Deck 18: Bank Regulation

Question 1

In making loans to a single customer, commercial banks ____ restricted to a maximum percentage of their capital, and they ____ allowed to use borrowed or deposited funds to purchase common stock.

A)are; are
B)are; are not
C)are not; are
D)are not; are not

Answer 1

B

Question 2

The premiums banks pay to the FDIC for deposit insurance are

A)the same fixed dollar amount for all banks.
B)the same fixed percentage of the bank's deposits for all banks.
C)the same fixed percentage of the bank's loan volume for all banks.
D)based on the risk of the bank.

Answer 2

D

Question 3

National banks are regulated by ____, and state banks are regulated by ____.

A)the Comptroller of the Currency; their state agency
B)the Comptroller of the Currency; the Comptroller of the Currency
C)their state agency; their state agency
D)their state agency; the Comptroller of the Currency

Answer 3

A

Question 4

Which of the following is NOT a corrective action that regulators may take when a bank is identified as a problem bank?

A)remove particular officers and directors of the bank
B)request that the bank boost its capital level or delay its plans to expand
C)require the bank to provide additional financial information that is periodically updated to allow continued monitoring
D)take legal action against the bank if it does not comply with their suggested remedies
E)All of these are possible corrective actions taken by bank regulators.

Question 5

Deposit insurance has a limit of

A)$10,000.
B)$25,000.
C)$100,000.
D)$250,000.

Question 6

Which of the following is NOT a specific criterion that regulators use to monitor banks?

A)capital adequacy
B)dollar value of fixed assets
C)asset quality
D)earnings
E)sensitivity to financial market conditions

Question 7

A common argument in favor of government rescues of large banks is that rescues can

A)reduce systemic risk in the financial system.
B)encourage banks to avoid risk.
C)ensure that bank executives are properly compensated.
D)prevent the moral hazard problem.

Question 8

The Basel framework recommends that banks maintain capital in proportion to their

A)mortgages.
B)commercial paper.
C)liabilities.
D)risk-weighted assets.

Question 9

The liquidity component of the CAMELS rating refers to

A)how a bank's earnings would change if economic conditions change.
B)how readily a bank's management would detect its financial problems.
C)a bank's sensitivity to financial market conditions.
D)the type of loans that a bank provides, the bank's process for deciding whether to provide loans, and the credit rating of debt securities that it purchases.
E)whether a bank frequently needs to borrow from outside sources, such as the federal funds market.

Question 10

Banks commonly use depositor funds to invest in stocks.

Question 11

All banks that are members of the Federal Reserve must hold

A)private insurance on deposits.
B)FDIC insurance on deposits.
C)both FDIC and private insurance on deposits.
D)None of these are correct.

Question 12

The liquidity coverage ratio, which is measured under the Basel III guidelines, is the ratio of a bank's _________ to its ___________.

A)liquid assets; projected net cash outflow
B)liquid assets; retained earnings
C)Tier 1 capital; liquid assets
D)projected net cash outflow; Tier 1 capital

Question 13

Which of the following was NOT achieved by the Depository Institutions Deregulation and Monetary Control Act of 1980?

A)removed interest rate ceilings on deposits
B)allowed banks to offer NOW accounts
C)increased competition among depository institutions
D)allowed interstate banking for depository institutions in most states

Question 14

Which of the following is an "off-balance-sheet commitment"?

A)long-term debt
B)additional paid-in capital
C)notes payable
D)standby  letters of credit backing commercial paper issued by firms

Question 15

In general, a bank defines its value-at-risk as the estimated potential loss from its trading businesses that could result from adverse movements in market prices.

Question 16

The Glass-Steagall Act of 1933 prevented

A)any firm that accepts deposits from underwriting stocks and bonds of corporations.
B)any firm that accepts deposits from underwriting general obligation bonds of states and municipalities.
C)any firm that accepts deposits from holding any corporate bonds in its asset portfolio.
D)state-chartered banks from offering commercial loans.

Question 17

The Garn-St Germain Act of 1982

A)permitted depository institutions to offer money market deposit accounts.
B)prevented depository institutions from acquiring problem institutions across geographic boundaries.
C)required the Fed to explicitly charge depository institutions for its services.
D)allowed the Fed to provide check clearing to depository institutions at no charge.

