Deck 15: Regulation of Financial Institutions

Question 1

In a clean bank purchase and assumption, the FDIC retains a "put" option to return bad loans to the acquiring bank.

Answer 1

False

Question 2

Federal deposit insurance has prevented widespread bank panics.

Answer 2

True

Question 3

Bank failures are now treated as a remote contingency at best.

Answer 3

False

Question 4

Safety and soundness regulations promote price competition among banks.

Question 5

Regulators have eliminated moral hazard in large bank and thrift firms.

Question 6

The FDIC generally prefers to just pay off depositors of a failed bank.

Question 7

The Federal Reserve System controls the money supply and is not a bank regulator.

Question 8

In a purchase and assumption, the acquiring bank assumes all deposits in the failed bank.

Question 9

The Office of the Comptroller of the Currency (OCC) is the oldest bank regulatory agency.

Question 10

The American public has determined that the market is an adequate regulator of banks.

Question 11

All state banking authorities have the power to charter banks.

Question 12

A "too big to fail" policy encourages small banks to take higher risks.

Question 13

Regional and industry recessions were and still are a major cause of bank failures.

Question 14

A role of the central bank is to provide liquidity and to prevent panic.

Question 15

Banks are regulated in part to protect the nation's money supply, much of which is a liability of the banking industry.

Question 16

Traditional level-premium deposit insurance encouraged excessive risk-taking.

Question 17

Private deposit insurance has not proven effective in preventing depositor panic.

Question 18

Bailout of large banks by federal regulators is an example of market discipline.

Question 19

The FDIC charters many state banks.

Question 20

The Glass Steagall restrictions separating investment and commercial banking were finally repealed in 1999 by Financial Services Modernization Act.

Question 21

While an individual bank's illiquidity may cause a bank ______, a general loss of faith in banks' ability to pay is called a _______.

A) loss; run
B) panic; run
C) run; panic
D) payoff; regulatory dialectic

Question 22

Regulations limiting risk taking of financial institutions are imposed because

A) the costs of regulation exceeds the benefits.
B) the private costs of failure exceed the social costs of failure.
C) the social costs of a general bank failure exceed the private costs to shareholders.
D) risk is harmful.

Question 23

All but one of the following has deposit insurance for its customers:

A) bank holding companies
B) credit unions
C) commercial banks
D) savings and loan associations

Question 24

The original purpose of deposit insurance was to

A) prevent bank runs by large depositors.
B) increase the regulatory monitoring of banks.
C) force the banks to invest in less risky investments.
D) prevent bank panics by insuring the small deposits of many people.

Question 25

The FDIC's use of purchase and assumption resolution of failed banks has resulted in de facto 100 percent deposit insurance because

A) all accounts up to $100,000 have been paid off by the FDIC.
B) the assuming bank assumes all deposits of the failed banks.
C) the assuming bank assumes all deposits up to $100,000.
D) the large accounts above $100,000 are assumed by the FDIC.

Question 26

Innovation around regulation followed by new regulation to offset the innovation is

A) moral hazard.
B) the innovation cycle.
C) the regulatory dialectic.
D) securitization.

Question 27

Bank capital is the most reliable cushion that prevents a decline in asset values from threatening the integrity of bank deposits.

Question 28

Regulations provide financial institutions certain benefits such as

A) reducing the chance of failure.
B) increasing the cost of funds.
C) increased labor cost to comply with regulations.
D) increased profit from the added compliance costs.

Question 29

In the United States, fixed premium charged for deposit insurance, regardless of risk that banks take, leads to a problem known as moral hazard.

Question 30

Which of the following is not a regulatory offset to the moral hazard of deposit insurance?

A) risk-based capital standards.
B) risk-based deposit insurance premiums.
C) truth-in-lending regulations.
D) safety and soundness examinations.

Question 31

The maximum amount of FDIC deposit insurance per eligible retirement account is

A) $25,000 b $50,000
C) $250,000
D) $150,000

Question 32

In a purchase and assumption of a failed bank, the ________ purchases the ________ of the failed bank and assumes its ________?

