Deck 18: Bank Regulation

Question 1

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

Answer 1

A

Question 2

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.

Answer 2

C

Question 3

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

A) examine the bank frequently and thoroughly
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 the above are possible corrective actions taken by bank regulators.

Answer 3

A

Question 4

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 5

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 discount window.

Question 6

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 7

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

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

Question 8

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 deposits 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 9

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 10

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 11

Deposit insurance has a limit of:

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

Question 12

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

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

Question 13

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 14

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

Question 15

Banks commonly use depositor funds to invest in stocks.

Question 16

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 17

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

Question 18

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 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 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 21

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 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

Deposit insurance now covers all bank deposits without any limit.

Question 24

Which banking act removed deposit rate ceilings?

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

Question 25

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 26

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

Question 27

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 28

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

Question 29

Which of the following statements is incorrect 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 the above are true.

Question 30

When the Federal Reserve conducts stress tests of banks, it may examine the U.S. operations of foreign-based banks as well as U.S. banks.

Question 31

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

Question 32

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 the above

Question 33

The moral hazard problem is minimized when deposit insurance premiums are

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

Question 34

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 35

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 36

____ is not a characteristics used by bank regulators to rate banks.

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

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

____ is not a rating criterion used by bank regulators.

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

Question 39

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 40

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 41

During the credit crisis, banks argued that they should be allowed to use fair value accounting in valuing their assets for purposes of meeting capital requirements.

Question 42

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

Question 43

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 44

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 affectedby rising interest rates.

Question 45

State banks are regulated by the Comptroller of the Currency.

Question 46

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 47

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 bankmanagers.

Question 48

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 49

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

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 the above

Question 51

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

Question 52

Commercial banks are allowed to invest in junk bonds.

Question 53

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 54

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

Question 55

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 56

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 57

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 58

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

Question 59

Which of the following was not a provision of the Financial Reform Act (Dodd-Frank 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