978-0133427073 Test Bank Chapter 18 Part 2

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35) As a way of stemming the decline in the number of savings and loans and mutual savings

banks, the Garn-St. Germain Act of 1982 allowed

A) money market certificates.

B) money market mutual funds.

C) money market deposit accounts.

D) negotiable order of withdrawal accounts.

36) An impact of the Garn-St. Germain Act of 1982 has been to

A) put savings and loans at a competitive disadvantage.

B) make the banking system more competitive.

C) give money market mutual funds a competitive advantage.

D) do both A and B of the above.

E) do both A and C of the above.

37) Moral hazard and adverse selection problems increased in prominence in the 1980s

A) as deregulation opened up more avenues for savings and loans and mutual savings banks to

take on more risk.

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 an increase in federal deposit insurance from $40,000 to $100,000.

D) because of all of the above.

E) because of only A and B of the above.

38) Moral hazard and adverse selection problems increased in prominence in the 1980s

A) as deregulation opened up more avenues for savings and loans and mutual savings banks to

take on more risk.

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) because of all of the above.

E) because of only A and B of the above.

39) 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) reduced the scope of deposit insurance in several ways.

C) eliminated governmentally administered deposit insurance.

D) did only A and B of the above.

40) The Federal Deposit Insurance Corporation Improvement Act of 1991

A) reduced the scope of deposit insurance in several ways.

B) eliminated restrictions on nationwide banking.

C) allowed well-capitalized banks to do some securities underwriting.

D) did only A and B of the above.

E) did only A and C of the above.

41) The Federal Deposit Insurance Corporation Improvement Act of 1991

A) reduced the scope of deposit insurance in several ways.

B) limited the FDIC’s ability to use the “too-big-to-fail” policy.

C) requires the FDIC to intervene earlier when a bank gets into trouble.

D) did all of the above.

42) The Federal Deposit Insurance Corporation Improvement Act of 1991

A) instructed the FDIC to come up with risk-based deposit insurance premiums.

B) expanded the FDIC’s ability to use the “too-big-to-fail” policy.

C) instructed the FDIC to wait longer before intervening when a bank gets into trouble.

D) did all of the above.

43) What is the primary argument for not giving depositors greater incentive to monitor financial

institutions?

A) Experts do not believe that depositors are capable of monitoring banks and imposing

discipline on them.

B) Banks could be subject to more frequent runs by nervous depositors.

C) Both A and B are correct.

D) Neither A nor B is correct.

44) Which of the following is least likely to accompany financial consolidation and the

development of large, complex banking organizations?

A) More financial institutions will be considered too big to fail.

B) The government safety net will be extended to include nonbanking activities.

C) Moral hazard problems will become less important.

D) Banks will have greater incentives and opportunities to take on more risk.

45) What accounts for the problems facing China’s four largest banks?

A) Large loans to inefficient, state-owned enterprises

B) Closing of unprofitable branches and laying off unproductive employees

C) Selling shares in the bank overseas to raise capital

D) All of the above

46) World Bank research on the effects of deposit insurance concludes that

A) adoption of deposit insurance will promote stability and efficiency in the banking systems of

emerging-market economies.

B) adoption of explicit government deposit insurance is associated with a higher incidence of

banking crises.

C) adoption of deposit insurance has the greatest benefits in countries that have weaker

institutional environments.

D) none of the above are true.

47) Just prior to the global financial crisis, mortgage loans known as NINJA loans were issued to

borrowers. What is a NINJA loan?

A) A loan issued by a Japanese bank, thus avoiding U.S. regulation.

B) A loan document originated by a mortgage banker named Bruce Lee.

C) A loan issued to borrowers with no income, employment, nor assets to speak of.

D) A loan issued with a “martial arts” clause.

48) Which of the following categories is not part of the Dodd-Frank legislation of 2010?

A) capital requirements

B) consumer protection

C) “Volcker Rule”

D) derivatives

49) In an effort to control the use of derivatives by financial institutions, the Dodd-Frank

legislation of 2010 requires ________.

A) standardized derivatives products

B) over-the-counter trading (instead of exchange trading) of derivatives products

C) an increase in counterparty risk

D) all of the above

50) An SIV, or structured investment vehicle, is an off-balance-sheet entity that shields a

sponsoring institution from risk. What happened to some of these SIVs when they ran into

financial problems?

A) The SIV sued the sponsoring institution to pay, in full, all liabilities of the SIV.

B) The SIV still remained off-balance-sheet, but investors did sue sponsoring institutions.

C) Nothing! The SIV status as off-balance-sheet remained, a nice example of a financial

structure that worked during the financial crisis.

D) Troubled SIVs became an asset of the sponsoring institution — the off-balance-sheet status

was meaningless.

51) What role did the credit-rating agencies play leading up to the start of the financial crisis in

2007?

A) Inaccurate ratings provided by credit-rating agencies helped promote risk taking throughout

the financial system.

B) The credit-rating agencies were the first to see signs of trouble, and they developed more

stringent standards as the housing bubble evolved.

C) Solid ratings provided by credit-rating agencies helped limit risk taking throughout the

financial system.