A) FDIC; charter; deposit liabilities
B) FDIC; assets; loan payments
C) assuming bank; deposits; assets
D) assuming bank; assets; deposit liabilities

Question 33

Deposit insurance with constant proportional premiums has

A) prevented bank failures.
B) created a moral hazard associated with increased risk assumption.
C) helped large banks at the expense of small banks.
D) charged increased premiums for increased risk.

Question 34

Which of the following has influenced U.S. banking structure?

A) concern for concentrated financial power
B) historical experience with bank failures and panics
C) states vs. federal authority
D) all of the above

Question 35

Insurance or a guarantee to cover losses may create a moral hazard

A) which is an increase in the chance that a random accident will occur.
B) which is an incentive to decreased risk-taking by the insured.
C) which is an incentive to increase risk-taking by the insurance authority.
D) which is an incentive to increase risk-taking by the insured.

Question 36

The Federal Reserve frequently changes reserve requirements for banks since the impacts of these changes is not big to risk taking behavior of banks.

Question 37

Most of the banks in the U.S. are _________ chartered, __________ of the Federal Reserve System and are insured by the _________.

A) state; members; FDIC-DIF
B) national; members; OCC-DIF
C) state; nonmember; FDIC-DIF
D) national; member; FRB-DIF

Question 38

The FDIC pays off on a failed bank. Assets are worth $100 million. Insured deposits total $60 million. Uninsured deposits and other unsecured liabilities total $80 million. What proportion of uninsured deposits will be recovered by depositors?

A) 60%
B) 50%
C) 40%
D) 100%

Question 39

All but one of the following is associated with bank failure:

A) banks hold illiquid assets and reserves that are but a fraction of total deposits.
B) assets may rise in value more quickly than liabilities when interest rates change.
C) excessive loan losses may erode net worth.
D) asset values fall below the value of liabilities.

Question 40

All but one of the following is a purpose of regulating financial institutions:

A) to provide stability of the money supply
B) to serve certain social objectives
C) to reduce barriers to entry
D) to offset the moral hazard incentives to protect the deposit insurance fund

Question 41

If the cost of an FDIC insurance payoff is $20 million and the cost of the financial assistance for a purchase and assumption is $15 million, the FDIC is likely to:

A) pay off depositors of the failed bank.
B) establish a Deposit Insurance National Bank.
C) ask Congress for assistance.
D) encourage a purchase and assumption of the failed bank by a healthy bank.

Question 42

If bank managers lobby to maintain America's traditional "dual banking" structure, they:

A) want an option of either federal or state bank chartering.
B) want to maintain the right to make loans and take deposits.
C) want the right to fight competition.
D) want the option of remaining a bank or a bank holding company.

Question 43

Federal deposit insurance has

A) prevented bank depositor panics, but not bank failures.
B) prevented bank panic and bank failures.
C) prevented bank failures, but not bank depositor panic.
D) not prevented bank depositor panics, but has eliminated bank failures.

Question 44

The purpose of a bank examination is to

A) verify the bank's financial statements according to generally accepted accounting principles.
B) maintain proper control of the bank by FDIC.
C) promote and safety, soundness, and compliance with regulations.
D) make sure the bank is not taking any risk.

Question 45

Which bank regulatory agency charters national banks?

A) the Comptroller of the Currency
B) the Federal Reserve
C) the FDIC
D) individual state agencies

Question 46

Private or state deposit insurance funds have not successfully prevented panic because

A) the size of the funds was more than enough to pay all depositors.
B) they overcharged the institutions on their premiums.
C) they did not have a "deep pocket" with unlimited borrowing power like Congress behind them.
D) the regulation of the depositors was not as restrictive as it should have been.

Question 47

In a purchase and assumption of a failed bank, an assuming bank may be required to invest funds for all but one of the following reasons:

A) acquire the sound assets of the failed bank
B) acquire the deposit liabilities
C) pay a premium for the intangible value of the bank
D) infuse sufficient cash to provide adequate capitalization.

