Deck 16: Major Milestones in Banking Legislation and Regulatory Reform

Question 1

The major provisions of the FIRREA are

A)to create a new supervisory and regulatory structure for thrifts.
B)to make banks and thrifts more comparable in terms of capital standards.
C)to investigate the moral hazard issues due to the risk-insensitive deposit insurance pricing.
D)to provide an orderly liquidation of zombie institutions.
E)all of the above

Answer 1

E

Question 2

The purpose of the International Banking Act of 1978 was

A)to allow foreign banks to hold equity of U.S.firms.
B)to allow U.S.banks to expand overseas without being subject to U.S.bank regulation.
C)to impose capital and liquidity requirements on foreign banks operating in the U.S.comparable to those of the U.S.banks.
D)to allow U.S.banks to underwrite equity securities of foreign firms.
E)all of the above

Answer 2

C

Question 3

The Depository Institutions Deregulation and Monetary Control Act DIDMCA) of 1980

A)authorized banks to make mortgage loans.
B)subjected all insured banks to the Federal Reserve cash-asset reserve requirements.
C)authorized the Fed to put a ceiling on the time and savings deposits.
D)b and c
E)all of the above

Answer 3

B

Question 4

What would be the possible causes) of excessive risk taking and management fraud?

A)Improved information processing in economy
B)Low charter values of depository institutions.
C)Market value accounting.
D)Regulatory uncertainty which causes cost of capital to be high.
E)Risk-sensitive deposit insurance pricing.

Question 5

A commonly suggested cure to reduce excessive risk taking and management fraud is

A)Risk-insensitive deposit insurance pricing.
B)To make regulation more predictable.
C)The provision of greater resources for regulatory surveillance.
D)The international harmonization of capital standards.
E)None of the above

Question 6

One of the objectives of the DBDMCA is to allow banks to

A)pay interest on deposits.
B)expand geographically outside the home states,
C)merge more easily with foreign banks.
D)reduce the amount of cash-asset reserve requirements if they are not a member of the Fed.
E)offer investment banking products.

Question 7

The McFadden Act of 1927

A)established the Securities and Exchange Commissions.
B)prohibited commercial banks from engaging in investment banking activities.
C)restricted the powers of national banks to expand geographically,
D)established the Federal Reserve System to serve as the lender-of-the-last-resort.
E)authorized the dual banking system,

Question 8

The Financial Institutions Reform, Recovery, and Enforcement Act FIRREA) of 1989 was designed to

A)empower the Federal Reserve System to close failed thrifts.
B)empower the Federal Reserve System to improve the financial conditions of troubled thrifts.
C)empower the Office of Thrifts Supervision to punish the thrifts officer that violated the banking regulations.
D)address the deposit insurance problems and resolve the problems faced by insolvent thrifts.
E)all of the above

Question 9

The Federal Open Market Committee was charged with a responsibility

A)to determine the level of Federal Reserve Notes allowed to circulate.
B)to supervise and regulate national as well as state banks.
C)to establish a monetary base level and growth leading to a stable economic environment by engaging in an open market operation.
D)to establish the reserve requirements for banks.
E)to serve as the lender-of-the-last-resort.

Question 10

The Banking Act of 1933

A)established the Federal Deposit Insurance Corporation.
B)prohibited the payment of interest on demand deposits.
C)separated commercial banking from investment banking.
D)mandated ceilings on deposit interest rates,
E)all of the above

Question 11

What would be the possible causes) of excessive delays in bank closures?

A)Market value accounting.
B)Risk-insensitive deposit insurance pricing.
C)Reserve requirements.
D)Regulatory accounting principles.
E)Improved regulatory surveillance.

Question 12

A commonly suggested cure to reduce delays in bank closures is

A)Regulatory accounting principles.
B)Expanded powers for banks to enter the investment banking and insurance industries.
C)Higher capital standards.
D)Improved incentives for regulators.
E)The dismantling of branching restrictions.

Question 13

Which of the following factors can contribute to excessive risk taking by banks?

A)Higher capital standards.
B)Ineffective regulatory monitoring.
C)Risk-insensitive deposit insurance pricing.
D)all of the above
E)b and c

Question 14

Which of the following actions can be used to reduce excessive risk taking and managerial fraud?

