Question 1

The deficit realized by the PBGC in 1992 was a result of risk-taking by fund administrators.

Accepted Answer

The PBGC's deficit in 1992 was mainly the result of the agency's inability to keep pace with the funding requirements of pension plans that terminated. However, some risk-taking by fund administrators may have contributed to the overall financial distress of the PBGC.

Question 2

FDICIA imposed additional regulatory discipline as a substitute for increased stockholder and depositor discipline.

Accepted Answer

FDICIA (Federal Deposit Insurance Corporation Improvement Act of 1991) was designed to enhance regulatory discipline while also increasing stockholder and depositor discipline, not substituting it. It introduced more stringent regulatory measures to ensure the stability and accountability of financial institutions, rather than replacing the role of stakeholders in monitoring and disciplining these institutions.

Question 3

The current "too big to fail" policy doctrine relies on the separation of small depositors who would receive deposit insurance and large depositors who would not receive the benefits of deposit insurance.

Accepted Answer

The current "too big to fail" policy doctrine does not rely on the separation of small and large depositors in terms of deposit insurance. Instead, it focuses on the government's willingness to bail out large and systemically important financial institutions in the event of their failure, regardless of the size of their depositors.

Question 4

By decreasing the use of the discount window as a source of funding for a DI,the Federal Reserve hopes to reduce volatility in the fed funds market.

Accepted Answer

The Federal Reserve uses the discount window as a mechanism to provide liquidity to depository institutions (DIs), ensuring stability in the financial system rather than directly aiming to reduce volatility in the fed funds market. The fed funds market volatility is more directly influenced by open market operations and the Federal Reserve's policy decisions regarding interest rates.

Question 5

The 1993 Depositor Protection legislation gives equal claim to the value of liquidated assets less the amount of insured deposits to foreign uninsured depositors,domestic uninsured depositors,and the FDIC.

Accepted Answer

The answer of The 1993 Depositor Protection legislation gives equal...

Question 6

The deposit insurance programs of the National Credit Union Administration (NCUA)is modeled after the programs offered by the FDIC.

Accepted Answer

The deposit insurance programs of the NCUA are indeed modeled after the programs offered by the FDIC.

Question 7

The employment of deposit brokers allows individual depositors to receive deposit insurance coverage on total asset balances well in excess of $250,000 at any given bank.

Accepted Answer

The answer of The employment of deposit brokers allows individual...

Question 8

Critics of the current FDIC insurance programs often argue that only uninsured depositors have any incentive to discipline riskier banks.

Accepted Answer

This statement is false. Insured depositors still have an incentive to discipline riskier banks because they may still face losses in the event of a bank failure, even if their deposits are insured. In addition, depositors may have other reasons to care about the health of their bank, such as convenience, reputation, or loyalty.

Question 9

The FIRREA prohibited all insured financial institutions from accepting brokered deposits or paying interest rates that are significantly higher than existing market rates.

Accepted Answer

The FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act of 1989) imposed restrictions on brokered deposits and interest rates for institutions that are not well capitalized, but it did not outright prohibit all insured financial institutions from accepting brokered deposits or paying higher interest rates. It allowed well-capitalized institutions some flexibility in these areas.

Question 10

The required contribution from surviving insurers to protect policyholders of failed insurance companies usually is on a pro rata amount based on the relative asset size of the surviving company.

Accepted Answer

The answer of The required contribution from surviving insurers to...

Question 11

The insured depositor transfer method of least-cost bank failure resolution requires the FDIC to employ the method that imposes the highest amount of failure costs on uninsured depositors.

Accepted Answer

The answer of The insured depositor transfer method of least-cost...

Question 12

The Pension Benefit Guaranty Corporation (PBGC)insures pension benefits against the under-funding of pension plans by corporations.

Accepted Answer

The statement is true. The PBGC is a United States government agency that guarantees the payment of basic pension benefits earned in private-sector defined benefit plans. It was created by the Employee Retirement Income Security Act of 1974 to protect pension benefits in case a private pension plan is terminated without sufficient funds to pay all promised benefits.

Question 13

The National Credit Union Administration (NCUA)is an independent federal agency that insures credit union deposits.

Accepted Answer

The National Credit Union Administration (NCUA) is indeed an independent federal agency that insures credit union deposits.

Question 14

Interest rates charged to healthy banks that use the Federal Reserve discount window are typically set one percent below the fed funds target interest rate.

Accepted Answer

Interest rates charged to healthy banks that use the Federal Reserve discount window are typically set above the fed funds target interest rate, not one percent below.

Question 15

The discount window at the Federal Reserve is a suitable substitute for deposit insurance and a possible method of preventing bank runs.

Accepted Answer

The discount window cannot serve as a substitute for deposit insurance because it only provides short-term liquidity to banks and does not protect depositors in case of a bank failure. While it can help prevent bank runs by providing banks with emergency funds, it does not address the underlying issues that lead to runs on deposits, such as poor bank management or economic instability.

Question 16

The introduction of prompt corrective action capital zones by FDICIA was an attempt to place greater decision-making power at the discretion of regulators rather than on objective,measurable rules.

Accepted Answer

The introduction of prompt corrective action (PCA) capital zones by the Federal Deposit Insurance Corporation Improvement Act (FDICIA) was aimed at creating objective, measurable rules for regulatory intervention based on a bank's capital levels, reducing the discretion of regulators by mandating specific actions based on those levels.

Question 17

Insured depositors can be covered for much more than $250,000 at any given FI under current FDIC regulations.

Accepted Answer

Insured depositors can be covered for up to $250,000 per ownership category at any given FI, but they can also qualify for additional coverage based on certain factors such as the type of account ownership, beneficiaries, and trust agreements. For example, joint accounts can receive coverage up to $500,000, while certain retirement accounts can receive coverage up to $250,000 per participant.

Question 18

State guaranty funds for insurance companies are sponsored by state insurance regulators rather than by a federal agency such as the FDIC.

Accepted Answer

State guaranty funds are indeed sponsored by state insurance regulators, not by a federal agency like the FDIC. The purpose of these funds is to provide protection and coverage to policyholders in the event that an insurance company becomes insolvent or is unable to pay claims. Each state has its own guaranty fund, and the specific details and coverage limits may vary depending on the state.

Question 19

The FDIC deposit insurance program is also available to credit unions.

Accepted Answer

Credit unions are not covered by the FDIC (Federal Deposit Insurance Corporation); instead, they are insured by the National Credit Union Administration (NCUA) through the National Credit Union Share Insurance Fund (NCUSIF).

Question 20

During the 1980s,a high proportion of brokered deposits at a DI became an early warning signal of its risk for failure.

Accepted Answer

Brokered deposits, which are deposits obtained through a third party rather than directly from customers, were often associated with riskier banking practices in the 1980s. Therefore, a high proportion of brokered deposits at a DI during this time period could indicate an increased risk for failure.

Quiz 19: Deposit Insurance and Other Liability Guarantees