Question 48

The moral hazard problem of federal deposit insurance is most associated with:

A) the competitiveness of financial services markets.
B) the incentives of managers.
C) the high salaries paid to managers.
D) the fear of loss by most depositors.

Question 49

Regulatory balance sheet restrictions are designed to

A) encourage high risk-taking by proper diversification.
B) limit proper diversification.
C) limit risk-taking and encourage diversification.
D) limit the size of depository institutions.

Question 50

Bank failures are considered to be more important to the economy because

A) failure of a single bank induces fear about the solvency of other banks.
B) they reduce the money supply in the economy.
C) a large number of people in a community lose their liquid wealth.
D) all of the above

Question 51

Financial institutions are regulated for the following reason(s):

A) they provide essential financial services to consumers and businesses.
B) there is a need to control the money supply.
C) government has promised to insure deposits.
D) all of the above

Question 52

The FDIC pays off on a failed bank. Assets are worth $100 million. Insured deposits total $60 million. Uninsured deposits and other unsecured liabilities total $80 million. What proportion of the stockholders' claim of $10 million will be realized in the FDIC payoff?

A) 0%
B) 10%
C) 50%
D) 100%

Question 53

The most significant cause of bank failure today is:

A) bank depositor panics.
B) economic recession.
C) insufficient bank regulation.
D) fraud, embezzlement, and poor management practices.

Question 54

Moral hazard incentives for undesirable manager behavior may have been created by

A) a "too big to fail" policy.
B) a flat proportional premium charge to banks and thrifts for deposit insurance.
C) regulatory accounting practices, which inflated capital ratios.
D) all of the above

Question 55

Which bank regulatory agency regulates bank holding companies?

A) the Comptroller of the Currency
B) the Federal Reserve System
C) the FDIC
D) individual state agencies

Question 56

Nonfederal deposit insurance arrangements have failed primarily because

A) not all banks participated.
B) the amount of the deposit funds were not adequate.
C) there was never a "deep pocket" backing such as the Federal Reserve System to prevent bank panics in the first place.
D) the FDIC worked hard to undermine the confidence in the nonfederal insurance arrangements.

Question 57

The experiences of the early 1930s taught bank regulators to respond to widespread economic panic with

A) restricted bank liquidity and increased bank capital requirements.
B) increased availability of liquidity and interbank guarantees of deposits.
C) increased availability of liquidity and federal guarantees for bank deposits.
D) restricted money supply and lowered interest rates.

Question 58

Most U.S. banking regulation focuses on

A) price control
B) consumer protection
C) safety and soundness
D) workplace safety

Question 59

All of the following are reasons to regulate depository institutions except:

A) To promote safety and soundness.
B) To affect the structure of banking.
C) To make sure bank capital ratios are competitive.
D) To protect the interest of consumers.

Question 60

The presence of moral hazard incentives

A) reduces the need for close regulatory supervision.
B) increases the need for more regulations, examinations, and regulators.
C) reduces the church attendance rate of bank managers.
D) increases the role of markets in disciplining excessive risk-taking.

Question 61

A bank holding company may, under the Financial Services Modernization Act, purchase an insurance underwriting subsidiary if:

A) the state insurance commissioner approves of the merger.
B) the bank holding company is well capitalized.
C) the bank holding company does business in the states where the insurance company is licensed.
D) the holding company applies to the Fed and becomes a financial holding company.

Question 62

Deposit insurance has a moral hazard associated with it because it offers an incentive by which of the following groups not to be concerned with how the bank is managed?

A) insured depositors
B) uninsured depositors
C) stockholders
D) subordinated creditors

Question 63

In 1999, the law that allows banks to affiliate with insurance companies and investment banks to form financial services conglomerates is

A) The Gramm-Leach-Bliley Act (Financial Services Modernization Act)
B) The National Banking Act
C) The Glass-Steagall Act
D) The Garn-St. Germain Act
E) The Riegle Neal Interstate Banking Act

Question 64

Which of the following regulators is also the lender of last resort?

