Chapter 18—Bank Regulation
1. Deposit insurance has a limit of:
a.
$10,000.
b.
$25,000.
c.
$100,000.
d.
$250,000.
2. The opening of a commercial bank in the United States
a.
does not require a charter.
b.
always requires a charter from a state government.
c.
always requires a charter from the federal government.
d.
requires a charter from a state or the federal government.
e.
requires a charter from both the state and federal government.
3. Commercial banks that are not members of the Federal Reserve System ____ borrow from the Fed,
and ____ subject to the Fed’s reserve requirements.
a.
may; are
b.
may; are not
c.
may not; are not
d.
may not; are
4. National banks are regulated by ____, and state banks are regulated by ____.
a.
the Comptroller of the Currency; their state agency
b.
the Comptroller of the Currency; the Comptroller of the Currency
c.
their state agency; their state agency
d.
their state agency; the Comptroller of the Currency
5. All Fed member banks must hold
a.
private insurance on deposits.
b.
FDIC insurance on deposits.
c.
both FDIC and private insurance on deposits.
d.
none of the above
6. Commercial banks ____ restricted to a maximum percentage of their capital to loan to a single
customer, and ____ allowed to use borrowed or deposited funds to purchase common stock.
a.
are; are
b.
are; are not
c.
are not; are
d.
are not; are not
7. Banks commonly use depositor funds to invest in stocks.
a. True
b. False
8. An “off-balance-sheet commitment” that provides the bank’s guarantee on the financial obligations of a
borrower to a specific party is a
a.
standby letter of credit.
b.
federal funds agreement.
c.
repurchase agreement.
d.
discount window agreement.
9. The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their
own
a.
reserve requirements.
b.
capital ratios.
c.
interest rates on savings deposits.
d.
corporate loan interest rates.
10. The Glass-Steagall Act of 1933 prevented
a.
any firm that accepts deposits from underwriting stocks and bonds of corporations.
b.
any firm that accepts deposits from underwriting general obligation bonds of states and
municipalities.
c.
any firm that accepts deposits from holding any corporate bonds in its asset portfolio.
d.
state-chartered banks from offering commercial loans.
11. Which of the following is not a main deregulatory provision of Depository Institutions Deregulation
and Monetary Control Act of 1980?
a.
phase-out of deposit rate ceilings
b.
allowance of checkable deposits for all depository institutions
c.
new lending flexibility of depository institutions
d.
allowance of interstate banking for depository institutions in most states
12. The Financial Reform Act was intended to:
a.
prevent another credit crisis.
b.
reduce capital ratios.
c.
impose interest rate ceilings on deposits.
d.
prevent banks from offering securities services.
13. The Garn-St. Germain Act of 1982
a.
permitted depository institutions to offer money market deposit accounts.
b.
prevented depository institutions from acquiring problem institutions across geographical
boundaries.
c.
required the Fed to explicitly charge depository institutions for its services.
d.
allowed the Fed to provide check clearing to depository institutions at no charge.
14. Which of the following is not a specific criterion the FDIC uses to monitor banks?
a.
capital adequacy
b.
dollar value of fixed assets
c.
asset quality
d.
earnings
e.
sensitivity to financial market conditions
15. The potential risk that financial problems can spread through financial institutions and the financial
system is referred to as:
a.
systemic
b.
systematic
c.
unsystematic
d.
market
16. The Basel framework recommends capital requirements in proportion to:
a.
mortgages
b.
commercial paper
c.
liabilities
d.
risk-weighted assets
17. The Basel Accord
a.
forces banks with greater risk to maintain more deposits.
b.
forces banks with greater risk to maintain more capital.
c.
forces banks with greater risk to maintain less capital.
d.
none of the above
18. In general, a bank defines its value–at-risk as the estimated potential loss from its traditional businesses
that could result from adverse movements in market prices.
a. True
b. False
19. Which of the following statements is incorrect?
a.
