Deck 15: The Regulation of Markets and Institutions

Question 1

"Insider trading" laws are meant to prevent

A) the executives of a corporation from holding a majority of its outstanding shares.
B) buying or selling shares based on information not available to the public.
C) foreign investors from gaining controlling interest in U.S. corporations.
D) the issuing of bonds for the purpose of buying stock.

Answer 1

B

Question 2

The __________ is a regulator of financial markets?

A) U.S. Treasury
B) SEC
C) FDIC
D) NCUA

Answer 2

B

Question 3

Which of the following is not a reason for regulation of U.S. financial markets?

A) Protection of individual investors
B) Disclosure of information about securities is the best way to safeguard investors
C) Full disclosure broadens investor's participation in the financial markets
D) The operation of financial markets requires government regulation if they are to be efficient in channeling funds from savers to borrowers.

Answer 3

D

Question 4

All issuers of publicly-traded securities must file an annual report on its financial condition with the SEC, called a __________ report.

A) 1040A
B) C311
C) 10K
D) G-109

Question 5

The __________ is a regulator of financial markets.

A) Comptroller of the Currency
B) Commodities Futures Trading Commission
C) FDIC
D) Federal Reserve

Question 6

Among the state nonmember banks, __________ have federal deposit insurance through the FDIC.

A) all
B) virtually all
C) a minority
D) none of them

Question 7

The "dual" nature of our banking system got its start in the

A) 1820s.
B) 1860s.
C) 1910s.
D) 1930s.

Question 8

The __________ is a regulator of intermediated markets?

A) SEC
B) Commodities Futures Trading Commission
C) NYSE
D) FDIC

Question 9

Must a corporation inform the SEC when it borrows from a commercial bank or through the private placements market?

A) Only from the private placements market
B) Only from the commercial bank
C) From both
D) From neither

Question 10

When the Federal Reserve was formed, state-chartered banks were __________ Fed member banks.

A) automatically made
B) required to become
C) given the option to become
D) not allowed to become

Question 11

An example of an "insider trading" law is that

A) no officer of a corporation is allowed to hold stock in that corporation.
B) an officer of a corporation must report to the SEC any buying or selling of stock in that corporation.
C) no dealer in domestic securities is allowed to handle foreign securities.
D) no more than 25 percent of the outstanding shares of a corporation may be held by the executives of that corporation.

Question 12

All __________ are required to be insured by the Federal Deposit Insurance Corporation.

A) commercial banks
B) savings banks
C) national banks
D) state banks that are not members of the Federal Reserve

Question 13

Our "dual" banking system refers to

A) commercial banks and thrifts.
B) federal and state chartering and supervision of commercial banks.
C) stockholder-ownership and depositor-ownership of depository institutions.
D) banks that are members and non-members of the Fed.

Question 14

State chartered banks were supposed to be driven out of business by the National Currency Act of 1863 and the National Banking Act of 1864 by

A) imposing a tax on their issuance of state bank notes.
B) prohibiting them from having interstate branches.
C) prohibiting them from paying interest on demand deposits.
D) regulating the amount of interest they could pay on savings accounts.

Question 15

Margin requirements on stocks are set by

A) the New York Stock Exchange.
B) the National Association of Securities Dealers.
C) the Federal Reserve System.
D) the Securities Exchange Commission.

Question 16

Today, __________ state banks are members of the Federal Reserve System.

A) all
B) most
C) a minority of
D) none of the

Question 17

When the Federal Reserve was formed, federally-chartered banks were __________ Fed member banks.

A) allowed to become
B) required to become
C) given the option to become
D) not allowed to become

Question 18

A major reason for regulating the financial sector is to facilitate __________ policy.

A) monetary
B) fiscal
C) antitrust
D) merger

Question 19

The __________ is a regulator of intermediated markets?

A) SEC
B) Commodities Futures Trading Commission
C) National Association of Securities Dealers
D) Comptroller of the Currency

Question 20

Which of the following does NOT appear on a prospectus?