D) The credit-rating agencies were largely uninvolved with the financial crisis.

1) To understand banking regulation in the United States, it is helpful to understand the concepts

of asymmetric information, adverse selection, and moral hazard.

2) Because asymmetric information problems in the banking industry are a fact of life throughout

the world, bank regulation in other countries is similar to that in the United States.

3) The failure of one bank can hasten the failure of others in what is referred to as a contagion

effect.

4) To be classified as a well-capitalized bank, a bank’s leverage ratio must exceed 8 percent.

5) Once a bank has been chartered, it is required to file periodic call reports that reveal the bank’s

assets and liabilities, income, ownership, and other details.

6) “Truth in lending” was mandated under the Consumer Protection Act of 1969 and requires all

lenders to reveal the annual percentage rate, or APR, on loans.

7) Probably the most important feature of FDICIA is its prompt corrective action provisions

which require the FDIC to intervene earlier and more vigorously when a bank gets into trouble.

8) According to some economists, Congress made a mistake when it passed the FDICIA of not

requiring the FDIC to assess risk-based insurance premiums.

9) The “too-big-to–fail” policy reduces the adverse selection problem in bank regulation.

10) A better capitalized bank has more to lose when it fails and is less likely to take less risk.

11) When the payoff method is used to resolve a failed bank, both large and small depositors are

protected from suffering losses.

12) In the years just prior to the global financial crisis, mortgage loans were issued to borrowers

with no income or employment.

13) The Dodd-Frank legislation of 2010 finally resolved the status of GSEs such as Freddie Mac.

14) Prior to the global financial crisis, inaccurate ratings provided by credit rating agencies

helped promote risk taking throughout the financial system.

1) What do we learn about the causes of banking crises by comparing crises throughout the

world to those that have occurred in the United States?

Topic: Chapter 18.4 Banking Crises Throughout the World in Recent Years

Question Status: Previous Edition

2) What is the asymmetric information problem and how does it contribute to our understanding

of the structure of bank regulation in the United States and other countries?

Topic: Chapter 18.1 Asymmetric Information and Financial Regulation

Question Status: Previous Edition

3) Why did the United States experience a banking crisis in the 1980s?

Topic: Chapter 18.2 The 1980s Savings and Loan Banking Crisis

Question Status: Previous Edition

4) How has bank regulation in the United States changed since the late 1980s? What accounts for

these changes?

Topic: Chapter 18.3 FDIC Improvement Act of 1991

Question Status: Previous Edition

5) How have bank capital requirements changed since the banking crisis of the 1980s? Explain.

Topic: Chapter 18.3 FDIC Improvement Act of 1991

Question Status: Previous Edition

6) Describe the CAMELS rating system used by bank examiners.

Topic: Chapter 18.1 Asymmetric Information and Financial Regulation

Question Status: Previous Edition

7) Why does the safety net created by deposit insurance increase the adverse selection and moral

hazard problems in banking? How do bank regulations attempt to overcome these problems?

Topic: Chapter 18.1 Asymmetric Information and Financial Regulation

Question Status: Previous Edition

8) Discuss some of the problems of Basel 2 that the global financial crisis revealed.

Topic: Chapter 18.1 Asymmetric Information and Financial Regulation

Question Status: New Question

9) Discuss the role of mark–to–market accounting during the global financial crisis. Did it help or

hurt credit markets and bank lending?

Topic: Chapter 18.1 Asymmetric Information and Financial Regulation

Question Status: New Question

10) Discuss the role of NINJA loans in the global financial crisis.

Topic: Chapter 18.1 Asymmetric Information and Financial Regulation

Question Status: New Question

11) Why is international financial regulation becoming more important in recent years?

Topic: Chapter 18.1 Asymmetric Information and Financial Regulation

Question Status: New Question

12) Describe 2 of the 5 different categories of regulation found in the Dodd-Frank legislation of

2010.

Topic: Chapter 18.5 The Dodd-Frank Bill, Wall Street Reform and Consumer Protection Act of

2010

Question Status: New Question

13) How can we change the way the credit-rating system works to avoid the problems

encountered with ratings prior to the Global Financial Crisis?

Topic: Chapter 18.1 Asymmetric Information and Financial Regulation

Question Status: New Question

14) Describe the difference between macroprudential and microprudential regulation.

Topic: Chapter 18.1 Asymmetric Information and Financial Regulation

Question Status: New Question

15) One way to avoid the too-big-to–fail problem with banks is to break-up large, systemically

important financial institutions. What are the downsides to this solution?

Topic: Chapter 18.6 Too-big-to–fail and Future Regulation

Question Status: New Question

16) How does Dodd–Frank claim to eliminate the too-big-to-fail problem?

Topic: Chapter 18.6 Too-big-to–fail and Future Regulation

Question Status: New Question

17) Discuss the advantages and problems of using market-value accounting for bank capital

requirements.

Topic: Chapter 18.A1 Evaluation FDICIA and Other Proposed Reforms of the Banking

Regulatory System

Question Status: New Question

18) Discuss some of the recent banking crises throughout the world.

Topic: Chapter 18.A2 Banking Crises Throughout the World

Question Status: New Question