The validity of a bank’s estimated VAR is assessed with backtests in which the actual
daily trading gains or losses are compared to the estimated VAR over a particular period.
b.
Some banks supplement the VAR estimate with stress tests.
c.
In general, the VAR model does not lend itself to determine capital requirements.
d.
All of the statements above are correct.
20. Which of the following is an “off-balance-sheet commitment?”
a.
long-term debt
b.
additional paid-in capital
c.
notes payable
d.
guarantees backing commercial paper issued by firms
21. The liquidity component of the CAMELS rating refers to
a.
regulators’ concern about how a bank’s earnings would change if economic conditions
change.
b.
how well the bank’s management would detect its own financial problems.
c.
a bank’s sensitivity to financial market conditions.
d.
monitoring the type of loans that are given, the bank’s process for deciding whether to
provide loans, and the credit rating of debt securities that it purchases.
e.
excessive borrowing by banks from outside sources, such as the discount window.
22. Which of the following is not a corrective action taken by regulators when a bank is identified as a
problem bank?
a.
Regulators may examine such banks frequently and thoroughly.
b.
Regulators may request that a bank boost its capital level or delay its plans to expand.
c.
Regulators can require that additional financial information be periodically updated to
allow continued monitoring.
d.
Regulators have the authority to take legal action against a problem bank if the bank does
not comply with their suggested remedies.
e.
All of the above are possible corrective actions taken by bank regulators.
23. The fee banks pay to the FDIC for deposit insurance is now
a.
a fixed dollar amount for all banks.
b.
a fixed percentage of the bank’s deposit level for all banks.
c.
a fixed percentage of the bank’s loan volume for all banks.
d.
based on the risk of the bank.
24. Generally, the failure of small banks
a.
causes more widespread concern about the safety of the banking system than the failure of
large banks.
b.
causes equal concern about the safety of the banking system as the failure of large banks.
c.
causes less concern about the safety of the banking system than the failure of large banks.
d.
Either A or B can be true, depending on the type of business cycle that exists while the
failures occur.
25. The Sarbanes-Oxley Act was enacted to make corporate managers, board members, and auditors more
accountable for the accuracy of the financial statements that their respective firms provide.
a. True
b. False
26. Bank A has a 10 percent capital ratio and uses a significant proportion of its assets to invest in very
highly-rated bonds. Bank B has an 12 percent capital ratio and uses a significant proportion of its
assets to invest in highly leveraged transactions. How would Bank A rate versus Bank B using the
capital and asset quality criteria?
a.
Bank A is perceived as safer by both criteria.
b.
Bank B is perceived as safer by both criteria.
c.
Bank A is perceived as safer according to capital, but more risky according to asset
quality.
d.
Bank B is perceived as safer according to capital, but more risky according to asset
quality.
27. The key reason for regulatory examinations (such as CAMELS ratings) is to
a.
rate past performance.
b.
detect problems of a bank in time to correct them.
c.
check for embezzlement.
d.
monitor reserve requirements.
28. Deposit insurance now covers all bank deposits without imposing any limit.
a. True
b. False
29. Which banking act allowed banks to cross state lines in order to acquire a failing institution?
a.
McFadden Act
b.
Glass-Steagall Act
c.
DIDMCA
d.
Garn-St. Germain Act
30. Which banking act allowed for the creation of NOW accounts?
a.
McFadden Act
b.
Glass-Steagall Act
c.
DIDMCA
d.
Garn-St. Germain Act
31. Which banking act allowed interstate banking?
a.
Reigle-Neal Interstate Banking and Branching Efficiency Act
b.
Glass-Steagall Act
c.
DIDMCA
d.
Sarbanes-Oxley Act
32. Which banking act permanently increased FDIC insurance up to $250,000?
a.
DIDMCA
b.
Sarbanes-Oxley Act
c.
Financial Reform Act
d.
Garn-St. Germain Act
33. Which banking act removed deposit rate ceilings?
a.
