17) Rising inflationary pressure caused the U.S. to tighten its monetary policy at the end of the 1960s.
As a result, market interest rates rose above the Regulation Q ceiling and American banks found it
impossible to attract time deposits for re-lending. How did the banks get around this problem?
A) by setting their own interest rates and then using better business as compensation for government
regulations
B) by borrowing funds from European branches, which faced no restriction on the interest they could
pay on Eurodollar deposits
C) by pushing through new legislation that nullified Regulation Q.
D) by creating subsidiary branches in foreign countries.
E) by waiting to trade time deposits until Regulation Q no longer applied.
18) What structures make up the international capital markets?
A) stock market, IFM, and the World bank
B) bond market, foreign exchange rates, IFM, and the World bank
C) commercial banks, corporations, non-bank financial institutions, the central banks, and other
government agencies
D) commercial banks and corporations
E) the central banks and non-bank financial institutions
19) What are the types of institution banks used to conduct foreign business?
A) corporations
B) central banks
C) commercial banks
D) agency offices, subsidiary banks, and foreign branches
E) state-owned enterprises
20) A business’s use of a bank located outside of the home country is called:
A) Swiss banking.
B) offshore banking.
C) international banking.
D) domestic banking.
E) international swapping.
21) The scale of transactions in the international capital market has
A) grown more quickly than world GDP since the early 1970s.
B) grown less quickly than world GDP since the early 1970s.
C) grown about the same rate as the world GDP since the early 1970s.
D) been fixed by international regulations.
E) decreased more quickly than world GDP since the early 1970s.
22) If a country chooses to have a monetary policy oriented toward domestic goals and a fixed exchange
rate, then
A) it can have the freedom of international capital movements.
B) it cannot have the freedom of international capital movements.
C) it cannot balance its current account.
D) it cannot have fiscal policy oriented toward domestic goals.
E) it cannot control money supply growth.
23) If a country chooses to have a monetary policy oriented toward domestic goals and the freedom of
international capital movements, then
A) it can have a fixed exchange rate.
B) it cannot have a fixed exchange rate.
C) it cannot balance its current account.
D) it cannot have a fiscal policy oriented toward domestic goals.
E) it cannot control money supply growth.
24) Offshore banking can take place at which institution?
A) agency office only
B) subsidiary bank only
C) foreign bank only
D) subsidiary bank and foreign bank
E) agency office, subsidiary bank, and foreign bank
25) The fact that assets of the political opponents of the U.S. were frozen in U.S. banks
A) was challenged as unconstitutional.
B) lead to an increased amount of funds being placed in Eurobanks.
C) lead to a violation of the Law of One Price.
D) lead to the Cold War.
E) lead to a violation of Regulation Q.
26) Regulatory asymmetries can explain why the following places have become main Eurocurrency
centers:
A) the United States
B) Germany
C) Zurich, Somalia, and Mozambique
D) London, Luxembourg, and The United States
E) London, Luxembourg, and Hong Kong
27) Who are the main actors in the international capital market?
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?
21.3 Regulating International Banking
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.
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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.