Deck 11: The Economics of Financial Regulation

Question 1

The FDICIA requires that regulators deal with insolvent banks using the least costly method.

Answer 1

True

Question 2

Basel recommendations are not binding on regulators.

Answer 2

True

Question 3

Deposit brokers help to circumvent the reserve requirement.

Answer 3

False

Question 4

During the Great Depression, the Federal Reserve was not aggressive enough in raising the money supply.

Question 5

The FDICIA eliminated the "too-big-to-fail" policy.

Question 6

Hugo Chavez has taken control of energy production in Venezuela. This development is unsurprising to those believe the private interest model is closer to reality.

Question 7

The FIRREA provided funds to bail out the S&L industry.

Question 8

The FIRREA weakened the "too-big-to-fail" policy.

Question 9

The public interest model tends to favor easing regulations.

Question 10

Regulatory capture tends to eliminate regulatory forbearance.

Question 11

One of the policy mistakes after the stock market crash starting in 1929 that worsened the Great Depression was the lowering of tariffs.

Question 12

Regulatory capture is an idea that fits well with the private interest model.

Question 13

According to the public interest model, government tries to enact laws, regulations, and policies that benefit the public.

Question 14

The FDICIA shut down the FSLIC, which engaged in regulatory forbearance during the S&L crisis.

Question 15

The private interest model states that politicians, bureaucrats, and other government workers are more motivated by self-interest instead of serving the public.

Question 16

The Basel accords put more emphasis on assessing the risk of assets.

Question 17

Tightening regulations on traditional banks was a major cause of the S&L crisis.

Question 18

One of the policy mistakes after the stock market crash starting in 1929 that worsened the Great Depression was the raising of interest rates.

Question 19

Regulatory forbearance was a problem during the S&L crisis.

Question 20

Canada's regulatory structure allowed its banking industry to avoid major problems during the financial crisis of 2008. This development is unsurprising to those who believe the private interest model is closer to reality.

Question 21

Which of the following are recommendations for banking regulation of the Basel accords?

A) Assess the risk of different assets.
B) Raise the importance of the leverage ratio.
C) Allow switching of accounting techniques in a crisis.
D) all of the above

Question 22

The Basel accords provide extra guards against bank runs.

Question 23

The C in CAMELS stands for credit risk.

Question 24

Insolvent banks that are allowed to continue to operate tend to take on more risk.

Question 25

Which of the following were factors exacerbating the Great Depression?

A) deposit insurance
B) higher interest rates
C) falling productivity
D) all of the above

Question 26

Barth, Caprio and Levine argue that financial markets and depositors do a better job of assessing the risk of banks than regulators do.

Question 27

The Gramm-Leach-Bliley legislation outlawed interstate banking.

Question 28

The Riegle-Neale legislation legalized interstate banking.

Question 29

According to Barth, Caprio, and Levine, regulators ought to think of ways of helping financial markets, particularly bank debt and equity holders, to monitor banks.

Question 30

Which of the following contributed to falling profits for banks in the 1970s and early 1980s?

A) Regulation Q
B) high inflation
C) competition from mutual funds
D) all of the above

Question 31

Barth, Caprio and Levine argue that financial regulators need to spend more time assessing the risk of bank assets.

Question 32

Which of the following contributed to falling profits for banks in the 1970s and early 1980s?

A) regulatory forbearance
B) high inflation
C) low capital levels
D) all of the above

Question 33

Which of the following contributed to the S&L crisis in the 1980s?

A) the Great Depression
B) regulatory restrictions on assets
C) regulatory forbearance
D) all of the above

Question 34

Which of the following contributed to the S&L crisis in the 1980s?

A) falling real interest rates around 1980
B) restrictions on the types of deposits at S&Ls
C) regulatory forbearance
D) all of the above

Question 35

Which of the following contributed to the S&L crisis in the 1980s?

A) the Great Inflation
B) Regulation Q
C) risky lending by S&Ls
D) all of the above

Question 36

In the early stages of the Great Depression, the Federal Reserve failed to act as a lender of last resort to the banking system and thereby contributed to the severity of the depression.

Question 37

The Gramm-Leach-Bliley legislation overturned Glass-Steagall.

Question 38

The S in CAMELS stands for sensitivity to market risk.

Question 39

Which of the following contributed to the S&L crisis in the 1980s?

A) rising real interest rates around 1980
B) S&L involvement in commercial real estate
C) regulatory forbearance
D) all of the above

Question 40

The Glass-Steagall Act was a key part of the stabilization of the financial sector during the Great Depression.

Question 41

The "too big to fail" policy exacerbates the moral hazard problem between

A) banks and borrowers.
B) regulators and banks.
C) politicians and regulators.
D) the public and politicians.