Question 18

The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own

A)reserve requirements.
B)capital ratios.
C)interest rates on savings deposits.
D)corporate loan interest rates.

Question 19

The potential risk that financial problems can spread through financial institutions and the financial system is referred to as ________ risk.

A)systemic
B)systematic
C)unsystematic
D)market

Question 20

The opening of a commercial bank in the United States

A)does not require a charter.
B)always requires a charter from a state government.
C)always requires a charter from the federal government. ​
D)requires a charter from a state or the federal government.
E)requires a charter from both the state and federal government.

Question 21

____ is not a rating criterion used by bank regulators.

A)Capital adequacy
B)Savings deposit volume
C)Asset quality
D)Management
E)Liquidity

Question 22

The key reason for regulatory examinations (such as CAMELS ratings)is to

A)rate past performance.
B)detect problems of a bank in time to correct them.
C)check for embezzlement.
D)monitor reserve requirements.

Question 23

The Sarbanes-Oxley Act was enacted to make corporate managers, board members, and auditors more accountable for the accuracy of the financial statements that their respective firms provide.

Question 24

Federal deposit insurance

A)has existed since the 1800s.
B)was created in 1933.
C)was created after World War II.
D)was created in 1960.

Question 25

Which of the following statements is  NOT correct with respect to the Financial Services Modernization Act of 1999?

A)It expanded the Glass-Steagall Act.
B)It enabled commercial banks to more easily pursue securities and insurance activities.
C)It allowed securities firms and insurance companies to acquire banks.
D)It required commercial banks to have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities.
E)All of these are correct.

Question 26

Which banking act removed interest rate ceilings on deposits?

A)McFadden Act
B)Glass-Steagall Act
C)DIDMCA
D)Garn-St Germain Act

Question 27

During the credit crisis, the U.S. government's Troubled Asset Relief Program (TARP)injected capital into banks by purchasing their preferred stock to provide them with a cushion against loan losses.

Question 28

Some publicly traded banks have incurred larger reporting expenses as a result of having to comply with the Sarbanes-Oxley Act.

Question 29

A potential benefit of the Financial Services Modernization Act is that

A)financial institutions can reduce their reliance on the demand for a single service.
B)financial institutions can spread across state lines as a result of the act.
C)financial institutions are free to provide loans for highly leveraged transactions and thereby increase their earnings.
D)financial institutions can reduce their reliance on the demand for a single service AND  financial institutions can spread across state lines as a result of the act.

Question 30

Which banking act allowed banks to cross state lines in order to acquire a failing institution?

A)McFadden Act
B)Glass-Steagall Act
C)DIDMCA
D)Garn-St Germain Act

Question 31

The Financial Services Modernization Act of 1999

A)gave banks and other financial service firms less freedom to merge.
B)allowed financial institutions to offer a diversified set of financial services.
C)offered very few benefits to a financial institution's clients.
D)increased the reliance of financial institutions on the demand for the single service they offer.

Question 32

The moral hazard problem is minimized when deposit insurance premiums are

A)zero (not imposed by the FDIC).
B)the same for all banks.
C)set at a fixed rate for large banks and at zero for small banks.
D)based on the bank's risk.

Question 33

The act of taking on more risk because of protection from adverse consequences due to the risk is referred to as a moral hazard problem.

Question 34

The Sarbanes-Oxley Act (2002)was enacted in response to some banks taking on too much risk.

Question 35

____ is NOT a characteristic used by bank regulators to rate banks.

A)Capital adequacy
B)Current stock price
C)Asset quality
D)Management
E)All of these are used to rate banks.

Question 36

Deposit insurance now covers all bank deposits without any limit.

Question 37

Which banking act allowed for the creation of NOW accounts?

A)McFadden Act
B)Glass-Steagall Act
C)DIDMCA
D)Garn-St Germain Act

Question 38

The Sarbanes-Oxley Act (SOX)was enacted to ensure a more transparent process for reporting on a firm's productivity and financial condition.

Question 39

The ____ is the fund used to cover insured depositors.

A)Deposit Insurance Fund
B)Federal Deposit Insurance Corporation Fund
C)Bank Depository Insurance Fund
D)Financial Institution Insurance Fund
E)None of these are correct.

