28) Describe the role of offshore banking and of offshore currency (eurocurrencies) trading
29) What do you expect would be the effects of 9/11 on the size of the Eurocurrency markets?
30) Explain why a London Eurobank has a competitive advantage over a bank in New York in
attracting dollar deposits.
31) Explain how Eurobanks played a role in the Iranian Hostage Crisis in 1979.
32) Describe how the Eurodollar market’s early growth was spawned by the Cold War between
the United States and the U.S.S.R.
33) Explain what Eurocurrencies are and why they are significant.
20.3 Banking and Financial Fragility
1) For the following question, assume the following facts:
(1) Chase (which is located in the United States) has a 20% reserve requirement imposed by the
government.
(2) Bank of Germany has no reserve requirements.
(3) Both banks may invest at an 8% interest rate.
(4) Both banks have fixed costs of $3 per deposit made.
What is the difference between the minimum interest rates each bank can offer and still make a
profit if the deposit is $500 for 1 year?
A) 0 – Both banks can offer the same rate.
B) 1%
C) 1.6%
D) 0.4%
E) 20%
2) Which of the following statements is TRUE?
A) Bank failure is limited to banks that have mismanaged their assets.
B) Bank failure is limited to banks that have invested in real estate.
C) Bank failure is limited to banks that have invested in government bonds.
D) Bank failure is limited to a few banks.
E) Bank failure is NOT limited to banks that have mismanaged their assets.
3) Which of the following statements is TRUE?
A) Bank failures inflict serious financial harm on individual depositors.
B) Bank failures do not inflict serious financial harm on individual depositors.
C) Bank failures inflict not only serious financial harm on individual depositors, but also harm
the macroeconomic stability of the economy.
D) Bank failures inflict serious financial harm on individual depositors, but fortunately do not
harm the macroeconomic stability of the economy.
E) Bank failures only inflict serious financial harm on the macroeconomic stability of the
economy.
4) Which of the following statements is TRUE for the U.S.?
A) The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against losses up to
$250,000.
B) The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against losses up to
$100,000.
C) The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against losses up to
$10,000.
D) The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against natural
disaster up to $100,000.
E) The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against floods up to
$100,000.
5) Which of the following statements is TRUE for the U.S.?
A) Federally chartered banks are required to make contributions to the FDIC to cover the cost of
bank
deposits insurance.
B) Federally chartered banks are not required to make contributions to the FDIC to cover the cost
of bank deposits insurance.
C) The States are not required to make contributions to the FDIC to cover the cost of bank
deposits insurance for banks with their main branch in that State.
D) The States are required to make contributions to the FDIC to cover the cost of bank deposits
insurance for banks with their main branch in that State.
E) The specific municipality where the main branch of the bank is located is required to make
contributions to the FDIC to cover the cost of bank deposits insurance.
6) Which of the following statements is TRUE for the U.S.?
A) The FDIC does not provide insurance for deposits for Savings and Loans (S&L) associations.
B) The FDIC does provide insurance for deposits for Savings and Loans (S&L) associations, but
only up to $50,000.
C) The FDIC does provide insurance for deposits for Savings and Loans (S&L) associations up
to $250,000.
D) The FDIC does provide insurance for deposits for Savings and Loans (S&L) associations up
to $150,000.
E) The FDIC does provide insurance for deposits for Savings and Loans (S&L) associations up
to $100,000.
7) Banks in the U.S.
A) face rules against lending too large a fraction of their assets to a single private customer only.
B) face rules against lending too large a fraction of their assets to a single private customer or to
a single foreign government borrower.
C) face rules against lending too large a fraction of their assets to a single foreign government
borrower only.
D) face rules against lending to too many foreign organizations and corporations.
E) face rules against lending to other banks.
8) Banks in the U.S.
A) cannot hold common stocks.
B) can hold common stocks.
C) cannot hold common stocks of companies they do business with.
D) cannot hold common stocks of companies that have their headquarters in the same state.
E) can hold risky assets.
9) Banks in the U.S.
A) are prevented from holding assets that are “too risky.”
B) are not prevented from holding assets that are “too risky.”
C) are encouraged not to hold assets that are “too risky.”
D) are not encouraged not to hold assets that are “too risky.”
E) are encouraged to lend to a single private customer.
10) In the U.S., the following agencies have the right to examine the bank’s books
A) Fed and the FDIC.
B) FDIC and the Office of the Comptroller of the Currency.
C) Fed and the Department of Commerce
D) FDIC, Fed and the Office of the Comptroller of the Currency.
E) Only the Fed.
11) In the U.S., banks
A) cannot be forced to sell assets that the bank examiner deems too risky.
B) can be forced to sell assets that the bank examiner deems too risky.
C) can be forced to sell assets that the bank examiner deems too risky only after a court order.
D) can be forced to sell assets that the bank examiner deems too risky only after both examiners
from the Fed and from the FDIC agree.
E) can be forced to trade assets that the bank examiner deems too risky.
12) In the U.S., banks
A) may not be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid.
B) may be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid.
C) may be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid only if the Fed and the FDIC examiners agree.
D) may be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid only if the Fed and the Office of the Comptroller of the
Currency examiners agree.
E) may be forced by bank examiner to adjust their balance sheets by paying off loans the
examiner thinks will not be repaid.
13) A bank faced with the wholesale loss of deposits is likely to shut down despite
fundamentally sound balance sheet. Why could this be?
A) Banks have accountants that are too optimistic.
B) Banks purposely lie about their balance sheets in order to attract more clients.
