Question 1

What is meant by the problem of time consistency in the conduct of financial system policy?

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Question 2

Explain why the ratio of assets to capital increased dramatically for commercial banks from the 1920s to the present.

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Question 3

Why are banks restricted in the assets that they can own? For example, why do you think banks are prohibited from owning common stock?

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Question 4

We saw in the text that regulations, specifically deposit insurance and the Basel Accord
(of 1988), can create moral hazard. Explain.

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Question 5

Identify at least two problems a borrower would face if banks were not required to disclose the information that they are currently required to make available.

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Question 6

What potential problems are created by regulatory competition?

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Question 7

Imagine a situation where the deposits at state chartered banks would be insured by a state insurance fund and deposits at nationally chartered banks would be insured by FDIC. How would you expect both depositors and banks would react?

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Question 8

What is the link between the safety net provided by the government to the financial industry and the relatively heavy regulation of the same industry by the government?

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Question 9

You are the head of finance for a very large corporation located in a relatively small town. At a local chamber of commerce meeting, the president of the local bank asks you why
you keep the corporation's bank accounts in a very large mid-western bank and not in his local bank. From a risk reduction perspective, how could you answer his question?

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Question 10

The FDIC used to charge all banks the same rate for insurance on deposits. From what you have learned, what problems did this create for not only the FDIC but for well-run banks?

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Question 11

Besides regulating banks, the government also regulates nondepository financial institutions, such as insurance companies. Consider a property casualty insurance company; why would the government need to regulate them?

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Question 12

Discuss the case for a "super-regulator" in the context of what you have learned about
"regulatory competition."

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Question 13

What were the positive effects of the 1988 Basel Accord? What were its shortcomings?

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Question 14

Define the components of the CAMELS criteria and explain how a CAMELS rating is calculated.

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Question 15

If we lived in an economy where interest rates were highly volatile, would you expect the maximum asset to capital ratio that a regulator would allow to increase or decrease and why?

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Question 16

What three strategies are employed by government officials to ensure that the risks created by the government safety net are contained?

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Question 17

The CAMELS criteria to evaluate the health of banks by supervisors is not made public. Make a case for one making this information public and a case for keeping it private.

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Question 18

Discuss the ramifications of the FDIC reducing deposit insurance limits to $25,000.

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Question 19

What was the primary motivation behind the creation of the 1988 Basel Accord?

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Question 20

Explain how bank regulators seem to face a bit of a paradox regarding preventing monopoly power by banks and spurring competition.

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Quiz 14: Regulating the Financial System