Question 1

One negative consequence of regulatory competition is:

Accepted Answer

Regulatory competition can lead financial institutions to seek out the most lenient regulator, which can result in a race to the bottom in terms of regulations and standards. This can ultimately harm customers and the stability of the financial system.

Question 2

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

Accepted Answer

According to the FDIC, as of December 31, 2020, the four largest commercial banks in the US (JPMorgan Chase, Bank of America, Wells Fargo, and Citibank) hold a combined 38.6% of total deposits. Therefore, the best choice is C, 40%.

Question 3

Credit Unions are regulated by a combination of agencies which includes:

Accepted Answer

Credit Unions are primarily regulated by state authorities and the National Credit Union Administration (NCUA), not the Federal Reserve, FDIC, or OCC.

Question 4

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 5

Banks can effectively choose their regulators by deciding whether to:

Accepted Answer

Banks can choose to be chartered at the national or state level. National banks are regulated by the Office of the Comptroller of the Currency (OCC) and state-chartered banks are regulated by their respective state banking authority. By choosing to be chartered at the state level, banks can potentially have more flexibility and a closer relationship with their regulator. However, national banks are also subject to federal regulations, which can provide consistency and nationwide standards. Ultimately, the choice depends on the specific goals and needs of the bank.

Question 6

Banking regulations prevent banks from:

Accepted Answer

Banking regulations prevent banks from owning common stocks of corporations in order to mitigate the risk associated with such investments and prevent conflicts of interest.

Question 7

Which of the following is not a pillar of the new (1998) Basel Accord?

Accepted Answer

The new (1998) Basel Accord, also known as Basel II, focuses on three pillars: a revised set of minimum capital requirements (A), supervisory review of bank balance sheets (B), and increased reliance on market discipline to encourage sound risk management practices (C). Uniform international laws for bank regulation (D) are not a pillar of the new Basel Accord.

Question 8

The fact that banks can be either nationally or state chartered creates:

Accepted Answer

The fact that banks can be either nationally or state chartered creates regulatory competition. This means that different regulatory bodies (e.g. the Federal Reserve or state banking boards) compete to attract banks to their jurisdiction by offering more favorable regulations or lower fees. This can lead to differences in regulations between states and a lighter regulatory burden for nationally chartered banks. However, it does not necessarily result in unregulated banks or the ability for banks to escape regulation in multiple states.

Question 9

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 10

The 1988 Basel Accord is:

Accepted Answer

The 1988 Basel Accord, also known as Basel I, is a set of guidelines for minimum capital requirements for internationally active banks. It was developed by the Basel Committee on Banking Supervision, which is composed of central banks and bank regulators from around the world. The accord aimed to ensure that banks hold enough capital to absorb losses and reduce the risk of bank failures.

Question 11

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 default risk.

Question 12

By setting fixed rules, regulators create the possibility that those being regulated will:

Accepted Answer

Fixed rules may be seen as inflexible and may lead those being regulated to seek loopholes or ways to avoid compliance with the rules.

Question 13

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

Accepted Answer

The moral hazard that government safety nets provide refers to the notion that banks may be more willing to take risks if they know that the government will bail them out if they fail. By restricting the assets that banks can own, financial regulations can reduce the risk of bank failures and discourage excessive risk-taking.

Question 14

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

The FDIC insures up to $250,000 per depositor per account ownership category. Since you have two separate accounts, each with its own ownership category, you would be insured for up to $250,000 in each account, for a total of $500,000. Therefore, in the event of a bank failure, you would receive up to $250,000 for each of your accounts, totaling $500,000.

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

While it is true that each account is insured up to $250,000 by the FDIC, in the event of a bank merger there may be some disruption and delay in accessing your funds. Therefore, it may be prudent to spread your deposits across multiple banks. Moving $10,000 to another account at a different bank would not only ensure that you stay within the FDIC insurance limits but also spread your risk across multiple institutions.

Question 16

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

Accepted Answer

Capital requirements for banks are typically based on the riskiness of their asset holdings. Banks with riskier assets are required to hold higher levels of capital to mitigate potential losses. This is intended to ensure that banks have sufficient cushion to absorb losses and maintain stability in the event of financial stress. The other options listed are not accurate - capital requirements are not uniform for all banks, the number of branches a bank has does not necessarily impact its capital requirements, and the relationship between assets and capital is not strictly inverse.

Question 17

Which of the following statements is most correct?

Accepted Answer

Financial regulators have the primary responsibility to prevent monopolies in banking industries to ensure fair and competitive market conditions. However, they also work to prevent strong competition, as excessive competition could lead to reckless lending practices and instability in the banking industry. Therefore, the most accurate statement is that financial regulators work to prevent monopolies and also work to prevent a level of competition that could be detrimental to the stability of the banking industry.

Question 18

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

Accepted Answer

The goal of financial regulators has traditionally been to prevent banks from becoming too big and powerful, in order to reduce the risk of systemic failure and protect consumers from potential abuses of power. This is why regulators often impose strict limits on the size and scope of banks' operations, and require regular reporting and oversight to ensure compliance with these rules.

Question 19

You hold an FDIC insured savings account at your neighborhood bank jointly with your father.Each of you has contributed equally into the account.The current balance in the account is $120,000.If the bank fails each of you will receive:

Accepted Answer

The FDIC insures each depositor up to $250,000 per insured bank for each account ownership category. Since the account is jointly owned, each owner is insured up to $250,000. Therefore, each of you will receive $60,000, which is half of the $120,000 balance.

Question 20

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 maximum amount insured by FDIC is $250,000 per depositor per insured bank. Therefore, in case the bank fails, the depositor will receive a maximum of $250,000 as insurance coverage. Any amount over $250,000 will not be insured and the depositor may lose that amount.

Quiz 14: Regulating the Financial System