Deck 15: Regulation of Financial Institutions

Question 1

A role of the central bank is to act as a lender of last resort in a systemic crisis and to provide regulations that reduce the probability of a bank crisis.

Answer 1

True

Question 2

Systemic risk is the risk that a bank failure could imperil the entire economy.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Bailouts of large banks by federal regulators are an example of market discipline.

Question 5

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

Question 6

Safety and soundness regulations promote price competition among banks.

Question 7

The FDIC or the Federal Reserve must approve all state bank charters.

Question 8

The FDIC's Deposit Insurance Fund is required by law to hold reserves of at least 10% of insured deposits.

Question 9

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

Question 10

The term "bank contagion" refers to the possibility that one bank failure will cause a panic that leads to other bank failures.

Question 11

Federal deposit insurance has prevented widespread bank panics.

Question 12

All state banking authorities have the power to charter banks.

Question 13

A "too big to fail" policy encourages excessive risk taking at large banks.

Question 14

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

Question 15

Off balance sheet commitments are not considered in calculating bank capital requirements.

Question 16

New banking rules have now eliminated moral hazard in large bank and thrift firms.

Question 17

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

Question 18

Basel capital requirements apply only to U.S. banks.

Question 19

The FDIC generally prefers to just pay off depositors of a failed bank rather than have another bank purchase the failing institution.

Question 20

The Glass Steagall restrictions separating investment and commercial banking were finally repealed in 1999 by Financial Services Modernization Act.

Question 21

The Dodd-Frank Act required the FDIC to assess deposit insurance premiums to average consolidated total assets minus average tangible equity instead of on adjusted domestic deposits.

Question 22

The Federal Reserve frequently changes reserve requirements for banks since the impacts of these changes on the money supply are small.

Question 23

Redlining was first allowed under the Community Reinvestment Act of 1977.

Question 24

Describe three methods by which the FDIC may handle a failed bank. Which method do you believe is of most benefit to depositors? Which of these methods causes a moral hazard? Explain.

Question 25

Bank capital is a major safeguard against another financial crisis that might result from a decline in asset values.

Question 26

The Dodd-Frank Act of 2010 created the BCFP to help protect consumers from informational asymmetry problems in their financial transactions.

Question 27

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

Question 28

What is the main problem with all the additional regulations that came along with the Dodd-Frank Act and the increased capital requirements? Are they worth the cost? Explain.

Question 29

Under the Community Reinvestment Act, banks that cannot show that they have complied with the CRA requirements may be prohibited from merging, branching, or engaging in other new areas of business.

Question 30

What is a GSIB? Describe the moral hazard associated with these institutions. What is the main additional regulation on these banks?

Question 31

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

Question 32

The Fair and Accurate Credit Transactions (FACT) Act of 2003 was the first law to promote the accuracy, fairness, and privacy of personal information assembled by credit-reporting agencies.

Question 33

The Dodd-Frank Act of 2010 requires large banks to submit a plan to regulators called a living will that specifies how the bank could best be liquidated in the event of failure in order to limit taxpayer losses.