Question 1

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 is a tool for providing liquidity to banks in need of short-term loans, but it is not a substitute for deposit insurance. Deposit insurance protects depositors from losses in the event of a bank failure, while the discount window helps banks maintain adequate cash reserves to meet their obligations. While the discount window may help prevent bank runs in some cases, it is not a foolproof solution and may not be sufficient to address larger systemic issues.

Question 2

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 3

Which of the following is NOT a social welfare effect of bank runs?

Accepted Answer

Discipline of incompetent managers is not a social welfare effect of bank runs. Bank runs can lead to negative effects on the economy, including reducing the availability of credit, negatively affecting the payments function of depository institutions, potentially decreasing the money supply, and impeding the ability to perform intergenerational wealth transfers. However, disciplining incompetent managers is not usually considered a social welfare effect of bank runs.

Question 4

The "too big to fail" policy doctrine prevalent through the 1980s and most of the 1990s is remised 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 "too big to fail" policy doctrine prevalent through the 1980s and most of the 1990s was based on the idea that some financial institutions were so large and interconnected that their failure could cause a widespread economic collapse. The doctrine involved providing government support to these institutions in times of crisis, rather than separating small and large depositors. Deposit insurance applies to all depositors up to a certain limit, regardless of the size of their deposits.

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 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 7

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 8

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 9

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

Accepted Answer

The NCUA's deposit insurance programs are indeed modeled after the FDIC's programs.

Question 10

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

Accepted Answer

During the 1980s, brokered deposits were often associated with high-risk behavior by banks and thrifts, and many institutions that relied heavily on brokered deposits ultimately failed. Therefore, a high proportion of brokered deposits became a warning signal of increased risk for failure.

Question 11

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 12

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

Accepted Answer

The deficit realized by the PBGC in 1992 was primarily due to underfunded pension plans and failed companies, but risk-taking by fund administrators also played a role.

Question 13

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

Accepted Answer

The PBGC was created by the Employee Retirement Income Security Act of 1974 to insure pension benefits and protect retirees in the event that their pension plan becomes insolvent. It is funded by insurance premiums paid by employers who sponsor pension plans and invested assets.

Question 14

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 15

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

Accepted Answer

Insured depositors can be covered for more than $250,000 at any given FI by using multiple ownership categories such as joint accounts, retirement accounts, and revocable trust accounts. Each category is insured up to $250,000, thereby allowing depositors to exceed the $250,000 limit for individual accounts.

Question 16

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 established and regulated at the state level by state insurance regulators. They are not administered by a federal agency like the FDIC.

Question 17

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 18

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.

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

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 an independent federal agency that insures credit union deposits.

Quiz 19: Deposit Insurance and Other Liability Guarantees

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

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.

Which of the following is NOT a social welfare effect of bank runs?

The "too big to fail" policy doctrine prevalent through the 1980s and most of the 1990s is remised on the separation of small depositors who would receive deposit insurance and large depositors who would not receive the benefits of deposit insurance.

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.

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.

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.

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.

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

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

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

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

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

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

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

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

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.

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.

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

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