23) Regulations designed to provide information to the marketplace so that investors can make
informed decisions are called
A) disclosure requirements.
B) efficient market requirements.
C) asset restrictions.
D) capital requirements.
24) The Dodd-Frank legislation of 2010 requires the largest banks in the United States to
conduct annual
A) stress tests.to see if the banks have sufficient capital to operate under dire scenarios.
B) stress tests to see if the banks buildings can withstand severe weather.
C) management evaluations to see if the managers deserve bonuses.
D) liability evaluations to make sure that they have sufficient insurance.
25) The global financial crisis pointed out the need for consumer education and protection in
financial areas such as mortgage loans. In response, with the passage of the Dodd-Frank
legislation, Congress created
A) the Consumer Financial Protection Bureau.
B) the Internal Revenue Service.
C) the Consumer Oversight Committee.
D) the lender of last resort.
26) Consumer protection legislation includes legislation to
A) 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.
27) An important factor in producing the global financial crisis was
A) 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.
28) Competition between banks
A) encourages greater risk taking.
B) encourages conservative bank management.
C) increases bank profitability.
D) eliminates the need for government regulation.
29) 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.
30) The ________ that required separation of commercial and investment banking was repealed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.
31) 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.
32) 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
33) 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
34) Agreements such as the ________ are attempts to standardize international banking
regulations.
A) Basel Accord
B) UN Bank Accord
C) GATT Accord
D) WTO Accord
35) 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
10.3 Web Appendix 1: The 1980s Banking and Savings and Loan Crisis
1) In the ten year period 1981-1990, the rate of commercial bank failures was approximately
________ times greater than that in the period from 1934 to 1980.
A) two
B) three
C) five
D) ten
2) 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.
3) 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.
4) 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.
5) 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.
6) 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.
7) 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.
8) 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.
9) 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.
10) 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.
11) 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
12) 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.
13) 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.
14) 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
15) “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.
16) 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.
17) 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.
18) 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.
19) 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 nation’s savings and loans.
D) politicians strong incentives to act in their own interests rather than the interests of the
taxpayers.
20) 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.
21) 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.
22) FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to
A) 8%.
B) 5%.
C) 10%.
D) 25%.
23) 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.
24) 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.
25) 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.
26) 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
27) How did the increase in the interest rates in the early 80s contribute to the S&L crisis?
10.4 Web Appendix 2: Banking Crises Throughout the World
1) 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.
2) 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.
3) 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.
4) 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.
5) 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.
6) 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.
7) 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.
8) 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
9) 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
10) Banking crises have occurred throughout the world. What similarities do we find when we
look at the different countries?