A)Improving capital standards.
B)Risk-sensitive deposit insurance pricing.
C)Improving monitoring procedures and regulatory surveillance.
D)Restricting entry into banking.
E)all of the above

Question 15

The reasons that the deposit insurance system has failed is

A)it is federal and the premium is risk-insensitive.
B)it creates incentives for the regulators to delay closing troubled institutions.
C)it is undercapitalized.
D)all of the above
E)a and b

Question 16

The National Bank Act of 1864

A)established the Federal Reserve System as the central bank.
B)established the Office of the Comptroller of the Currency to charter and supervise national banks,
C)chartered the First Bank of the U.S.
D)chartered the Second Bank of the U.S.
E)established the Federal Deposit Insurance Corporation,

Question 17

With the Banking Act of 1935,

A)the Federal Reserve System was given more powers to regulate discount rates and change reserve requirements.
B)the OCC was given more discretion in the granting of national bank charters,
C)the SEC was given the powers to regulate national banks.
D)a and b
E)all of the above

Question 18

The Bank Holding Company Act of 1956 and the Douglas Amendment of 1970

A)gave the Fed control over the formation, expansion, and operation of multibank holding companies.
B)prohibited multibank holding companies from acquiring out-of-state banks.
C)strengthened the Fed's power and authority to charter national banks.
D)all of the above
E)a and b

Question 19

What would be the possible causes) of the declining competitiveness of U.S.banks?

A)Lack of talented managers.
B)Improved information processing in the economy and reduced value of banking services.
C)The dismantling of branching restrictions.
D)The low charter values of depository institutions.
E)all of the above

Question 20

The principal objective of the Garn-St.German Act of 1982 was

A)to regulate commercial banks to be more competitive with thrifts.
B)to provide thrifts with a flexibility to change their charter and to broaden their funding base.
C)to allow thrifts to sell or underwrite equity of foreign firms.
D)to provide thrifts with a power to branch out of state.
E)to allow foreign banks to compete more freely in the U.S.

Question 21

How does Title II of the Dodd-Frank Act help to reduce banking risk and improve financial stability?

Question 22

How can the information asymmetry between the banks and the regulators which cause the deposit insurance problems be reduced?

A)By requiring banks to use Regulatory Accounting Principles.
B)By designing a self-selection mechanism that allows banks to choose their most desired combinations of insurance premium and capital requirement.
C)By lowering the capital standards.
D)By reducing the reserve requirements.
E)a and c

Question 23

The Dodd-Frank Act of 2010 addresses systemic risk and financial stability by...

A)stipulating that the regulator should provide no monitoring at all and let the bank shareholders do the monitoring.
B)asking the regulators to jointly design an optimal monitoring scheme and a guarantee structure to achieve social welfare at a minimal total cost.
C)stipulating that the regulator should never bail out any failed banks and therefore there is no need for monitoring.
D)establishing the Financial Stability Oversight Council under Title I to identify systemically important financial institutions and monitor their risks.
E)all of the above

Question 24

How can eliminating the deposit contract itself by doing away with the sequential service constraint reduce the possibility of bank run?

A)The bank can issue dividend-paying) equity claims such as those issued by mutual funds and any withdrawal by investors would be commensurate with the fractional ownership in the fund so there is no advantage to be the first in the queue.
B)Without the deposit contract, the bank is an all-equity financed firm and therefore there is no risk of failure.
C)Without the deposit contract, the bank is not subject to bank regulation and therefore it does not have to worry about regulatory monitoring.
D)As long as the bank's shareholders don't have to share the bank's profits with other creditors, the bank shareholders need not run the bank to withdraw their investments.
E)none of the above

Question 25

What is the advantage of tying the ex post performance of the bank to the deposit insurance premia?

A)It eliminates the need for timely information and constant monitoring.
B)Disclosure and information processing requirements are more modest.
C)There is no need for regulatory monitoring.
D)all of the above
E)a and b

Question 26

What is the main argument in favor of expanding banking powers into insurance and securities underwriting?

A)There is no need of regulatory monitoring of banks as the discipline of the market will regulate them.
B)It will be easier to monitor and limit the bank risk taking behavior.
C)It can enhance the banks' charter values, and it is very difficult to separate these activities in practice.
D)It can reduce the tension and conflict of interest between the investment and commercial banks.
E)There is no need to maintain a capital standard which allows banks to be more competitive.

Question 27

The most important structural reform suggested by the UK Vickers Report of 2011 was that:

A)The Too-Big-To-Fail policy will be eliminated.
B)The risk-sensitive deposit insurance premia must be adopted and should also account for interest rate risk.
C)Insured brokered deposits can only be sold by the best-capitalized banks.
D)There be ring fencing to separate retail banking from wholesale and investment banking services

Question 28

After the 2007-09 financial crisis, what directive did the EU issue on deposit insurance?

Question 29

What is the advantage of narrow banking?

A)would limit taxpayer exposure.
B)avoids having to privatize deposit insurance.
C)there is no need for regulatory monitoring at all since banks can only invest in safe assets.
D)a and b
E)all of the above

Question 30

What is the disadvantage of discretionary regulation?

A)It clearly defines the scope of activities that the bank is not allowed to engage in which makes the bank less competitive relative to investment bank.
B)It increases the investors' required return on the bank's equity due to the regulatory uncertainty, which then raises the bank's cost of capital and reduces it global competitiveness.
C)It expands the scope of activities that the bank can engage in and therefore can make the bank more prone to failure.
D)It requires banks to maintain higher capital standards which then limits the banks' ability to compete in the global market
E)It eliminates the need to regulate the banks and this can be detrimental to the economy as a whole.

