Financial Markets and Institutions, 8e (Mishkin)
Chapter 26 Savings Associations and Credit Unions
26.1 Multiple Choice
1) Savings banks
A) were first established in Scotland and England.
B) were established to encourage saving by the poor.
C) were very conservative with their funds, placing most of them in commercial banks.
D) are all of the above.
E) are only A and B of the above.
2) Which of the following statements about mutual savings banks are true?
A) There are currently under 200 mutual savings banks in the United States.
B) Most mutual savings banks are federally chartered.
C) Both A and B of the above are true.
D) None of the above are true.
3) Which of the following statements concerning the mutual form of ownership of savings banks
are true?
A) The mutual form of ownership accentuates the principal-agent problem that exists in
corporations.
B) More capital is available, contributing to the safety of mutual savings banks compared to
other banking organizations.
C) Managers of mutual savings banks are more risk averse than in the corporate form, because
the value of their ownership does not increase if the firm does well.
D) All of the above are true.
E) Only A and B of the above are true.
4) Savings and loan associations
A) were established by Congress to encourage home ownership.
B) initially were not permitted to accept demand deposits.
C) held about 85 percent of their assets in the form of mortgages prior to the Great Depression.
D) are all of the above.
E) are only A and B of the above.
5) Savings and loans associations
A) initially were allowed to attract funds by offering savings accounts that paid a slightly higher
interest rate than that offered by commercial banks.
B) held about 85 percent of their total assets as mortgages prior to the Great Depression.
C) did not weather the Great Depression well, as thousands of S&Ls failed in the 1930s.
D) are all of the above.
E) are only A and B of the above.
6) Thrifts
A) fueled the home-building boom from 1934-1978.
B) suffered in the 1970s as inflation rose above deposit interest rate ceilings.
C) have grown in importance in attracting deposits relative to commercial banks since 1980.
D) are all of the above.
E) are only A and B of the above.
7) Thrifts suffered problems in the 1970s as
A) market interest rates rose above the rates thrifts could pay on deposits and savings accounts.
B) thrift customers moved their funds from thrifts to money market mutual funds.
C) government regulators severely limited the scope of activities that thrifts could undertake to
grow their way out of trouble.
D) all of the above occurred.
E) only A and B of the above occurred.
8) In the early stages of the banking crisis in the 1980s, financial institutions were especially hurt
by
A) the sharp increases in interest rates from late 1979 until 1981.
B) the severe recession in 1981-82.
C) the sharp decline in the price level from mid-1980 to early 1983.
D) all of the above.
E) only A and B of the above.
9) In the early stages of the banking crisis in the 1980s, 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) all of the above.
10) Savings and loans lost a total of $10 billion in 1981-1982 due to a combination of rising
interest rates in 1979-1981 and
A) the recession of 1981-1982 that reduced real estate prices enough to cause significant loan
defaults.
B) the regulatory restrictions enacted by Congress in 1981 and 1982.
C) the loss of market share to commercial banks that were allowed to compete directly with
thrifts in the real estate market.
D) the acceleration of inflation in 1981-1982 that caused thrifts to lose additional funds to money
market mutual funds.
11) In the 1980s, thrift institutions, which had been almost entirely restricted to making loans for
home mortgages only, were allowed by regulators to
A) finance acquisitions in commercial real estate.
B) extend consumer loans.
C) purchase junk bonds.
D) do all of the above.
E) do only A and B of the above.
12) The government granted thrifts greater powers in the early 1980s in hopes of turning the
industry’s problems around. These powers
A) required greater expertise in managing risk than many thrift managers possessed.
B) encouraged thrifts to expand lending rapidly in real estate, increasing their exposure to risk.
C) expanded the scope and complexity of thrift lending activities that went beyond what
regulators could effectively monitor, given their limited resources.
D) did all of the above.
E) did only A and B of the above.
13) When nearly half of the S&Ls in the United States had a negative net worth and were thus
insolvent by the end of 1982, regulators adopted a policy of ________, which amounted to
________ capital requirements.
A) regulatory forbearance; raising
B) regulatory forbearance; lowering
C) regulatory stringency; raising
D) regulatory stringency; lowering
14) 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 selection
C) regulatory stringency; moral hazard
D) regulatory stringency; adverse selection
15) Which of the following reasons explain why federal regulators adopted a policy of regulatory
forbearance toward insolvent financial institutions in the early 1980s?
A) The FSLIC lacked sufficient funds to cover insured deposits in the insolvent S&Ls.
B) The regulators were reluctant to close the firms that justified their regulatory existence.
C) The Federal Home Loan Bank Board and the FSLIC were reluctant to admit that they were in
over their heads with problems.
D) All of the above are reasons.
E) Only A and B of the above are reasons.