A) FDIC
B) Office of Comptroller of Currency
C) Office of Thrift Supervision
D) Federal Reserve System

Question 65

A state-chartered bank which is not a member of the Federal Reserve System will never be examined by the

A) state banking authority
B) FDIC
C) OCC
D) Fed

Question 66

A major deposit insurance reform of 2005 was to

A) encourage S&Ls to convert their charters to commercial banks.
B) reduce deposit insurance premiums
C) merge BIF and SAIF into DIF
D) merge FDIC and NCUSIF

Question 67

The "market" disciplines banks for assuming excessive risk levels by

A) driving up deposit insurance premiums
B) denying job opportunities to managers who take risks
C) pricing nondeposit financial claims accordingly
D) refusing to demand loanable funds from risky banks

Question 68

All but one of the following is an example of safety and soundness regulation:

A) Consumer Credit Protection Act of 1968
B) Banking Act of 1933 (Glass-Steagall)
C) FDIC Improvement Act of 1991
D) FIRRE Act of 1989

Question 69

Most depository institutions are regulated in some way or to some extent by

A) the Fed
B) the FDIC
C) both of the above
D) none of the above

Question 70

If the regulated financial institutions are able to encourage their regulator to serve the industry's interest over the public's interest, what has occurred?

A) regulatory representation
B) regulatory capture
C) regulatory acquisition
D) regulator-regulated negotiation

Question 71

In a bank examination, the most important area of the CAMEL analysis is

A) bank capital.
B) liquidity.
C) asset quality.
D) management competency.

Question 72

In recent years, know-your-clients (KYC) is required by international financial regulators. In the U.S., what is the act that requires financial institutions to share information about customer identities with appropriate government agencies?

A) The USA Patriot Act
B) The Sarbanes-Oxley Act
C) The 9/11 Act
D) The U.S. Treasury Department Act
E) The Gramm-Leach-Bliley Act
ESSAY QUESTIONS

Question 73

In 1994, the law that allowed bank holding companies to acquire banks anywhere in the U.S. is:

A) The Glass-Steagall Act
B) The Federal Deposit Insurance Corporation Improvement Act
C) The Federal Reserve Act
D) The Riegle-Neal Interstate Banking and Branching Efficiency Act
E) The National Bank Act

Question 74

Explain why depository institutions are today the most regulated firms in the financial services industry.

Question 75

Why financial institutions are highly regulated in all countries?

A) Financial institutions are the major collectors of the public's savings.
B) Financial institutions have the power to create money.
C) Financial institutions provide businesses and individuals with loans that support consumption and investment spending.
D) Financial institutions assist governments in conducting economic policy, collecting taxes and dispensing government payments.
E) All of the above.

Question 76

A national bank is regulated in some way or to some extent by

A) the Fed
B) the OCC
C) the FDIC
D) all of the above

Question 77

An institutional arrangement in which federal and state authorities both have significant bank regulatory powers is referred to as:

A) Dual Banking System
B) Balance of Power
C) Federalism
D) Cooperative Regulation
E) Coordinated Control

Question 78

Although the FDIC does not charter depository financial institutions, it is said to have considerable influence in an institution's application for chartering because

A) the FDIC establishes the types of deposit accounts that financial institutions can offer.
B) the FDIC reviews all bank charter applications.
C) chartering criteria include eligibility for deposit insurance.
D) the FDIC advises the Fed as to which banks it should charter.

Question 79

Bank structure might be more competitive if:

A) bank charters were more difficult to obtain.
B) banks could establish branches in response to customer demographics rather than to political boundaries.
C) large bank mergers were encouraged.
D) bank holding companies were prohibited from entering nonbanking businesses.

Question 80

If FDIC tends to charge depository institutions less than the full cost of deposit insurance in its risk-based deposit premium system,

A) the banks will be upset with FDIC.
B) the risk-based premium system will adequately "tax" the excess risk returns of banks that have made risky investments.
C) the moral hazard associated with deposit insurance is still present.
D) the regulator will not have to worry about banks taking excessive risk.