Question 31

The Capital Requirements Regulation adopted by the EU is a measure that:

A)attempts to mimic US bank regulation under Dodd-Frank.
B)tries to make European banks more competitive.
C)seeks to improve the efficiency of EU banks.
D)all of the above

Question 32

The idea that private deposit insurance can do a better job than a federal deposit insurance is

A)that the private sector is always better at dealing with competition than a public sector.
B)A program in which banks co-insure and monitor each other has better incentives for banks to avoid excessive risks.
C)that the banking industry should never have been regulated in the first place and since deposit insurance is already in place, it would be politically dangerous to not have a deposit insurance system.
D)that the private sector has a higher capacity to absorb losses in the banking industry than the government.
E)all of the above

Question 33

How can a discretionary regulation reduce moral hazard?

A)It requires banks to maintain higher standards such as capital ratios) which makes it costly for banks to pursue excessive risks.
B)It clearly defines the nature of risk and increases the span of regulation which makes any pursuit of risk heavily punishable.
C)It is ambiguous and the bank can never be sure if the regulator will come to its rescue and therefore it provides an incentive for the bank to pursue less risk.
D)It delegates the monitoring to several large shareholders of the bank and therefore tends to reduce the bank's risk taking behavior.
E)none of the above

Question 34

Reforming deposit insurance by eliminating it altogether and using a mark-to-market accounting can be advantageous in the sense that

A)the banking industry will not be prone to failure.
B)the regulators need only to monitor bank capital after all assets and liabilities are properly marked to market.
C)the banks can be quickly closed down when the capital is low but still positive.
D)a and b
E)b and c

Question 35

How can risk taking be reduced by tying ex post performance of the bank and the deposit insurance premia that it has to pay?

A)Insurance premium is fixed at some fraction of total deposits unless the bank's rate of return on equity in the preceding accounting period exceeds a prespecified threshold.
B)Insurance premium is fixed at some fraction of total deposits for those banks with a return on equity in the preceding accounting period greater than a prespecified threshold.
C)Insurance premium is fixed at some fraction of insured deposits and collected at the start of the period, but the insurer has the option to return that premium in exchange for a prespecified fraction of the bank's net income.
D)a and c
E)b and c

Question 36

The Vickers Report suggested that the loss-absorbing capacity of the UK banking system be improved by:

A)Raising the minimum capital requirements of retail banks to at least 10% of risk-weighted assets.
B)Subjecting banks and S&Ls to different capital rules.
C)Asking banks to report off-balance sheet items on financial statements and provide a disclosure of the fair market value to the extent possible.
D)Asking banks to provide a uniform disclosure of the terms and conditions of savings accounts.
E)All of the above

Question 37

Why is the adoption of the Market Value Accounting MVA) an attractive feature in the overall design of the deposit insurance reform?

A)MVA requires that all assets and liabilities be marked-to-market and therefore reflects the health of a financial institution better.
B)MVA can be used to assess how much risk a financial institution is taking and thus allows the regulator to properly implement the risk-based deposit insurance premia scheme.
C)MVA removes the necessity to regulate the banks since all risk is properly assessed by the market and fairly reflected on the balance sheet.
D)a and b
E)all of the above

Question 38

What issues can complicate the design of risk-sensitive deposit insurance scheme?

A)There are many types of risk that a depository institution is subject to.
B)Information asymmetry problem between the banks and the regulators.
C)Information asymmetry problem between the banks and their shareholders.
D)all of the above
E)a and b

Question 39

How can improving the incentives of bank executives restrain bank risk taking?

A)Compensate bank executives based on based on the long-run survival and performance.
B)Eliminate compensation features that reward failures, such as golden parachutes.
C)Reward the bank executives based on the accounting earnings.
D)a and b
E)all of the above

Question 40

Why do the regulators have an incentive to delay the closing of troubled financial institutions?

A)The regulators are self-interested agents of the taxpayers and are worried more about their tenure than the well being of their constituencies.
B)Closing down troubled institutions sends a signal that the industry is in trouble and that the regulators are slow to recognize the problems.
C)Closing down troubled institutions can damage the regulators' reputation and make it very difficult for them to get a new job.
D)all of the above
E)a and c

Question 41

The Dodd-Frank Act's scope covered:

A)Banks and other depository institutions
B)Over-the-counter derivative markets
C)Non-financial companies
D)Non-depository financial institutions
E)All of the above

Question 42

To increase the risk-absorption capacity of the EU banking system, the Liikanen Report suggests that:

A)Banks be allowed to pursue profitable trading opportunities.
B)The capital standards of EU banks be lowered.
C)Bail-in-debt be used by banks
D)all of the above
E)a and b