Deck 11: The Economics of Financial Regulation

Question 1

One of the policy mistakes after the stock market crash starting in 1929 that worsened the Great Depression was the lowering of tariffs.

Answer 1

False

Question 2

Hugo Chavez has taken control of energy production in Venezuela. This development is unsurprising to those believe the private interest model is closer to reality.

Answer 2

True

Question 3

The FDICIA shut down the FSLIC, which engaged in regulatory forbearance during the S&L crisis.

Answer 3

False

Question 4

One of the policy mistakes after the stock market crash starting in 1929 that worsened the Great Depression was the raising of interest rates.

Question 5

The FIRREA provided funds to bail out the S&L industry.

Question 6

Canada's regulatory structure allowed its banking industry to avoid major problems during the financial crisis of 2008. This development is unsurprising to those who believe the private interest model is closer to reality.

Question 7

Deposit brokers help to circumvent the reserve requirement.

Question 8

Tightening regulations on traditional banks was a major cause of the S&L crisis.

Question 9

According to the public interest model, government tries to enact laws, regulations, and policies that benefit the public.

Question 10

Regulatory capture tends to eliminate regulatory forbearance.

Question 11

The Basel accords put more emphasis on assessing the risk of assets.

Question 12

The FDICIA requires that regulators deal with insolvent banks using the least costly method.

Question 13

Regulatory forbearance was a problem during the S&L crisis.

Question 14

The FDICIA eliminated the "too-big-to-fail" policy.

Question 15

The public interest model tends to favor easing regulations.

Question 16

Regulatory capture is an idea that fits well with the private interest model.

Question 17

Basel recommendations are not binding on regulators.

Question 18

The private interest model states that politicians, bureaucrats, and other government workers are more motivated by self-interest instead of serving the public.

Question 19

The FIRREA weakened the "too-big-to-fail" policy.

Question 20

During the Great Depression, the Federal Reserve was not aggressive enough in raising the money supply.

Question 21

Barth, Caprio and Levine argue that financial regulators need to spend more time assessing the risk of bank assets.

Question 22

In the early stages of the Great Depression, the Federal Reserve failed to act as a lender of last resort to the banking system and thereby contributed to the severity of the depression.

Question 23

Which of the following contributed to falling profits for banks in the 1970s and early 1980s?

A) regulatory forbearance
B) high inflation
C) low capital levels
D) all of the above

Question 24

Which of the following contributed to the S&L crisis in the 1980s?

A) falling real interest rates around 1980
B) restrictions on the types of deposits at S&Ls
C) regulatory forbearance
D) all of the above

Question 25

Which of the following contributed to the S&L crisis in the 1980s?

A) the Great Depression
B) regulatory restrictions on assets
C) regulatory forbearance
D) all of the above

Question 26

Which of the following were factors exacerbating the Great Depression?

A) deposit insurance
B) higher interest rates
C) falling productivity
D) all of the above

Question 27

The Riegle-Neale legislation legalized interstate banking.

Question 28

The C in CAMELS stands for credit risk.

Question 29

Which of the following contributed to the S&L crisis in the 1980s?

A) rising real interest rates around 1980
B) S&L involvement in commercial real estate
C) regulatory forbearance
D) all of the above

Question 30

The S in CAMELS stands for sensitivity to market risk.

Question 31

The Gramm-Leach-Bliley legislation outlawed interstate banking.

Question 32

The Glass-Steagall Act was a key part of the stabilization of the financial sector during the Great Depression.

Question 33

The Gramm-Leach-Bliley legislation overturned Glass-Steagall.

Question 34

According to Barth, Caprio, and Levine, regulators ought to think of ways of helping financial markets, particularly bank debt and equity holders, to monitor banks.

Question 35

Which of the following are recommendations for banking regulation of the Basel accords?

A) Assess the risk of different assets.
B) Raise the importance of the leverage ratio.
C) Allow switching of accounting techniques in a crisis.
D) all of the above

Question 36

Insolvent banks that are allowed to continue to operate tend to take on more risk.

Question 37

The Basel accords provide extra guards against bank runs.

Question 38

Barth, Caprio and Levine argue that financial markets and depositors do a better job of assessing the risk of banks than regulators do.

Question 39

Which of the following contributed to falling profits for banks in the 1970s and early 1980s?

A) Regulation Q
B) high inflation
C) competition from mutual funds
D) all of the above

Question 40

Which of the following contributed to the S&L crisis in the 1980s?

A) the Great Inflation
B) Regulation Q
C) risky lending by S&Ls
D) all of the above

Question 41

The private interest model focuses on the asymmetric information problem between

A) banks and regulators.
B) regulators and politicians.
C) politicians and the public.
D) all of the above.

