Deck 13: Regulation of Commercial Banks

Question 1

The quantity of notes and coin in the economy is called inside money but the bulk of the money supply is outside money.

Answer 1

False

Question 2

The Glass-Steagall Act came about due to concerns about excessive risk taking at banks and conflicts of interest between commercial and investment banking activities.

Answer 2

True

Question 3

The term disintermediation refers to

A)the policy of not closing insolvent institutions in hopes that they can eventually turn around their performance.
B)the withdrawal of deposits from depository institutions that are reinvested in other types of intermediaries.
C)the policy of regulating the minimum rate of return institutions can pay on deposits.
D)chartering restrictions that limit the ability of new banks to enter into a local market.
E)the policy of not allowing banks to grow by creating a de novo branch outside their traditional market area.

Answer 3

B

Question 4

The Financial Services Modernization Act first allowed Section 20 affiliates.

Question 5

A bank holding company that only has one bank is termed a unit bank.

Question 6

The Investment Company Act of 1940 and the Securities Acts of 1933 and 1934 are examples of investor protection regulations.

Question 7

A financial intermediary that can engage in a broad range of financial service activities is termed a universal FI.

Question 8

The Financial Services Modernization Act allowed bank holding companies to open insurance underwriting affiliates and allowed insurance companies to open banks.

Question 9

The FDIC insures bank deposits and the OTS insures thrift deposits.

Question 10

A securities subsidiary of a bank holding company that engages in investment banking is called a Riegle-Neal affiliate.

Question 11

The difference between the private costs of regulations and the private benefits for the producers of financial services is called the net regulatory burden.

Question 12

A bank that has an equity to asset ratio equal to 12 percent can normally lend no more than _________________ of its assets to any one borrower.

A)1.20 percent
B)1.50 percent
C)1.80 percent
D)12.00 percent
E)15.00 percent

Question 13

Unit banking states are states that do not allow interstate branch banking but allow the creation of intrastate branch banks.

Question 14

U.S. depository institutions may be subject to as many as ______________ separate regulators.

A)four
B)five
C)six
D)seven
E)eight

Question 15

FDIC deposit insurance is generally limited to ________________ per depositor per bank.

A)$50,000
B)$100,000
C)$150,000
D)$200,000
E)$250,000

Question 16

Banks are generally prohibited from making loans exceeding more than 15 percent of their own equity capital to any one company or borrower.

Question 17

There were a greater number of bank failures from 1980 to 1990 inclusive than from 1934 to 1979.

Question 18

The layers of regulation imposed on banks to protect depositors against bank failure are termed credit allocation regulations.

Question 19

The CRA of 1977 and the HMDA of 1975 are examples of consumer protection regulations.

Question 20

The reduction in deposit funds cost to an individual bank brought about by government insurance is an example of the

A)social benefit of regulation.
B)private cost of regulation to DIs.
C)private benefits of regulation to DIs.
D)net regulatory burden.
E)none of the options

Question 21

Major provisions of the Financial Services Modernization Act of 1999 include all of the following except

A)allowing bank holding companies to open insurance underwriting affiliates and vice versa.
B)allowing bank holding companies to open or merge with investment banks.
C)creating one regulator to oversee all activities of financial service firms.
D)all of the options are included

Question 22

Tier I (core)capital includes at least some part of which of the following?
I) Common stockholders' equity
II) Retained earnings
III) Subordinated debt
IV) Allowance for loan and lease losses

A)I only
B)I and II only
C)I and IV only
D)II and III only
E)I,II,III,and IV

Question 23

The FDIC may require an undercapitalized bank to
I) provide the FDIC with a capital restoration plan.
II) cease acquiring brokered deposits.
III) obtain FDIC approval for all acquisitions.
IV) suspend dividends and management fees.
V) suspend payments on subordinated debt.

A)I and II only
B)III only
C)I,II,III,and IV only
D)I,II,III,IV,and V
E)I,II,III,and V only

Question 24

Which act led to interstate banking in the United States?

A)Glass-Steagall Act
B)DIDMCA
C)McFadden Act
D)Riegle-Neal Act
E)Financial Services Modernization Act

Question 25

Which of the following would increase the value of a bank charter?
I) Tightening restrictions on new charters
II) Broadening the activities banks can engage in
III) Increasing reserve requirements
IV) Doubling capital adequacy requirements

A)I and II only
B)II only
C)III and IV only
D)I and IV only
E)II and III only

Question 26

Requiring foreign banks to operate under the same rules as domestic banks is termed

A)favored status.
B)IBA clause.
C)national treatment.
D)NAFTA.
E)post-patriotism requirement.

Question 27

The law that largely repealed the Depression era banking laws was the

A)Depository Institution Deregulation and Monetary Control Act of 1980.
B)Financial Services Modernization Act.
C)FIRRE Act.
D)International Banking Act.
E)None of the options.

Question 28

Tier II (supplementary)capital includes which of the following?
I) Allowance for loan and lease losses,up to 1.25 percent of risk-weighted assets
II) Subordinated debt not maturing within five years (max amount = 50 percent of Tier 1 capital)
III) Common stock and retained earnings
IV) Nontransaction deposits

A)II and III only
B)I and IV only
C)I and II only
D)I,II,and III only
E)I,III,and IV only

Question 29

Among other things,the Financial Institutions Reform,Recovery,and Enforcement Act stipulated the creation of the

A)FDIC.
B)OTS.
C)OCC.
D)Warren Commission.
E)CRA.

Question 30

All banks located in the European Union offer deposits that are insured for __________ euros,although depositors are subject to a _________________ in the event of loss.