A) The price of the securities being issued
B) The salaries of the borrowing firm's top executives
C) Audited financial statements of the borrower
D) An explanation of any unusual rights granted to stockholders

Question 21

Savings-and-loans are now federally insured through the

A) FDIC.
B) FSLIC.
C) NCUSIF.
D) Comptroller of the Currency.

Question 22

Savings-and-loans were originally federally insured through the

A) FDIC.
B) FSLIC.
C) NCUSIF.
D) Comptroller of the Currency.

Question 23

The current level of deposit insurance is

A) $100,000 per depositor.
B) $100,000 per deposit.
C) $200,000 per depositor.
D) $200,000 per deposit.

Question 24

Federal deposit insurance in the United States began in

A) 1864.
B) 1933.
C) 1968.
D) 1984.

Question 25

What was particularly significant about the failure of the Bank of New England in 1991?

A) It was the FDIC's first use of the purchase and assumption method.
B) It fell under the FDIC's "too big to fail" policy.
C) The FDIC had to delay bank liquidation due to lack of funds.
D) The FDIC began its policy of insuring checkable deposits fully.

Question 26

Deposit insurance has been __________ in achieving its goals of preventing runs and __________.

A) successful; protecting small investors
B) successful; protecting large investors
C) unsuccessful; protecting small investors
D) unsuccessful; protecting large investors

Question 27

For federally chartered banks, the "primary" federal regulator is the

A) Federal Reserve.
B) FDIC.
C) House Banking Committee.
D) Comptroller of the Currency.

Question 28

The existence of multiple federal bank regulatory authorities has been permitted to continue because

A) the regulators coordinate their activities well enough to avoid differences.
B) different types of banks require different kinds of regulation.
C) many regulatory authorities are necessary to insure the safety of depositor's funds.
D) the legislative will to replace the current regulatory system has been lacking.

Question 29

A bank run __________ possibly mushroom into a bank panic because the quality of a bank's portfolio of loans __________ made public information by bank examining agencies.

A) can; is
B) can; is not
C) cannot; is
D) cannot; is not

Question 30

Credit unions are federally insured through the

A) FDIC.
B) FSLIC.
C) NCUSIF.
D) Comptroller of the Currency.

Question 31

The FDIC handles most bank failures by the purchase and assumption method because

A) the existence of uninsured deposits (over $100,000) makes runs and panics possible.
B) it allows the FDIC to avoid paying off large deposits when a bank fails.
C) most banks have become too big for the FDIC to allow them to fail.
D) it allows the FDIC to write checks legally to pay all deposits, even those over $100,000.

Question 32

Among state member and national banks, __________ have federal deposit insurance through the FDIC.

A) all
B) virtually all
C) a minority
D) none of them

Question 33

It is estimated that approximately __________ percent of U.S. depositors have their deposits fully federally insured.

A) 25
B) 40
C) 70
D) 99

Question 34

For state nonmember banks, the "primary" federal regulator is the

A) Federal Reserve.
B) FDIC.
C) House Banking Committee.
D) Comptroller of the Currency.

Question 35

In bank regulation in the United States there is a strong emphasis on

A) maximizing depositor returns.
B) limiting depositor returns.
C) maximizing depositor risk.
D) limiting depositor risk.

Question 36

The regulator that determines the permissible activities any bank may engage in is the

A) Federal Reserve.
B) FDIC.
C) House Banking Committee.
D) Comptroller of the Currency.

Question 37

Banking regulation in the United States is strongly influenced by the large amount of __________ deposits and __________ assets banks hold.

A) time; illiquid
B) time; liquid
C) checkable; illiquid
D) checkable; liquid

Question 38

For state member banks, the "primary" federal regulator is the

A) Federal Reserve.
B) FDIC.
C) House Banking Committee.
D) Comptroller of the Currency.

Question 39

In the wake of the failure of __________ in 1984, the FDIC announced the "too big to fail" policy.

A) Mariners' Trust of Detroit
B) Manufacturers Hanover Bank
C) Silverado Savings-and-Loan
D) Continental Illinois Bank

Question 40

The FDIC handles most bank failures by the __________ method.