McFadden Act
b.
Glass-Steagall Act
c.
DIDMCA
d.
Garn-St. Germain Act
34. The argument that interstate banking would allow banks to grow and more fully achieve a reduction in
operating costs per unit of output as output increases is based on
a.
economies of scale.
b.
financial leverage.
c.
diseconomies of scale.
d.
capital adequacy theory.
35. Federal deposit insurance
a.
existed since the 1800s.
b.
was created in 1933.
c.
was created after World War II.
d.
was created in 1960.
36. ____ is not a characteristics used by the Federal Deposit Insurance Corporation (FDIC) to rate banks.
a.
Capital adequacy
b.
Current stock price
c.
Asset quality
d.
Management
e.
All of the above are used by the FDIC to rate banks.
37. The moral hazard problem is minimized when deposit insurance premiums are
a.
zero (not imposed by the FDIC).
b.
the same percentage of assets for all banks.
c.
set at a fixed percentage of assets for large banks, and is zero for small banks.
d.
set at a percentage of assets that is based on the bank’s risk level.
38. Which of the following statements is incorrect with respect to the Financial Services Modernization
Act of 1999?
a.
It complemented the Glass-Steagall Act.
b.
It enabled commercial banks to more easily pursue securities and insurance activities.
c.
It gave securities firms and insurance companies the right to acquire banks.
d.
The Act requires that commercial banks must have a strong rating in community lending
in order to pursue additional expansion in securities and other nonbank activities.
e.
All of the above are true.
39. The ____ is the fund used to cover insured depositors.
a.
Bank Insurance Fund
b.
Federal Deposit Insurance Corporation (FDIC)
c.
money market mutual fund
d.
growth fund
e.
none of the above
40. ____ is not a rating criterion used by the FDIC.
a.
Capital adequacy
b.
Off-balance sheet financing
c.
Asset quality
d.
Management
e.
Liquidity
41. The uniform global capital requirements mandated a minimum level of Tier 1 capital, which primarily
consists of funds obtained from
a.
issuing commercial paper and bonds.
b.
retaining earnings and issuing commercial paper.
c.
retaining earnings and issuing common stock.
d.
issuing bonds and common stock.
42. During the 2008-2010 period, the ____ was implemented to alleviate the financial problems
experienced by banks and other financial institutions with excessive exposure to mortgages or
mortgage-backed securities.
a.
Riegle Program
b.
Sarbanes-Oxley Program
c.
FDIC Program
d.
Troubled Asset Relief Program (TARP)
43. The act of taking a risk because of protection from adverse consequences due to the risk is referred to
as a moral hazard problem.
a. True
b. False
44. The Sarbanes-Oxley Act (SOX) was enacted in 2002 in order to ensure a more transparent process for
reporting on productivity and the financial condition of the firm.
a. True
b. False
45. The Sarbanes-Oxley Act (2002) was enacted in response to some banks taking too much risk.
a. True
b. False
46. Publicly-traded banks have incurred larger reporting expenses to comply with the Sarbanes-Oxley Act.
a. True
b. False
47. The Financial Services Modernization Act of 1999
a.
gave banks and other financial service firms less freedom to merge.
b.
allowed financial institutions to offer a diversified set of financial services without being
subjected to stringent constraints.
c.
offers very few benefits to a financial institution’s clients.
d.
increased the reliance of financial institutions on the demand for the single service they
offer.
48. Which of the following is not true regarding the Financial Services Modernization Act of 1999?
a.
It provided more momentum for the consolidation of financial services.
b.
Financial institutions were finally able to offer a diversified set of financial services
without being subjected to stringent constraints on the form or amount of financial
services that they could offer.
c.
Banks and other financial service firms were given more freedom to merge, but were
forced to divest some of the financial services that they acquired.
d.