C) Many bank assets are illiquid and cannot be sold quickly to meet deposit obligations without
substantial loss to the bank.
D) Many banks operate on a budget that exceeds their actual reserves.
E) Many banks will shut down to preserve their interest profits.
14) Which statement is NOT true regarding emerging markets?
A) Emerging market financial institutions have generally proven to be weaker than those in
industrialized countries.
B) Emerging markets are the capital markets of poorer, developing countries that have
liberalized their financial system to allow private asset trade with foreigners.
C) Countries with emerging markets include Brazil, Mexico, and Thailand.
D) Countries with emerging markets have been unable to liberalize their financial systems to
allow private trade with foreigners.
E) Emerging market financial institutions contributed to the financial crisis of 1997-1999.
15) The main problem with securitization is that
A) governments are no longer able to repackage bank assets.
B) securitized banks grow too large and create oligopolies.
C) There is no problem. Governments can still get an accurate picture of global financial flows
by simply examining bank balance sheets.
D) governments are not able to monitor bank assets or to asses a bank’s risk to the soundness of
the international banking system.
E) the bank assets are not marketable.
16) In the United States, which of the following safety precautions has the government NOT
taken to reduce Bank failures?
A) implemented deposits insurance
B) bank reserve requirements
C) capital requirements and asset restrictions
D) required bank examination
E) forcibly closing poorly run banks
17) The purpose of the Basel Committee was to
A) achieve a better coordination of the surveillance exercised by national authorities over the
international banking system.
B) achieve a better coordination of domestic banking systems.
C) achieve a better coordination between brokers and investment bankers.
D) achieve a better coordination between bond holder and bon issuers.
E) manipulate bank rates for more leverage profits.
18) The case where people purposely act in a careless way, for example, driving recklessly
because they are insured, is called
A) asymmetric information.
B) risk aversion.
C) moral hazard.
D) bounded rationality.
E) thrill-seeking.
19) Capital markets of poor developing countries that liberalized their financial systems to allow
private asset trade with foreigners are called
A) direct foreign markets.
B) foreign exchange markets.
C) stock & bond markets.
D) emerging markets.
E) fledgling financial markets.
20) U.S. reserve requirements
A) are rejected by half the banks operating in the United States.
B) show how regulatory asymmetries can operate to enhance the profitability of Eurocurrency
trading.
C) tend to harm the bank’s business and decrease monetary aggregates.
D) force banks to hold a portion of its assets in a liquid form easily mobilized to meet sudden
deposit outflows.
E) remain in place, but capital requirements have begin defaulting.
21) What is a difficulty encountered in regulating international banking?
A) excessive deposit insurance rates on international banks
B) absence of reserve requirements
C) oppressive regulatory controls that reduce competitiveness
D) lack of funds and incentive to secure payments
E) variability in exchange rates
22) The Basel committee
A) takes advantages of loopholes in multinational banks
B) does not support regulatory agencies that monitor the assets of banks’ foreign subsidiaries.
C) submitted its Concordat in 1975 and was then disbanded.
D) continues to be the major forum for cooperation in the regulation of international banking.
E) met for the first time in 1975.
23) What is an appropriate definition for “securitization”?
A) the repackaging of bank assets into readily marketable forms
B) the promise of a secure return on deposits in FDIC-banks
C) the simplification of interest-bearing assets into their simplest derivative form
D) the unloading of derivative securities in response to a bank run
E) the reinforcement of an asset’s worth through official certification
24) What caused a major economic shock in August 2007?
A) U.S. mortgage market
B) war in Iraq
C) U.S. bond market
D) technology stocks
E) misreporting from Asian markets
25) The first run on a British bank since 1866 occurred in August 2007 at which bank?
A) Liberty Mutual
B) Liberty Rock
C) Northern Rock
D) Bank of England
E) First Savings and Loan
26) Did the Bank of England intervene and perform its Lender of Last Resort responsibility to
end the panic in August 2007?
A) yes
B) no
C) yes, only after a bank run and under pressure from the British financial industry
D) no, since such support would present a moral hazard problem
E) no, despite intense pressure from the chancellor of the exchequer
27) Many observers believe that the largely unregulated nature of global banking activity leaves
the world financial system vulnerable to bank failure on a massive scale. Is this a real threat? If
so, what measures have governments taken to reduce it?
28) “Bank failure may not be limited to banks that have mismanaged their assets.” Explain why?
29) “It is in the interest of each depositor to withdraw her money from a bank if all other
depositors are doing the same, even when the bank’s assets are sound.” Discuss. As part of your
answer clearly state whether the statement is true or false.
30) “There is evidence that the string of U.S. bank closings in the early 1930s helped start and
worsen the Great Depression.” Discuss.
31) Describe the extensive “safety net” that has been set up in the United States in order to
reduce the risk of bank failure.
32) Explain why the FDIC is following a “too-big-to-fail” policy of fully protecting all
depositors at the largest banks.
33) Explain the issues involved with the Fed acting as a lender of Last Resort (LLR).
34) Explain the causes of the U.S. Savings and Loans crisis of the early 1980s.
35) Explain the difficulties in regulating international banking.
36) “The internationalization of banking has weakened national safeguards against banking
collapse, but at the same time it has made the need for effective safeguards more urgent.”
Discuss.
37) Why did the Fed step in to organize a rescue for Long Term Capital Management (LTCM) in
September, 1998, rather than simply letting the trouble fund fail? Was the Fed’s action necessary
or advisable?
38) What is securitization?