A) payoff
B) nationalization
C) purchase and assumption
D) share transfer

Question 41

Suppose a bank has total assets of $4,000,000,000, of which $1,000,000,000 are cash assets and government securities with a "risk weight" of 0% and $3,000,000,000 are loans with a risk weight of 50%. The bank has total deposits and other liabilities of $3,500,000,000. The bank's risk-based capital ratio is

A) 14.3%.
B) 25.0%.
C) 33.3%.
D) 37.5%.

Question 42

The __________ policy dealt with the problem of the consequences of identification of weak banks by changing the closure rule.

A) forbearance
B) setting of "firewalls"
C) prompt corrective action
D) risk-based capital ratio

Question 43

A "forbearance" policy in dealing with weak banks is opposed by the __________ policy.

A) prompt corrective action
B) too-big-to-fail
C) risk-based capital ratio
D) leverage ratio

Question 44

A bank has total assets of $3,000,000. Of these assets, $200,000 are cash and $300,000 are Treasury securities. Furthermore, the bank holds municipal revenue bonds of $600,000, residential mortgages of $1,000,000, and consumer and commercial loans of $900,000. This bank's risk-adjusted assets are

A) $3,000,000.
B) $1,900,000.
C) $1,250,000.
D) $1,070,000.

Question 45

The textbook states that in attacking moral hazard, having both risk-based capital requirements and risk-based deposit insurance premiums

A) is necessary, to deal with the problem from both sides of the bank's balance sheet.
B) is redundant and that one of the policies should be ended.
C) is necessary in order to deal with the moral hazard of both bankers and depositors.
D) may be redundant in theory but advisable in practice given the difficulty of measuring risk.

Question 46

The behavior of many savings-and-loans in the 1980s appears to be evidence __________ the existence of __________ problem in deposit insurance.

A) supporting; a moral hazard
B) supporting; an adverse selection
C) against; a moral hazard
D) against; an adverse selection

Question 47

The proposed Basel II capital adequacy rules

A) address the incentive banks have to switch from riskier to safer assets.
B) avoid the use of statistical rules by relying mostly on "common sense."
C) use highly theoretical measures of risk.
D) will likely be adopted initially to a handful of large banks with significant international exposure.

Question 48

The minimum-leverage-ratio approach to capital adequacy requirements

A) has been dominant since the 1930s.
B) was phased out in the 1990s.
C) was adopted in the 1990s.
D) has never been implemented.

Question 49

A bank has total assets of $3,000,000. Of these assets, $200,000 are cash and $300,000 are Treasury securities. Furthermore, the bank holds municipal revenue bonds of $600,000, residential mortgages of $1,000,000, and consumer and commercial loans of $900,000. The bank has capital of $100,000. This bank's risk-adjusted capital ratio is

A) 9.3%.
B) 4.0%.
C) 3.3%.
D) 8.0%.

Question 50

The problem of moral hazard that resulted from federal deposit insurance can be attributed to all of the following except

A) depositors have little incentive to monitor their bank.
B) deposit premiums until recently did not depend on risk.
C) risk aversion by managers of banks plus bank examination.
D) the incentive of bank stockholders to increase risk because they share disproportionately in success but the FDIC shares disproportionately in failure.

Question 51

The large number of bank failures in the 1980s compared to the number of failures in earlier decades appears to be evidence __________ the existence of __________ problem in deposit insurance.

A) supporting; a moral hazard
B) supporting; an adverse selection
C) against; a moral hazard
D) against; an adverse selection

Question 52

Under the PCA guidelines, the FDIC must start closure proceedings on a bank once its leverage ratio falls below __________ percent.

A) 0
B) 2
C) 5
D) 10

Question 53

Suppose a bank has total assets of $3,000,000,000 and total deposits and other liabilities of $2,800,000,000. The bank's leverage ratio is

A) 6.7%.
B) 7.1%.
C) 5.6%.
D) 93.3%.

Question 54

Suppose a bank has total assets of $4,000,000,000 and total deposits and other liabilities of $3,500,000,000. The bank's leverage ratio is

A) 11.2%.
B) 12.5%.
C) 14.3%.
D) 87.5%.