Financial institutions no longer had to search for loopholes or monitor their business to
ensure that the degree of financial services offered remained within the regulatory
constraints that were previously imposed.
e.
all of the above are true
49. All state banks are required to be members of the Federal Reserve System.
a. True
b. False
50. State banks are regulated by the Comptroller of the Currency.
a. True
b. False
51. Banks that are insured by the Federal Deposit Insurance Corporation (FDIC) are also regulated by the
FDIC.
a. True
b. False
52. Commercial banks are allowed to invest in junk bonds.
a. True
b. False
53. In general, banks would prefer to maintain a high amount of capital to boost their return on equity
ratio, yet regulators have argued that banks need only a sufficient amount of capital to absorb potential
operating losses.
a. True
b. False
54. The provision of a letter of credit by a bank to issue commercial paper issued by a corporation is an
example of an off-balance sheet commitment.
a. True
b. False
55. As a result of the Reigle-Neal Act, bank customers have benefited because of lower costs to banks and
because of convenience.
a. True
b. False
56. There is much emphasis by regulators on the bank’s sensitivity to interest rate movements, since many
banks have liabilities that are repriced more frequently than their assets and are adversely affected by
rising interest rates.
a. True
b. False
57. If regulators reduce bank failures by imposing regulations that reduce competition, bank efficiency
will be increased.
a. True
b. False
58. An ideal solution to react to a large failing bank would prevent a run on deposits of other large banks,
yet not reward a poorly performing bank with a bailout.
a. True
b. False
59. ____ is not a rating criterion used by the Federal Deposit Insurance Corporation (FDIC).
a.
Capital adequacy
b.
Off-balance sheet financing
c.
Asset quality
d.
Management
e.
Liquidity
60. A federal bank charter is issued by the
a.
Comptroller of the Currency.
b.
Securities and Exchange Commission.
c.
U.S. Treasury.
d.
Federal Reserve.
e.
none of the above
61. Bank regulations typically:
a.
involve a tradeoff between the safety of the banking system and the efficiency of bank
operations.
b.
impose restrictions on the types of assets in which banks can invest.
c.
set requirements for the minimum amount of capital that banks must hold.
d.
all of the above
62. When a bank holds a lower level of capital, a given dollar level of profits represents a lower return on
equity.
a. True
b. False
63. Shareholders and managers of banks may prefer that banks be required to hold higher levels of capital
because this would allow for higher share prices for the banks and larger bonuses for bank managers.
a. True
b. False
64. A bank can increase its capital ratio by:
a.
buying back shares of its stock from shareholders.
b.
selling assets.
c.
increasing its dividend to encourage more investors to purchase its stock.
d.
increasing its off-balance sheet activities.
65. The Basel III framework proposes:
a.
lower capital requirements for banks to enable them to generate higher earnings to make
up for their losses during the credit crisis.
b.
relying on the rating agencies to assess the risk of bank assets.
c.
increased capital requirements and liquidity requirements for banks.
d.
using the gap ratio to set the capital ratio.
66. During the credit crisis, all of the following occurred except:
a.
some securities firms were allowed to become bank holding companies.
b.
the Federal Reserve rescued American International Group, an insurance company.
c.
the Treasury injected funds into financial institutions.
d.
the Supreme Court ruled that the Federal Reserve had exceeded its authority by assisting
Bear Stearns because Bear was a securities firm and not a commercial bank.
67. The Volcker rule, named for a former Fed chair:
a.
is intended to increase the powers of the Fed.
b.
states that the U.S. government will rescue certain large banks if necessary to reduce
systemic risk in the financial system.
c.
sets limits on banks’ proprietary trading.
d.
requires all banks to undergo annual stress tests.
68. The Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010:
a.
ended the system of risk-based insurance premiums.
b.
set requirements for the Deposit Insurance Fund’s reserves.
c.
raised the limit for insured deposits to $750,000 per depositor.
d.
allowed large insurance companies such as American International Group to compete with
the FDIC to insure bank deposits.