Question 40

Which banking act allowed interstate banking?

A)Reigle-Neal Interstate Banking and Branching Efficiency Act
B)Glass-Steagall Act
C)DIDMCA
D)Sarbanes-Oxley Act

Question 41

During the credit crisis, the U.S. government purchased the common stock of the largest banks in order to inject funds into the banks and cushion their losses.

Question 42

When a bank holds a lower level of capital, a given dollar level of profits represents a lower return on equity.

Question 43

The Basel III framework proposes

A)lower capital requirements for banks to enable them to generate higher earnings to make up for their losses during the credit crisis.
B)relying on the rating agencies to assess the risk of bank assets.
C)increased capital requirements and liquidity requirements for banks.
D)using the gap ratio to set the capital ratio.

Question 44

State banks are regulated by the Comptroller of the Currency.

Question 45

Shareholders and managers of banks may prefer that banks be required to hold higher levels of capital because this would allow for higher share prices for the banks and larger bonuses for bank managers.

Question 46

The Reigle-Neal Interstate Banking and Branching Efficiency Act allowed banks to achieve economies of scale through nationwide interstate banking.

Question 47

Which of the following was NOT a provision of the Financial Reform Act of 2010?

A)established the Financial Stability Oversight Council
B)put limits on banks' proprietary trading
C)established the Consumer Financial Protection Bureau
D)reestablished the separation between banking and securities activities that had existed under the Glass-Steagall Act
E)required derivative securities to be traded through a clearinghouse or exchange

Question 48

During the credit crisis, all of the following occurred EXCEPT

A)some securities firms were allowed to become bank holding companies.
B)the Federal Reserve rescued American International Group, an insurance company.
C)the Treasury injected funds into financial institutions.
D)the Supreme Court ruled that the Federal Reserve had exceeded its authority by assisting Bear Stearns because Bear was a securities firm and not a commercial bank.

Question 49

Banks that are insured by the Federal Deposit Insurance Corporation (FDIC)are also regulated by the FDIC.

Question 50

Bank regulations typically

A)involve a trade-off between the safety of the banking system and the efficiency of bank operations.
B)impose restrictions on the types of assets in which banks can invest.
C)set requirements for the minimum amount of capital that banks must hold.
D)All of these are correct.

Question 51

Regulators put much emphasis on a bank's sensitivity to interest rate movements, since many banks have liabilities that are repriced more frequently than their assets and are adversely affected by rising interest rates.

Question 52

A federal bank charter is issued by the

A)Comptroller of the Currency.
B)Securities and Exchange Commission.
C)U.S. Treasury.
D)Federal Reserve.
E)None of these are correct.

Question 53

The fair value accounting that is used to value a bank's assets for purposes of meeting capital requirements requires a bank to periodically "mark its assets to market."

Question 54

The Financial Reform Act (Wall Street Reform and Consumer Protection Act or Dodd-Frank Act)of 2010

A)ended the system of risk-based insurance premiums.
B)set requirements for the Deposit Insurance Fund's reserves.
C)raised the limit for insured deposits to $750,000 per depositor.
D)allowed large insurance companies such as American International Group to compete with the FDIC to insure bank deposits.

Question 55

The Volcker Rule, named for a former Fed chair

A)is intended to increase the powers of the Fed.
B)states that the U.S. government will rescue certain large banks if necessary to reduce systemic risk in the financial system.
C)sets limits on banks' proprietary trading.
D)requires all banks to undergo annual stress tests.

Question 56

A bank can increase its capital ratio by

A)buying back shares of its stock from shareholders.
B)selling assets.
C)increasing its dividend to encourage more investors to purchase its stock.
D)increasing its off-balance sheet activities.

Question 57

Commercial banks are allowed to invest in junk bonds.

Question 58

The Volcker Rule prohibits banks from sponsoring or holding an ownership interest in a hedge fund or a private equity fund.

Question 59

All state banks are required to be members of the Federal Reserve System.

Question 60

When a bank acts as an intermediary on an interest rate swap and guarantees payment in the event that one of the parties to the swap defaults, the bank is engaging in an off-balance sheet commitment.