Question 55

The larger the leverage ratio of a bank,

A) the greater the proportion of its deposits that are fully insured.
B) the smaller the proportion of its deposits that are fully insured.
C) the thicker its cushion against failure.
D) the thinner its cushion against failure.

Question 56

Risk-based deposit insurance premiums have recently been __________ and this is expected to __________ the moral hazard problem of deposit insurance.

A) abolished; alleviate
B) abolished; worsen
C) established; alleviate
D) established; worsen

Question 57

As a bank's assets become less risky, its

A) risk-based capital ratio rises.
B) risk-based capital ratio falls.
C) leverage ratio rises.
D) leverage ratio falls.

Question 58

A bank has total assets of $2,000,000 and capital of $150,000. The bank's leverage ratio is

A) 20%.
B) 15%.
C) 7.5%.
D) None of the above.

Question 59

There is __________ problem with deposit insurance as the insurer shares disproportionately in the __________ risk of banking.

A) an adverse selection; upside
B) an adverse selection; downside
C) a moral hazard; upside
D) a moral hazard; downside

Question 60

Suppose a bank has total assets of $3,000,000,000, of which $1,000,000,000 are cash assets and government securities with a "risk weight" of 0% and $2,000,000,000 are loans with a risk weight of 50%. The bank has total deposits and other liabilities of $2,800,000,000. The bank's risk-based capital ratio is

A) 6.7%.
B) 20.0%.
C) 33.3%.
D) 50%.

Question 61

This basic pattern emerges in the United States: financial institutions are more heavily regulated

A) the smaller is their typical contributor.
B) the larger is their typical contributor.
C) the riskier are their assets.
D) the larger they are in total asset size.

Question 62

Behind the Glass-Steagall Act was the feeling that __________ is too risky for commercial banks.

A) underwriting corporate securities
B) competing to pay high deposit rates
C) making business mortgage loans
D) interstate branching

Question 63

"Universal banking" can lower the risk of participating financial institutions if

A) there is high correlation in the returns of the permitted activities.
B) there is low correlation in the returns of the permitted activities.
C) there are firewalls between all the permitted activities.
D) none of the customers of the institution are federally insured.

Question 64

In the 1960s, banks started __________ in order to maneuver around the Glass-Steagall act.

A) opening foreign branches
B) using Section 20 affiliates
C) forming one-bank holding companies
D) dropping Federal Reserve membership

Question 65

The Glass-Steagall Act became law in the

A) 1890s.
B) 1910s.
C) 1930s.
D) 1950s.

Question 66

The Glass-Steagall Act forbids banks from owning

A) municipal bonds.
B) corporate stock.
C) home mortgages.
D) bonds issued by foreign governments.

Question 67

The smaller the typical depositor at a financial institution, the __________ likely that some of the institution's deposits are federally insured and thus the __________ heavily that institution tends to be regulated.

A) less; less
B) less; more
C) more; less
D) more; more

Question 68

Combining commercial banking and investment banking in the same organization produces a risk for that organization

A) that must be above that of investment banking.
B) that is the same as investment banking, the riskier of the two activities.
C) somewhere in between the risk of the two activities.
D) that may be below that of commercial banking.

Question 69

The Gramm-Leach-Bliley Act

A) has allowed affiliates of financial holding companies to engage in commercial and investment banking.
B) provides for the regulation of holding company affiliates by functional supervisors such as the SEC.
C) designates the Federal Reserve as the "umbrella" regulator.
D) All of the above.

Question 70

In order to manage risk of failure and protect guarantors, the Employee Retirement income Security Act (ERISA)established all of the following requirements on pension funds except for minimum

A) disclosure of information.
B) reporting requirements
C) investment standards.
D) risk-based capital requirements.

Question 71

The motivation behind mutual fund regulation is protection of individual investors through

A) risk-based capital requirements.
B) full financial disclosure.
C) insurance of investors accounts.
D) performance of periodic audits by the SEC.