Deck 11: Financial Markets and Their Regulation

Question 1

The Securities Exchange Act made full disclosure unnecessary as a measure to protect the privacy of the transacting parties.

Answer 1

False

Question 2

Depository institutions such as banks are required to maintain a fractional reserve requirement, which allows the formal banking system to lend a multiple of the deposits held.

Answer 2

True

Question 3

The dissenting members of the Financial Crisis Inquiry Commission identified the housing bubble as one of the essential causes of the crisis.

Answer 3

True

Question 4

The Federal Reserve has rule-making authority over the practices of credit card companies.

Question 5

The Federal Reserve Bank of New York serves as overseer of banks and managed the bailout of banks during the financial crisis.

Question 6

When a bank buys mortgage loans and issues new securities, it engineers the new securities so as to ensure that it alone benefits from the financial gain.

Question 7

Securitization involves pooling contractual debt obligations and issuing new securities backed by those obligations.

Question 8

The majority of members of the Financial Crisis Inquiry Commission concluded that over-the-counter derivatives contributed significantly to the financial crisis.

Question 9

Credit card borrowings and mortgage loans are the largest securitization categories.

Question 10

The Federal Reserve is governed by a seven-member board of governors.

Question 11

Savings and investments do not involve risks.

Question 12

When credit card issuers cancel the cards of high-risk cardholders, more people have access to credit.

Question 13

The Securities Act required full disclosure when new securities were issued.

Question 14

Independent mortgage brokers cannot be the originators of mortgage loans.

Question 15

The Senate's confirmation is not required for the appointment of the members of the board of governors of the Federal Reserve.

Question 16

The Securities Exchange Act established the Securities and Exchange Commission (SEC) to regulate and police the markets and those who trade in them.

Question 17

The majority of members of the Financial Crisis Inquiry Commission concluded that the financial crisis was unavoidable.

Question 18

The Securities Exchange Act did not regulate insider trading.

Question 19

Congress passed the Credit CARD Act of 2009 to decrease the regulation of credit card issuers.

Question 20

If a depositor wants to withdraw her funds, the bank is not obliged to replace the funds with other deposits.

Question 21

Following the fall of Lehman Brothers in September 2008, the repo market froze leading to a severe recession.

Question 22

The members of the board of governors of the Federal Reserve are appointed by the ________.

A) president
B) Senate
C) secretary of state
D) chairman of the Federal Reserve

Question 23

The Dodd-Frank Act made suing an agency for fraud difficult by inhibiting investors to bring lawsuits against credit rating agencies.

Question 24

The Credit CARD (Card Accountability Responsibility and Disclosure) Act of 2009 was passed to ________.

A) increase the regulation of credit card issuers
B) increase the dropping interest rates on credit card borrowings
C) reduce the notice period for late fees
D) enhance the ability of card issuers to use risk-based pricing

Question 25

The ________ forced banks to separate their commercial banking and investment banking businesses.

A) Glass-Steagall Act of 1933
B) Consumer Protection Act of 2010
C) Securities Act of 1933
D) Securities Exchange Act of 1934

Question 26

The appointment of the members of the board of governors of the Federal Reserve is confirmed by the________.

A) president
B) Senate
C) chairman of the Federal reserve
D) secretary of state

Question 27

After two decades of political activity by banks, the Glass-Steagall Act was repealed by the ________.

A) Consumer Protection Act of 2010
B) Securities Exchange Act of 1934
C) Gramm-Leach-Bliley Act of 1999
D) Dodd-Frank Act of 2010

Question 28

The Obama administration's $787 billion economic stimulus program gave tax credits to first-time homebuyers, new car buyers who turned in a clunker, and homeowners who made their homes more energy efficient.

Question 29

In constructing CDOs, the mortgage loans are sliced into tranches with the cash flowing first to the _____.

A) most senior tranche
B) mezzanine tranche
C) equity tranche
D) non-investment grade tranche

Question 30

Which of the following is true with regard to the report issued by the Financial Crisis Inquiry Commission (FCIC) in 2011 on the causes of the financial crisis?

A) The majority laid much of the blame on the role of Fannie Mae and Freddie Mac.
B) The majority held the Community Reinvestment Act (CRA) primarily responsible for the crisis.
C) The majority concluded that Wall Street and its securitization of high-risk mortgages did not contribute significantly to the crisis.
D) The majority concluded that stronger regulation and more vigilant enforcement could have prevented the crisis.

Question 31

Bella, a depositor with Curio Bank, wishes to withdraw her funds. The bank ________.

A) is not obliged to pay Bella
B) must convince Bella to take out a loan in order to reap monthly savings
C) is required to pay Bella only a fraction of the amount originally deposited by her in order to keep the reserve requirement intact
D) must replace the funds with other deposits or reduce its loans after paying Bella

Question 32

The first New Deal legislation enacted was the ________.

A) Glass-Steagall Act of 1933
B) Consumer Protection Act of 2010
C) Securities Act of 1933
D) Securities Exchange Act of 1934

Question 33

Dissenters criticized the majority report issued by the Financial Crisis Inquiry Commission (FCIC) on the grounds that the majority ________.

A) unfairly blamed nontraditional mortgages as the essential cause of the crisis
B) failed to identify systematic breakdown in accountability and ethics as one of the essential causes of the crisis
C) unfairly blamed the credit bubble for the crisis
D) ignored evidence of a crisis in Europe at the same time as the one in the United States

Question 34

No tax credit was given under the Making Work Pay program.

