risk-weighted assets.
C) both of the above occur.
D) none of the above occur.
25) Of the following assets, the one which has the highest capital requirement under the Basel
Accord is
A) municipal bonds.
B) residential mortgages.
C) commercial paper.
D) securities issued by industrialized countries’ governments.
26) Which of the following is not true regarding the Basel 2 proposal to reform the original 1988
Basel Accord?
A) It attempts to link capital requirements more closely to actual risk by expanding the number
of risk categories.
B) It focuses on assessing the quality of risk management in banking institutions.
C) It attempts to improve market discipline by requiring increased disclosure of pertinent
information about banks.
D) It has been well received by banks and national regulatory agencies.
27) Ways in which bank regulations reduce the adverse selection and moral hazard problems in
banking include
A) a chartering process designed to prevent crooks from getting control of a bank.
B) restrictions that prevent banks from acquiring certain risky assets, such as common stocks.
C) high bank capital requirements to increase the cost of bank failure to the owners.
D) all of the above.
E) only A and B of the above.
28) The chartering process is especially designed to deal with the ________ problem, and regular
bank examinations help to reduce the ________ problem.
A) adverse selection; adverse selection
B) adverse selection; moral hazard
C) moral hazard; adverse selection
D) moral hazard; moral hazard
29) The chartering process is especially designed to deal with the ________ problem, and
restrictions on asset holdings help to reduce the ________ problem.
A) adverse selection; adverse selection
B) adverse selection; moral hazard
C) moral hazard; adverse selection
D) moral hazard; moral hazard
30) Regular bank examinations and restrictions on asset holdings indirectly help to reduce the
________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs
will be discouraged from entering the banking industry.
A) moral hazard
B) adverse selection
C) ex post shirking
D) post-contractual opportunism
31) Regular bank examinations and restrictions on asset holdings indirectly help to ________ the
adverse selection problem because, given fewer opportunities to take on risk, risk-prone
entrepreneurs will be ________ from entering the banking industry.
A) increase; encouraged
B) increase; discouraged
C) reduce; encouraged
D) reduce; discouraged
32) The legislation that separated commercial banking from the securities industry is known as
the ________.
A) National Bank Act
B) Federal Reserve Act
C) Glass-Steagall Act
D) McFadden Act
33) The Depository Institutions Deregulation and Monetary Control Act of 1980
A) approved NOW accounts nationwide.
B) restricted the use of ATS accounts.
C) imposed interest rate ceilings on bank loans.
D) did all of the above.
34) The Depository Institutions Deregulation and Monetary Control Act of 1980
A) approved NOW accounts nationwide.
B) imposed uniform reserve requirements.
C) mandated the phase out of interest-rate ceilings on deposits.
D) did all of the above.
E) did only A and B of the above.