Question 42

Scholars like Barth, Caprio and Levine argue that regulators should focus on improving the _____ of financial institutions.

A) liquidity
B) transparency
C) capital adequacy
D) none of the above

Question 43

Which of the following pieces of legislation is intended to help with the asymmetric information problems between regulators and banks?

A) Riegle-Neale
B) FIRREA
C) FDICIA
D) all of the above

Question 44

The FDIC was created in response to

A) bank runs.
B) zombie S&Ls.
C) the stock market crash.
D) WWII.

Question 45

Which of the following pieces of legislation made interstate banking legal?

A) Riegle-Neale
B) FIRREA
C) Gramm-Leach-Bliley
D) none of the above

Question 46

Off-balance sheet activities worsen the asymmetric information problem between

A) banks and regulators.
B) regulators and politicians.
C) politicians and the public.
D) none of the above.

Question 47

According to Barth, Caprio, and Levine:

A) Regulators ought to think of ways of helping financial markets monitor banks.
B) Regulators should improve how they screen new bank applicants.
C) both a and b
D) none of the above

Question 48

Which of the following pieces of legislation eased the barriers between banks and insurance companies?

A) Glass-Steagall
B) FIRREA
C) FDICIA
D) none of the above

Question 49

The Gramm-Leach Bliley legislation overturned

A) the McFadden Act.
B) the Glass-Steagall legislation.
C) the Riegle-Neale Act.
D) all of the above.

Question 50

TBTF policy states that:

A) regulators will not allow an institution to fail because to do would be too disruptive to the financial system.
B) some institutions have such large reserves that they cannot fail.
C) large institutions are inherently less likely to fail.
D) none of the above

Question 51

The most beneficial government reaction to the Great Depression was

A) lowering interest rates.
B) raising tariffs.
C) creating the FDIC.
D) raising the reserve requirement.

Question 52

Which of the following provided the funds to bail out or close down the failed institutions of the S&K crisis?

A) Glass-Steagall
B) FIRREA
C) FDICIA
D) none of the above

Question 53

The FDIC is intended to alleviate asymmetric information problems between

A) banks and the public.
B) regulators and banks.
C) politicians and regulators.
D) the public and politicians.

Question 54

The FDICIA helps solve the moral hazard problem between

A) banks and the public.
B) regulators and banks.
C) politicians and regulators.
D) the public and politicians.

Question 55

Basel II's third pillar refers to

A) judging asset quality.
B) financial market marketing.
C) leverage ratio calculation.
D) none of the above.

Question 56

The most beneficial government reaction to the Great Depression was

A) raising interest rates.
B) lowering tariffs.
C) raising the reserve requirement.
D) none of the above

Question 57

The "too big to fail" policy exacerbates the moral hazard problem between

A) banks and borrowers.
B) regulators and banks.
C) politicians and regulators.
D) the public and politicians.

Question 58

Which of the following reduces the incentive for consumers to monitor the liquidity of banks?

A) online banking
B) SWAPs
C) brokered deposits
D) all of the above

Question 59

Which of the following are part of CAMELS?

A) earnings
B) management
C) sensitivity to market risk
D) all of the above

Question 60

Basel II gave more sophisticated guidelines for judging _____ than Basel I.

A) asset quality
B) capital adequacy
C) liquidity
D) all of the above

Question 61

The FDICIA helped to solve a moral hazard problem between regulators and banks. Explain.

Question 62

Why does the FDICIA limit interest on deposits for significantly undercapitalized banks?

Question 63

What does CAMELS stand for?

Question 64

How did the FDICIA affect investment banks?

Question 65

Explain how regulatory forbearance negatively impacted the financial system.

Question 66

How would the private interest model explain the behavior of regulators during the S&L crisis?

Question 67

What did the Riegle-Neale Act legalize?

Question 68

What was the primary beneficial action the government took to help financial markets during the Great Depression?

Question 69

What is a zombie S&L?

Question 70

How did regulatory forbearance during the S&L crisis worsen moral hazard problems between S&Ls and regulators?

Question 71

The creation of the FDIC had immediate benefits and long term costs. Describe both and how they relate to asymmetric information.

Question 72

What could the government have done that might have helped prevent the Great Depression?

Question 73

The TBTF policy worsens the moral hazard problem between what two groups? Explain.

Question 74

Why do some scholars advocate for regulators to focus on transparency in the financial industry?

Question 75

How does the TBTF policy encourage large financial institutions to take on bigger risk?

Question 76

How does asymmetric information affect elections?

Question 77

What is the difference between the public and private interest models in their approach to government solutions to economics problems?