Question 35

Which of the following forms a part of the principal conclusions reached by the majority of members of the Financial Crisis Inquiry Commission (FCIC) with regard to the causes of the financial crisis?

A) that there was no systematic breakdown in accountability and ethics
B) that the financial crisis was unavoidable
C) that the contribution of over-the-counter derivatives to the crisis was insignificant
D) that the failures of the credit rating agencies were essential cogs in the wheel of financial destruction

Question 36

Which of the following is true with regard to the securitization of mortgage loans?

A) The loans used to back the collateralized debt obligations (CDOs) have risks that cannot be diversified.
B) In the securitization of mortgages, diversification cannot be achieved by pooling mortgages for house purchases in different parts of the country.
C) The bank buying mortgage loans issues new securities referred to as collateralized debt obligations (CDOs).
D) In constructing collateralized debt obligations (CDOs), cash flows from the mortgages to the tranches reflect a spiral model.

Question 37

Which of the following serves as overseer of banks and managed the bailout of banks during the financial crisis?

A) the World Bank
B) the Federal Reserve Bank of New York
C) the International Monetary Fund
D) the Citigroup

Question 38

According to the dissenters, who criticized the majority report issued by the Financial Crisis Inquiry Commission (FCIC), ________ was one of the essential causes of the crisis.

A) traditional mortgages
B) widespread failures in financial regulation
C) breakdown in ethics
D) the fall in housing prices

Question 39

The Troubled Asset Relief Program (TARP) is administered by the Department of the Treasury.

Question 40

The ________ established the Federal Deposit Insurance Corporation (FDIC) to insure deposits in banks.

A) Glass-Steagall Act of 1933
B) Consumer Protection Act of 2010
C) Securities Act of 1933
D) Securities Exchange Act of 1934

Question 41

Which of the following is true of credit rating agencies?

A) The credit rating agencies were prompt in recognizing the riskiness of the mortgage-backed securities that were at the center of the financial crisis.
B) The credit rating agencies were widely criticized for failing to appreciate the risks associated with the collateralized debt instruments.
C) Credit rating agencies are government-owned companies.
D) The ratings issued by the credit rating agencies have always been accurate in their risk assessment.

Question 42

Which of the following is true with regard to the Obama administration's $787 billion economic stimulus program?

A) Most Americans benefitted from the stimulus as the employment rate reached a record high.
B) First-time homebuyers were denied tax credits under the program.
C) Income tax rates were not reduced under the program but withholding rates were.
D) No tax credit was given under the Making Work Pay program.

Question 43

The Basel Committee on Banking Supervision is an organization of 27 nations that ________.

A) created the Troubled Asset Relief Program in 2008
B) issued a 633-page report in 2011 blaming the dramatic failures of corporate governance and risk management for the financial crisis
C) sets capital requirements for banks
D) sets ethical standards for shadow banks

Question 44

The Consumer Financial Protection Bureau (CFPB) has authority over ________.

A) auto dealers
B) hot dog vendors
C) banks with assets under $8 billion
D) banks with assets over $10 billion

Question 45

As the severity of the crisis became clearer in 2008, the Bush administration and Congress created the ________, which was authorized with funding up to $700 billion to be used to shore up banks and stimulate the provision of credit to borrowers.

A) Making Homes Affordable Program
B) Making Work Pay Program
C) Affirmative Action Program
D) Troubled Asset Relief Program

Question 46

Three of the dissenters characterized the majority report issued by the Financial Crisis Inquiry Commission (FCIC) as a compilation of all the bad events that took place rather than as an explanation of the critical factors that caused the crisis. What were the essential causes of the crisis according to the dissenters?

Question 47

Write short notes on the Volcker rule.

Question 48

The structure of Wall Street compensation was criticized on the ground that ________.

A) the current cash bonus system discouraged risk-taking in the financial system
B) the compensation for bankers and traders on Wall Street included a nominal annual bonus
C) the current cash bonus system provided strong incentives for short-term performance but weak incentives for long-term performance
D) deferred incentive compensation with a higher base salary multiplied "material risk" on the bank

Question 49

The Volcker Rule was aimed at ________.

A) penalizing customers who defaulted on interest payments
B) increasing the regulation of credit card issuers
C) reducing speculative investments by banks
D) regulating credit rating agencies

Question 50

In the late 1990s the Basel Committee had lowered capital requirements in the ________ agreement, and after the financial crisis the focus in ________ was on raising capital requirements.

A) Basel I; Basel II
B) Basel II; Basel III
C) Basel III; Basel IV
D) Basel IV; Basel V

Question 51

Write short notes on credit card regulation.

Question 52

Which of the following is true with regard to the Dodd-Frank Act?

A) The Act made suing an agency for fraud easier by allowing investors to bring lawsuits against credit rating agencies that knowingly or recklessly failed to conduct a reasonable investigation of the rated security.
B) The Act dissolved the Office of Credit Ratings and relaxed internal controls by the credit rating agencies.
C) The Act restructured the ratings system.
D) The Act forced banks to separate their commercial banking and investment banking businesses.

Question 53

List the principal conclusions of the majority of members of The Financial Crisis Inquiry Commission (FCIC).

Question 54

State the purpose behind the establishment of the Federal Reserve System and briefly explain its function.

Question 55

Which of the following is true of TARP?

A) TARP was created by the Obama administration to stimulate the economy.
B) TARP was successful in preventing a collapse of the financial system.
C) TARP was authorized with funding up to $350 billion.
D) Most of the TARP funds provided to banks were not repaid.