16) The policy of regulatory forbearance
A) meant delaying the closing of “zombie S&Ls” as their losses mounted during the 1980s.
B) benefited “zombie S&Ls” at the expense of healthy S&Ls, as healthy institutions lost deposits
to insolvent institutions.
C) contributed to declining profitability in the S&L industry and an increase in the number of
“zombie S&Ls.”
D) did all of the above.
E) did only A and B of the above.
17) The policy of regulatory forbearance
A) meant delaying the closing of “zombie S&Ls” as their losses mounted during the 1980s.
B) benefited “zombie S&Ls” at the expense of healthy S&Ls, as healthy institutions lost deposits
to insolvent institutions.
C) had the advantage of benefiting healthy S&Ls by giving them the opportunity to attract
deposits that began to leave the “zombie S&Ls.”
D) did both A and B of the above.
E) did both A and C of the above.
18) Which of the following are reasons that explain why regulators pursued a policy of
regulatory forbearance toward thrifts in the early 1980s?
A) Regulators knew that the FSLIC did not have sufficient funds to close insolvent S&Ls and
pay off their depositors.
B) Regulators were probably too close to the people they were supposed to be regulating to close
down thrifts and put them out of business.
C) Regulators preferred to sweep the problems that thrifts were suffering under the rug in the
hope that they would go away as the economy improved.
D) All of the above explain regulatory forbearance.
E) Only A and B of the above explain regulatory forbearance.
19) Examples of the huge risks that “zombie S&Ls” undertook include
A) building shopping centers in the desert.
B) buying manufacturing plants to convert manure to methane.
C) purchasing billions of dollars of junk bonds.
D) all of the above.
E) only A and B of the above.
20) “Zombie S&Ls”
A) paid above market interest rates to attract deposits to fuel their lending boom.
B) offered loans at below market interest rates to expand their lending.
C) drove down the profitability of solvent S&Ls, threatening to turn them into “zombies” too.
D) did all of the above.
E) did only A and B of the above.
21) According to the text, the Competitive Equality in Banking Act of 1987
A) turned the thrift industry around by providing the necessary funds to close the “zombie
S&Ls.”
B) lowered the cost of bailing out the S&Ls by quickly closing “zombie S&Ls” before they could
cause other thrifts to fail.
C) failed to provide the funds necessary to close ailing S&Ls, and actually encouraged regulators
to continue to pursue regulatory forbearance.
D) did both A and B of the above.
22) The Competitive Equality in Banking Act of 1987
A) discouraged regulators from pursuing regulatory forbearance.
B) directed regulators to close “zombie S&Ls” as quickly as administratively possible.
C) encouraged regulators to continue their policy of regulatory forbearance.
D) did both A and B of the above.
23) The Competitive Equality in Banking Act of 1987
A) provided insufficient funds to the FSLIC to close down insolvent S&Ls.
B) actually directed S&L regulators to continue to pursue regulatory forbearance, further
delaying the closing of insolvent S&Ls.
C) created a new agency, the Resolution Trust Corporation, to manage insolvent thrifts.
D) did all of the above.
E) did only A and B of the above.
24) The major provisions of the Competitive Equality in Banking Act of 1987 included
A) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal
deposit insurance system.
B) establishing 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) all of the above.
E) only A and B of the above.
25) The major provisions of the Competitive Equality in Banking Act of 1987 included
A) abolishing the Federal Home Loan Bank Board and the FSLIC.
B) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift
Supervision, a bureau within the U.S. Treasury Department.
C) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed
in conservatorship or receivership.
D) all of the above.
E) none of the above.
26) An analysis of the political economy of the savings and loan crisis helps one to understand
A) why politicians hampered the efforts of thrift regulators, cutting regulatory appropriations and
encouraging regulatory forbearance.
B) why thrift regulators were reluctant to admit that any problem even existed in the thrift
industry.
C) why thrift regulators willingly acceded to pressures placed upon them by members of
Congress.
D) all of the above.
E) only A and B of the above.
27) 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 the closing of insolvent thrifts.
B) why thrift regulators were 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) all of the above.
28) The political economy of the S&L crisis shows that the principal-agent problem occurs in
politics. In this instance, the agent-regulators did not act to protect the principal-taxpayers
because
A) regulators wanted to escape blame, hoping the situation would improve before others
discovered the problem.
B) regulators responded to pressure to pursue regulatory forbearance from politicians who had
accepted campaign donations from owners of S&Ls.
C) Congress was unwilling to allocate the necessary funds regulators needed to close insolvent
S&Ls.
D) all of the above.
E) only A and B of the above.
29) That taxpayers were poorly served by thrift regulators in the 1980s is now quite clear. This
poor performance is explained by
A) regulators’ desire to escape blame for poor performance, leading to a perverse strategy of
“regulatory 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 unwillingness to appropriate sufficient funds to permit regulators to examine the
many thrift institutions that needed monitoring.