Question 42

The most beneficial government reaction to the Great Depression was

A) raising interest rates.
B) lowering tariffs.
C) raising the reserve requirement.
D) none of the above

Question 43

Basel II gave more sophisticated guidelines for judging _____ than Basel I.

A) asset quality
B) capital adequacy
C) liquidity
D) all of the above

Question 44

The FDIC was created in response to

A) bank runs.
B) zombie S&Ls.
C) the stock market crash.
D) WWII.

Question 45

Which of the following reduces the incentive for consumers to monitor the liquidity of banks?

A) online banking
B) SWAPs
C) brokered deposits
D) all of the above

Question 46

The private interest model focuses on the asymmetric information problem between

A) banks and regulators.
B) regulators and politicians.
C) politicians and the public.
D) all of the above.

Question 47

The most beneficial government reaction to the Great Depression was

A) lowering interest rates.
B) raising tariffs.
C) creating the FDIC.
D) raising the reserve requirement.

Question 48

Which of the following are part of CAMELS?

A) earnings
B) management
C) sensitivity to market risk
D) all of the above

Question 49

Which of the following pieces of legislation is intended to help with the asymmetric information problems between regulators and banks?

A) Riegle-Neale
B) FIRREA
C) FDICIA
D) all of the above

Question 50

The FDICIA helps solve the moral hazard problem between

A) banks and the public.
B) regulators and banks.
C) politicians and regulators.
D) the public and politicians.

Question 51

The Gramm-Leach Bliley legislation overturned

A) the McFadden Act.
B) the Glass-Steagall legislation.
C) the Riegle-Neale Act.
D) all of the above.

Question 52

Basel II's third pillar refers to

A) judging asset quality.
B) financial market marketing.
C) leverage ratio calculation.
D) none of the above.

Question 53

Which of the following pieces of legislation made interstate banking legal?

A) Riegle-Neale
B) FIRREA
C) Gramm-Leach-Bliley
D) none of the above

Question 54

The FDIC is intended to alleviate asymmetric information problems between

A) banks and the public.
B) regulators and banks.
C) politicians and regulators.
D) the public and politicians.

Question 55

According to Barth, Caprio, and Levine:

A) Regulators ought to think of ways of helping financial markets monitor banks.
B) Regulators should improve how they screen new bank applicants.
C) both a and b
D) none of the above

Question 56

Which of the following pieces of legislation eased the barriers between banks and insurance companies?

A) Glass-Steagall
B) FIRREA
C) FDICIA
D) none of the above

Question 57

Scholars like Barth, Caprio and Levine argue that regulators should focus on improving the _____ of financial institutions.

A) liquidity
B) transparency
C) capital adequacy
D) none of the above

Question 58

TBTF policy states that:

A) regulators will not allow an institution to fail because to do would be too disruptive to the financial system.
B) some institutions have such large reserves that they cannot fail.
C) large institutions are inherently less likely to fail.
D) none of the above

Question 59

Which of the following provided the funds to bail out or close down the failed institutions of the S&K crisis?

A) Glass-Steagall
B) FIRREA
C) FDICIA
D) none of the above

Question 60

Off-balance sheet activities worsen the asymmetric information problem between

A) banks and regulators.
B) regulators and politicians.
C) politicians and the public.
D) none of the above.

Question 61

Why does the FDICIA limit interest on deposits for significantly undercapitalized banks?

Question 62

What did the Riegle-Neale Act legalize?

Question 63

What is a zombie S&L?

Question 64

The FDICIA helped to solve a moral hazard problem between regulators and banks. Explain.

Question 65

Explain how regulatory forbearance negatively impacted the financial system.

Question 66

What does CAMELS stand for?

Question 67

What could the government have done that might have helped prevent the Great Depression?

Question 68

How does asymmetric information affect elections?

Question 69

How did regulatory forbearance during the S&L crisis worsen moral hazard problems between S&Ls and regulators?

Question 70

How does the TBTF policy encourage large financial institutions to take on bigger risk? If a large institution fails, the shock to the financial market might be too large for the financial system to handle. The TBTF policy is the explicit or implicit promise that regulators will not allow the institution to fail, so these institutions tend to take on more risk.

Question 71

What was the primary beneficial action the government took to help financial markets during the Great Depression?

Question 72

Why do some scholars advocate for regulators to focus on transparency in the financial industry?

Question 73

The creation of the FDIC had immediate benefits and long term costs. Describe both and how they relate to asymmetric information.

Question 74

How would the private interest model explain the behavior of regulators during the S&L crisis?

Question 75

The TBTF policy worsens the moral hazard problem between what two groups? Explain.

Question 76

How did the FDICIA affect investment banks?

Question 77

What is the difference between the public and private interest models in their approach to government solutions to economics problems?