Deck 18: Bank Regulation

Question 1

All Fed member banks must hold

A)private insurance on deposits.
B)FDIC insurance on deposits.
C)both FDIC and private insurance on deposits.
D)none of the above

Answer 1

B

Question 2

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 geographical 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.

Answer 2

A

Question 3

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.

Answer 3

D

Question 4

Commercial banks ____ restricted to a maximum percentage of their capital to loan to a single customer, and ____ 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

Question 5

Banks commonly use depositor funds to invest in stocks.

Question 6

Which of the following is not a specific criterion the FDIC uses 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

Commercial banks that are not members of the Federal Reserve System ____ borrow from the Fed, and ____ subject to the Fed's reserve requirements.

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

Question 8

Which of the following statements is incorrect?

A)Many banks have expanded across the country in recent years.
B)Bank regulation is needed to protect customers who supply funds to the banking system.
C)Bank regulators have attempted to manage the speed of integration between banks and other financial service firms.
D)Regulators have shifted the risk assessment to the individual small depositors.

Question 9

The specified amount of deposits per person insured by the FDIC is $____ today.

A)50,000
B)100,000
C)10,000
D)200,000

Question 10

Which of the following is not a main deregulatory provision of Depository Institutions Deregulation and Monetary Control Act of 1980?

A)phase-out of deposit rate ceilings
B)allowance of checkable deposits for all depository institutions
C)new lending flexibility of depository institutions
D)allowance of interstate banking for depository institutions in most states

Question 11

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 12

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

Question 13

An "off-balance-sheet commitment" that provides the bank's guarantee on the financial obligations of a borrower to a specific party is a

A)standby letter of credit.
B)federal funds agreement.
C)repurchase agreement.
D)discount window agreement.

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)guarantees on interest rate swaps

Question 15

The Depository Institutions Deregulation and Monetary Control Act of 1980

A)allowed S&Ls to offer the same conventional demand deposits that commercial banks offer.
B)removed all restrictions on commercial loans by S&Ls.
C)removed all restrictions on consumer loans by S&Ls.
D)required the Fed to offer check clearing services to any depository institutions that desire them.

Question 16

The Basel Accord

A)forces banks with greater risk to maintain more deposits.
B)forces banks with greater risk to maintain more capital.
C)forces banks with greater risk to maintain less capital.
D)none of the above

Question 17

Which of the following statements is incorrect?

A)The Basel Accord based capital requirements on a bank's risk level.
B)The Basel Accord forced banks with greater risk to maintain a higher level of capital.
C)The goal of the Basel II Accord is to properly account for a bank's risk so that the bank's capital requirements are in line with its corresponding risk.
D)The Basel II Accord will explicitly account for interest rate risk.

Question 18

Regulation Q limited

A)consumer loan interest rates.
B)"off-balance-sheet commitments."
C)interest rates on savings deposits.
D)corporate loan interest rates.

Question 19

Which of the following statements is incorrect?

A)The validity of a bank's estimated VAR is assessed with backtests in which the actual daily trading gains or losses are compared to the estimated VAR over a particular period.
B)Some banks supplement the VAR estimate with stress tests.
C)In general, the VAR model does not lend itself to determine capital requirements.
D)All of the statements above are correct.

Question 20

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

Question 21

Generally, the failure of small banks

A)causes more widespread concern about the safety of the banking system than the failure of large banks.
B)causes equal concern about the safety of the banking system as the failure of large banks.
C)causes less concern about the safety of the banking system than the failure of large banks.
D)Either A or B can be true, depending on the type of business cycle that exists while the failures occur.

Question 22

Bank A has a 10 percent capital ratio and uses a significant proportion of its assets to invest in very highly-rated bonds.Bank B has an 12 percent capital ratio and uses a significant proportion of its assets to invest in highly leveraged transactions.How would Bank A be rated versus Bank B using the capital and asset quality criteria?

A)Bank A is perceived as safer by both criteria.
B)Bank B is perceived as safer by both criteria.
C)Bank A is perceived as safer according to capital, but more risky according to asset quality.
D)Bank B is perceived as safer according to capital, but more risky according to asset quality.

Question 23

The fee banks pay to the FDIC for deposit insurance is now

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

Question 24

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 25

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 26

The ____ is the fund used to cover insured depositors.

A)Bank Insurance Fund
B)Federal Deposit Insurance Corporation (FDIC)
C)money market mutual fund
D)growth fund
E)none of the above

Question 27

When the Continental Illinois Bank problem became widely publicized, regulators guaranteed all deposits of all banks.

Question 28

The McFadden Act restricted banks from

A)branching within a city.
B)interstate branching.
C)intrastate banking.
D)A and C

Question 29

The moral hazard problem is minimized when deposit insurance premiums are

A)zero (not imposed by the FDIC).
B)the same percentage of assets for all banks.
C)set at a fixed percentage of assets for large banks, and is zero for small banks.
D)set at a percentage of assets that is based on the bank's risk level.

Question 30

Which banking act phased out deposit rate ceilings?

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

Question 31

The specified maximum deposit amount per depositor of a single bank insured by the FDIC is currently ____.

A)$25,000
B)$40,000
C)$50,000
D)$100,000

Question 32

The McFadden Act was applicable to banks

A)in states where no branching was allowed.
B)only in limited branching states.
C)only in statewide branching states.
D)in all states, regardless of their intrastate branching status.