D) all of the above.
E) only A and B of the above.
30) That taxpayers were poorly served by thrift regulators in the 1980s is now quite clear. This
poor performance cannot be explained by
A) regulators’ desire to escape blame for poor performance, leading to a perverse strategy of
“regulatory 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) any of the above.
31) 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) prohibitions against onerous regulatory restrictions against S&Ls as mandated in the
Competitive Equality in Banking Act.
D) all of the above.
E) only A and B of the above.
32) “Bureaucratic gambling” refers to
A) the belief of thrift managers that they would not be audited by thrift regulators in the 1980s
due to the relatively weak bureaucratic power of the 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) none of the above.
33) Charles Keating
A) was allowed to acquire Lincoln Savings and Loan of Irvine, California, even though he had
been accused of fraud by the SEC only four-and-a-half years earlier.
B) fired Lincoln’s conservative lending officers and internal auditors, even though he had
promised regulators he would keep them.
C) enlisted the help of five senators to delay the seizure of Lincoln’s assets.
D) did all of the above.
34) Examiners from the Federal Home Loan Bank Board of San Francisco recommended that
Lincoln Savings and Loan be seized when they discovered that
A) officials at the thrift had attempted to mislead them.
B) it had exceeded the 10 percent limit on equity investments by $600 million.
C) its owner, Charles Keating, had been convicted of embezzlement ten years before he
purchased the thrift.
D) all of the above occurred.
E) only A and B of the above occurred.
35) 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 who received generous campaign contributions from the savings and loan industry,
like regulators, hoped that the problems in the industry would ease over time.
C) Congress encouraged, and thrift regulators acceded to, a policy of regulatory forbearance.
D) of all of the above.
E) of only A and B of the above.
36) The bailout of the savings and loan industry was much delayed and, therefore, much more
costly to taxpayers because
A) regulators initially attempted to downplay the seriousness of problems within the thrift
industry.
B) politicians who received generous campaign contributions from the savings and loan industry
hoped that the problems in the industry would ease over time.
C) Congress did not wait long enough for many of the problems in the thrift industry to correct
themselves.
D) of all of the above.
E) of only A and B of the above.
37) Prior to August 1989, the agency that regulated the nation’s savings and loan associations
was the
A) Federal Home Loan Bank Board.
B) Office of Thrift Supervision.
C) Resolution Trust Corporation.
D) Comptroller of the Currency.
38) The Federal Home Loan Bank Board and the FSLIC, both of which failed in their regulatory
tasks, were abolished by the
A) Competitive Equality in 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.
39) The major provisions of the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 included
A) abolishing the Federal Home Loan Bank Board and the FSLIC.
B) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift
Supervision, a bureau within the U.S. Treasury Department.
C) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal
deposit insurance system.
D) all of the above.
E) only A and B of the above.
40) The major provisions of the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 included
A) abolishing the Federal Home Loan Bank Board and the FSLIC.
B) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift
Supervision, a bureau within the U.S. Treasury Department.
C) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed
in conservatorship or receivership.
D) all of the above.
E) only A and B of the above.
41) The major provisions of the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 included
A) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift
Supervision, a bureau within the U.S. Treasury Department.
B) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal
deposit insurance system.
C) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed
in conservatorship or receivership.
D) all of the above.
E) only A and B of the above.
42) The major provisions of the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 included
A) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal
deposit insurance system.
B) establishing 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) all of the above.
E) only A and B of the above.
43) The major provisions of the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 included
A) reducing the regulatory responsibilities of the FDIC.
B) establishing 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) all of the above.
E) only A and B of the above.
44) In the early 1990s, to replenish the reserves of the Savings Association Insurance Fund,
insurance premiums for S&Ls were increased from ________ cents per $100 of deposits to
________ cents and can rise as high as 32.5 cents.
A) 12.5; 17.5
B) 17.5; 20.5
C) 20.8; 23.0
D) 23.0; 27.8
45) Since 1993, the number of savings and loan associations has ________.
A) held steady
B) risen sharply
C) risen slightly
D) declined substantially
46) The largest asset held by S&Ls is ________.
A) consumer loans
B) securities
C) mortgage loans
D) consumer savings
47) (I) S&Ls’ net worth ratio is about the same as that of commercial banks.
(II) Goodwill accounts for a majority of S&Ls’ capital.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
48) Since the early 1990s, the number of savings and loan associations has ________ and the
average size (in assets) has ________.
A) risen; declined
B) declined; risen
C) risen; risen
D) declined; declined
49) The main source of funds at savings and loan associations is
A) borrowing in the money market.
B) borrowing in the capital market.