A)100,000; 2.5 percent insurance premium
B)50,000; 95 percent recovery rate
C)50,000; 10 percent deductible
D)45,000; 5 percent fine
E)75,000; 90 percent recovery rate

Question 31

In the United States,regulators currently use a ________________ to calculate required reserve balances.

A)lagged reserve accounting system
B)contemporaneous reserve system
C)homoscedastic reserve system
D)two-day computation period
E)accrual accounting period

Question 32

In the post-Depression era the largest number of bank failures occurred in which time period?

A)1955-1965
B)1965-1975
C)1975-1985
D)1985-1995
E)1995-2005

Question 33

A bank has Tier 1 capital of $90 million and Tier 2 capital of $70 million. The bank has total assets of $2,522 million and risk-weighted assets of $2,017.6 million. This bank is

A)critically undercapitalized.
B)significantly undercapitalized.
C)undercapitalized.
D)adequately capitalized.
E)well-capitalized.

Question 34

To be well-capitalized,a bank must have a leverage ratio of at least ____________ percent,Tier I capital to risk-adjusted asset ratio of at least ____________ percent,and a total risk-based capital ratio of at least ___________ percent.

A)4; 4; 8
B)5; 6; 10
C)3; 3; 8
D)4; 8; 4
E)4; 6; 10

Question 35

The _______________________ introduced the prompt corrective action policy that requires federal intervention when a bank's capital falls below certain minimums.

A)Federal Deposit Insurance Corporation Improvement Act
B)Financial Services Modernization Act
C)USA Patriot Act
D)Foreign Bank Supervision Enhancement Act
E)Foreign Banking Activity Powers Enforcement Act

Question 36

Areas of commercial bank regulation designed to encourage banks to lend to socially important sectors such as housing and farming are termed ______________________ regulations.

A)safety and soundness
B)consumer protection
C)investor protection
D)credit allocation
E)monetary policy

Question 37

To be classified as an adequately capitalized bank,the bank must have a leverage ratio of at least ____________ percent,Tier I capital to risk-adjusted asset ratio of at least ______________ percent and a total risk-based capital ratio of at least __________ percent,and does not meet the definition of a well-capitalized bank.

A)4; 4; 8
B)5; 6; 10
C)3; 3; 8
D)4; 8; 4
E)4; 6; 10

Question 38

Areas of commercial bank regulation dealing with preventing banks from discriminating unfairly in lending are termed ______________________ regulations. rev:
10_17_2013_QC_37326

A)safety and soundness
B)consumer protection
C)investor protection
D)credit allocation
E)monetary policy

Question 39

Among other things,the _____________ prohibits U.S. banks from providing banking services to foreign shell banks.

A)International Banking Act
B)Financial Services Modernization Act
C)USA Patriot Act
D)Foreign Bank Supervision Enhancement Act
E)Foreign Banking Activity Powers Enforcement Act

Question 40

Recent regulation such as the Riegle-Neal Act of 1994 has removed some of the federal banking laws that formerly constrained profitable opportunities for commercial banks. The Riegle-Neal Act removes the major restrictions on banks' ability to _________________.

A)diversify geographically
B)diversify their product line
C)engage in securities underwriting
D)engage in insurance underwriting
E)engage in loan brokerage

Question 41

Discuss the four layers of regulation designed to preserve the safety and soundness of DIs.

Question 42

Look at the following simplified bank balance sheet. Assume that the bank has no off-balance-sheet commitments.

Question 43

(a)A bank has risk-weighted assets of $175 and equity of $12.5. If regulators require a minimum risk-weighted capital ratio of 5 percent given the current level of equity,how many new assets with a 100 percent risk weight can the bank add?
How many with a 50 percent risk weight?
(b)If the bank had 20 percent more equity,how many new assets with a 100 percent risk weight could the bank add?
How many with a 50 percent risk weight?
How does having more equity affect a bank's ability to grow?
How is this growth affected by the riskiness of the bank's assets?

Question 44

What changes to foreign bank operations in the United States have been brought about by the Foreign Bank Supervision and Enhancement Act of 1991?

Question 45

How do risk-based deposit insurance premiums and risk-based capital requirements help reduce the moral hazard problem of deposit insurance?
(Hint:
Moral hazard means that because of deposit insurance,banks may take on excessive amounts of risk.)

Question 46

Cite one law or regulation per each of the following categories:
Safety and Soundness Regulation
Monetary Policy Regulation
Credit Allocation Regulation
Consumer Protection Regulation
Investor Protection Regulation

Question 47

A financial service holding company operates a nationally chartered bank,an insurance firm,a securities firm,and a federal savings bank. Who is the primary regulator for this company?
Explain.

Question 48

The FDIC is required to collect additional insurance premiums from insured institutions if the BIF reserves fall below ________________ of insured deposits.

A)1.00 percent
B)1.15 percent
C)1.50 percent
D)1.75 percent
E)2.00 percent

Question 49

(a)What are the mandatory Prompt Corrective Action (PCA)Provisions for an undercapitalized bank?
Explain why these provisions are required.
(b)Why does one of the mandatory PCA Provisions for a critically undercapitalized bank include appointing a receiver/conservator within 90 days?

Question 50

Which act allowed the establishment of full-service financial institutions in the United States?

A)Riegle-Neal Act
B)Financial Services Modernization Act
C)USA Patriot Act
D)Foreign Bank Supervision Enhancement Act
E)Foreign Banking Activity Powers Enforcement Act

Question 51

Why have some states placed restrictions on intrastate and interstate branches?
What historical laws gave this right to states?
What law changed these restrictions?

Question 52

Why were the FIRREA of 1989 and the FDICIA of 1991 passed?
What were their major provisions?
How did these laws differ from earlier acts of the 1980s?