Question 33

Which banking act increased FDIC insurance up to $100,000?

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

Question 34

Which banking act prevented interstate banking?

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

Question 35

Federal deposit insurance

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

Question 36

____ is not a rating criterion used by the FDIC.

A)Capital adequacy
B)Off-balance sheet financing
C)Asset quality
D)Management
E)Liquidity

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 argument that interstate banking would allow banks to grow and more fully achieve a reduction in operating costs per unit of output as output increases is based on

A)economies of scale.
B)financial leverage.
C)diseconomies of scale.
D)capital adequacy theory.

Question 39

Which of the following was not a provision of DIDMCA?

A)the phase-out of deposit rate ceilings
B)the allowance of checkable deposits for all depository institutions
C)the permission of depository institutions to offer money market deposit accounts (MMDAs)
D)new lending flexibility for depository institutions
E)all of the above were provisions of DIDMCA

Question 40

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 41

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

Question 42

As a result of the Reigle-Neal Act, bank customers have benefited because of lower costs to banks and because of convenience.

Question 43

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

Question 44

If regulators reduce bank failures by imposing regulations that reduce competition, bank efficiency will be increased.

Question 45

Which of the following is not true regarding the Financial Services Modernization Act of 1999?

A)It provided more momentum for the consolidation of financial services.
B)Financial institutions were finally able to offer a diversified set of financial services without being subjected to stringent constraints on the form or amount of financial services that they could offer.
C)Banks and other financial service firms were given more freedom to merge, but were forced to divest some of the financial services that they acquired.
D)Financial institutions no longer had to search for loopholes or monitor their business to ensure that the degree of financial services offered remained within the regulatory constraints that were previously imposed.
E)all of the above are true

Question 46

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 without being subjected to stringent constraints.
C)offers 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 47

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 the above

Question 48

An ideal solution to react to a large failing bank would prevent a run on deposits of other large banks, yet not reward a poorly performing bank with a bailout.

Question 49

The International Banking Act of 1978

A)restricted U.S.banks from accepting deposits across state lines.
B)had a slightly negative effect on stock returns of money center banks competing with foreign banks.
C)permitted foreign-owned banks to accept deposits across state lines without establishing Edge Act corporations.
D)required each foreign-owned bank to identify one state in the United States as its home state.

Question 50

The uniform global capital requirements mandated a minimum level of Tier 1 capital, which primarily consists of funds obtained from

A)issuing commercial paper and bonds.
B)retaining earnings and issuing commercial paper.
C)retaining earnings and issuing common stock.
D)issuing bonds and common stock.

Question 51

Commercial banks are allowed to invest in junk bonds.

Question 52

State banks are regulated by the Comptroller of the Currency.

Question 53

____ is not a rating criterion used by the Federal Deposit Insurance Corporation (FDIC).

A)Capital adequacy
B)Off-balance sheet financing
C)Asset quality
D)Management
E)Liquidity

Question 54

In general, banks would prefer to maintain a high amount of capital to boost their return on equity ratio, yet regulators have argued that banks need only a sufficient amount of capital to absorb potential operating losses.

Question 55

The provision of a letter of credit by a bank to issue commercial paper issued by a corporation is an example of an off-balance sheet commitment.

Question 56

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

Question 57

Publicly-traded banks have incurred larger reporting expenses to comply with the Sarbanes-Oxley Act.

Question 58

There is much emphasis by regulators on the 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 59

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

Question 60

The Sarbanes-Oxley Act (SOX) was enacted in 2002 in order to ensure a more transparent process for reporting on productivity and the financial condition of the firm.

Question 61

Which of the following is not a corrective action taken by regulators when a bank is identified as a problem bank?

A)Regulators may examine such banks frequently and thoroughly.
B)Regulators may request that a bank boost its capital level or delay its plans to expand.
C)Regulators can require that additional financial information be periodically updated to allow continued monitoring.
D)Regulators have the authority to take legal action against a problem bank if the bank does not comply with their suggested remedies.
E)All of the above are possible corrective actions taken by bank regulators.

Question 62

Which of the following statements is incorrect with respect to the Financial Services Modernization Act of 1999?

A)It complemented the Glass-Steagall Act.
B)It enabled commercial banks to more easily pursue securities and insurance activities.
C)It gave securities firms and insurance companies the right to acquire banks.
D)The Act requires that commercial banks must have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities.
E)All of the above are true.

Question 63

Which of the following statements is not true with respect to the proposed Basel II Accord?

A)Basel II provides an incentive for banks to reduce their operational risk.
B)The Accord provides for an alternative method of calculating credit risk in the form of the internal ratings-based (IRB) approach.
C)Basel II should encourage banks to use more aggressive management.
D)The Basel Committee defines operational risk as the risk of losses resulting from inadequate or failed internal processes or systems.

Question 64

____ is not a characteristics used by the Federal Deposit Insurance Corporation (FDIC) to rate banks.

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

Question 65

The liquidity component of the CAMELS rating refers to

A)regulators' concern about how a bank's earnings would change if economic conditions change.
B)how well the bank's management would detect its own financial problems.
C)a bank's sensitivity to financial market conditions.
D)monitoring the type of loans that are given, the bank's process for deciding whether to provide loans, and the credit rating of debt securities that it purchases.
E)excessive borrowing by banks from outside sources, such as the discount window.