C) deposits.
D) equity capital.
50) Since the early 1990s, the net income of savings and loan associations has ________.
A) risen
B) fallen slightly
C) fallen sharply
D) held steady
51) Credit unions are characterized by
A) mutual ownership.
B) common bond membership.
C) nonprofit, tax-exempt status.
D) all of the above.
E) none of the above.
52) The common bond membership requirement makes it difficult for ________ to diversify
their loans.
A) savings and loan associations
B) credit unions
C) banks
D) mutual savings banks
53) The smallest average-sized depository institution is ________.
A) credit unions
B) savings and loan associations
C) commercial banks
D) money market mutual funds
54) Which of the following is a lender of last resort for credit unions?
A) National Credit Union Administration
B) U.S. Central Credit Union
C) State central credit unions
D) The Central Liquidity Facility
55) The day-to-day liquidity needs of credit unions are met by the ________.
A) National Credit Union Administration
B) Federal Reserve System
C) state central credit unions
D) Central Liquidity Facility
56) Since 1980, the number of credit unions has ________.
A) declined substantially
B) remained steady
C) increased substantially
D) increased slightly
57) Since 1990, the number of credit union members has ________.
A) increased substantially
B) increased slightly
C) decreased substantially
D) decreased slightly
58) Credit unions’ main source of funds is ________.
A) regular share accounts
B) share certificates
C) share draft accounts
D) money market accounts
59) Credit unions’ main type of loans is ________.
A) mortgages
B) automobile
C) credit cards
D) nonresidential real estate
60) Mutual savings banks are concentrated in the ________ United States.
A) northeastern
B) southeastern
C) western
D) all of the above
61) Mutual savings banks
A) are heavily concentrated in mortgages.
B) have more flexibility in their investing practices.
C) are both A and B of the above.
D) are neither A nor B of the above.
62) To act in the taxpayer’s interest and lower costs to the deposit insurance agency, regulators
must
A) set tight restrictions on holding assets that are too risky.
B) impose high capital requirements.
C) not adopt a stance of regulatory forbearance.
D) do all of the above.
63) Politicians have ________ incentives to act in their own interests rather than in the interests
of taxpayers.
A) no
B) strong
C) weak
D) low
64) The purpose of reserve requirements
A) is to limit the expansion of the money supply.
B) is to ensure adequate liquidity for the institutions.
C) is both A and B of the above.
D) is neither A nor B of the above.
65) ________ view credit unions as unfair competitors due to government support they receive
in the form of tax advantages.
A) Regulators
B) The Federal Reserve
C) Commercial banks
D) none of the above
66) The capital of financial institutions is often measured by the ________ ratio.
A) current
B) net worth
C) asset turnover
26.2 True/False
1) The mutual form of ownership accentuates the principal-agent problem that exists in
corporations.
2) Savings and loans are not as heavily concentrated in mortgages and have had more flexibility
in their investing practices than mutual savings banks.
3) The congressionally imposed cap on the interest rate that S&Ls could pay on savings accounts
became a serious problem for them in the 1970s when inflation rose.
4) Regulatory forbearance reduces moral hazard because an operating but insolvent S&L will
take fewer risks than healthy S&Ls that can take risks and still remain solvent.
5) The Competitive Equality in Banking Act of 1987 allowed the FSLIC to borrow all the funds
it needed to close insolvent S&Ls and pay off depositors.
6) In the 1980s, regulators engaged in bureaucratic gambling when they allowed insolvent S&Ls
to continue operating.
7) FIRREA imposed new restrictions on thrift activities that, in essence, re-regulated the S&L
industry to the asset choices it had before 1982.
8) Most credit unions today have federal charters.
9) Credit unions are owned by stockholders.
10) Federal legislation allows credit unions representing groups with different common bonds to
merge into a single credit union.
11) Credit unions view commercial banks as government-supported and hence unfair
competitors due to their tax advantages.
12) Mutual savings banks are the only financial institutions that are tax-exempt.
13) The second major liability of savings and loans is borrowings.
14) Listing large amounts of goodwill as an asset is another way that savings and loans are able
to hide the fact that they are insolvent.
26.3 Essay
1) What factors contributed to creating the thrift crisis?
2) Explain why thrift regulators engaged in regulatory forbearance in the 1980s.
3) Explain how the Lincoln Savings and Loan scandal is an application of the principal-agent
4) Why did the Competitive Equality in Banking Act of 1987 fail to solve the problems in the
thrift industry?
5) How has the thrift industry been transformed since FIRREA?
6) Why have commercial banks gone to court in an effort to limit the activities of credit unions?
7) Discuss the background of mutual savings banks and how this lead to the creation of S&Ls.
8) Explain the advantages and disadvantages between mutual savings banks and savings and
loans.