Question 1

Banking regulations prevent banks from:

Accepted Answer

Banking regulations prevent banks from owning common stocks of corporations in order to prevent conflicts of interest and maintain stability in the banking system. Banks are allowed to invest in other securities, but there are limits on the amount and type of investments they can make. Holding more than 10 percent of their assets in common stock of companies is not a regulation, nor is owning corporate jets or building big office buildings.

Question 2

You have savings accounts at two separately FDIC insured banks.At one of the banks your account has a balance of $200,000.At the other bank the account balance is $60,000.If both banks fail, you will receive:

Accepted Answer

The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category. Since the accounts are at two separate banks and both balances are under the $250,000 limit, you would be fully insured and receive the full amount of $260,000 ($200,000 + $60,000).

Question 3

The acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes the following, except:

Accepted Answer

The acronym CAMELS stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk. Losses are included in asset quality evaluation.

Question 4

The CAMELS ratings are:

Accepted Answer

CAMELS ratings are not made public and are kept confidential between the bank and its regulatory agency.

Question 5

Prior to the financial crisis of 2007-2009 banks did all but which of the following to bulk up their profit:

Accepted Answer

Prior to the financial crisis, banks bought or sponsored hedge funds, traded securities for customers, and purchased equities for their own account in order to increase their profits. However, collusion to fix benchmark interest rates was not a common practice for banks to increase their profits prior to the crisis.

Question 6

You hold an FDIC insured savings account at your neighborhood bank.Your current balance is $275,000.If the bank fails you will receive:

Accepted Answer

The FDIC insures up to $250,000 per account holder per bank. Therefore, if the bank fails, the maximum amount that can be recovered is $250,000. The remaining balance beyond $250,000 is not insured and may be lost.

Question 7

Following the consolidation that resulted from the 2007-2009 financial crisis in the U.S., the 4 largest commercial banks share of total deposits was:

Accepted Answer

According to data from the Federal Reserve, as of June 30, 2020, the four largest commercial banks in the U.S. (JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup) held approximately 40% of total deposits in FDIC-insured institutions.

Question 8

Banks are required to disclose certain information.This disclosure is done for all of the following reasons except:

Accepted Answer

The disclosure of information is not intended to create uniform prices for standard bank services. The other options are valid reasons for banks to disclose information.

Question 9

Which of the following is not a pillar of the latest Basel Accord?

Accepted Answer

The latest Basel Accord, also known as Basel III, consists of three pillars: a revised set of minimum capital requirements, liquidity requirements in addition to capital requirements, and supplements to capital requirements based on risk-weighted assets with restrictions on leverage. However, there are no provisions for uniform international laws for bank regulation in Basel III.

Question 10

The original Basel Accord was:

Accepted Answer

The original Basel Accord, also known as Basel I, was a set of guidelines for basic capital requirements for internationally active banks. It was developed by the Basel Committee on Banking Supervision and was implemented by countries around the world. The goal was to ensure that banks had adequate capital to cover their risks and to promote stability in the global financial system.

Question 11

A long-standing goal of financial regulators has been to:

Accepted Answer

The goal of financial regulators is to prevent banks from becoming too big and powerful, which can lead to systemic risk and instability in the financial system. This is why there are regulations in place, such as limits on bank mergers and acquisitions, to ensure that banks do not become too dominant in the market.

Question 12

Which of the following statements is most correct?

Accepted Answer

Financial regulators aim to prevent monopolies, as having just one or a few dominant banks can lead to market failures and higher prices for consumers. However, they also recognize that excessive competition can lead to instability and risks in the financial system. Therefore, they work to strike a balance between preventing monopolies and ensuring healthy competition.

Question 13

Which of the following is not a positive effect of the Basel Accord?

Accepted Answer

The Basel Accord did not provide a system to differentiate between bonds based on their systemic risk. Instead, it focused on setting minimum capital standards for banks, establishing a framework for assessing risk, and promoting international cooperation and consistency in regulation.

Question 14

Bank mergers require government approval because banking officials want to make sure that:

Accepted Answer

The answer of Bank mergers require government approval because banking...

Question 15

You have savings accounts at two separately FDIC insured banks.At one of the banks your account has a balance of $200,000.At the other bank the account balance is $60,000.You find out the banks are going to merge.If you are concerned about the possibility of the new bank failing, you should:

Accepted Answer

Although your funds are still insured up to $250,000 per account, it's always better to be cautious. Moving $10,000 to a different FDIC-insured bank would help to diversify your funds and provide added protection in case the new bank fails. Keep in mind that the FDIC only insures up to $250,000 per depositor.

Question 16

One reason that financial regulations restrict the assets that banks can own is to:

Accepted Answer

Financial regulations restrict the assets that banks can own in order to combat the moral hazard that government safety nets provide. Government safety nets, such as deposit insurance and too-big-to-fail policies, can create a situation where banks take on excessive risk in pursuit of profits because they believe the government will bail them out if they fail. By limiting the types of assets banks can hold, regulators can reduce the likelihood that banks will take on excessive risk, therefore reducing the moral hazard created by government safety nets.

Question 17

One reason a bank's officer may be reluctant to write off a past-due loan is that it will:

Accepted Answer

Writing off a past-due loan means reducing the amount of assets that the bank has, which in turn reduces the bank's capital. Therefore, a bank officer may be reluctant to write off a past-due loan because it would decrease the bank's assets and capital.

Question 18

The supervision of banks includes:

Accepted Answer

On-site examinations of the bank is the most effective method of supervision as it allows regulators to fully assess the bank's operations, risk management systems, and compliance with regulations. The other options may also be used as part of regulatory supervision but are not sufficient on their own.

Question 19

You have two savings accounts at an FDIC insured bank.You have $225,000 in one account and $40,000 in the other.If the bank fails, you will receive:

Accepted Answer

Each account is insured by the FDIC up to $250,000, so both accounts combined are insured up to $500,000. Therefore, if the bank fails, you will receive the full amount of both accounts, which is $265,000.

Question 20

Financial regulators set capital requirements for banks.One characteristic about these requirements is:

Accepted Answer

Capital requirements are set based on a bank's risk profile, and the riskier the asset holdings, the more capital is required to cover potential losses. Therefore, option B is the correct characteristic of capital requirements for banks. Option A and C are incorrect as capital requirements may differ depending on the individual bank's financial situation. Option D is incorrect as the amount of capital required is actually directly related to the amount of assets a bank owns.

Quiz 14: Regulating the Financial System