Question 1

The Volcker Rule addresses the off-balance-sheet problem involving

Accepted Answer

The Volcker Rule is designed to address trading risks by prohibiting banks from engaging in proprietary trading and limiting their investments in certain funds. It does not directly address selling loans, loan guarantees, or interest rate risks.

Question 2

The collapse of the Bank of Credit and Commerce International,BCCI,showed the difficulty of international banking regulation.BCCI operated in more than ________ countries and was supervised by the small country of ________.

Accepted Answer

BCCI operated in more than 70 countries and was supervised by the small country of Luxembourg.

Question 3

Firms that are designated as systemically important financial institutions (SIFIs)are subject to all of the following additional Federal Reserve regulations except

Accepted Answer

SIFIs are subject to higher capital standards, stricter liquidity requirements and providing a plan for orderly liquidation if necessary as per federal regulations, but they are not subject to interest rate ceilings on time deposits.

Question 4

In the ten year period 1981-1990,1202 commercial banks were closed,with a peak of 206 failures in 1989.This rate of failures was approximately ________ times greater than that in the period from 1934 to 1980.

Accepted Answer

The answer of In the ten year period 1981-1990,1202 commercial...

Question 5

Prior to the 1980s,S&Ls and mutual savings banks were restricted almost entirely to

Accepted Answer

Prior to the 1980s, S&Ls and mutual savings banks were primarily involved in home mortgages.

Question 6

Banking crises have occurred throughout the world.What similarities do we find when we look at the different countries?

Accepted Answer

The answer of Banking crises have occurred throughout the world.What...

Question 7

A common element in all of the banking crisis episodes in different countries is

Accepted Answer

In all banking crisis episodes, there is generally an expectation of a government safety net, which can lead to moral hazard behavior by banks, where banks take excessive risks knowing that they will be bailed out by the government if things go wrong. This safety net can also make depositors complacent, as they believe that their deposits are guaranteed by the government, leading to a higher probability of bank runs in times of financial stress.

Question 8

The government safety net creates both an adverse selection problem and a moral hazard problem.Explain.

Accepted Answer

The answer of The government safety net creates both an...

Question 9

All of the following are common to banking crises in different countries except

Accepted Answer

Dual banking system is not a common factor in banking crises in different countries. Financial liberalization or innovation, weak bank regulatory systems, and a government safety net are all common factors in banking crises in different countries.

Question 10

The Basel Committee ruled that regulators in other countries can ________ the operations of a foreign bank if they believe that it lacks effective oversight.

Accepted Answer

The sentence suggests that if regulators in other countries believe that a foreign bank lacks effective oversight, they can take action to limit or control its operations within their jurisdiction. Therefore, the best choice is "restrict".

Question 11

The Depository Institutions Deregulation and Monetary Control Act of 1980

Accepted Answer

The Depository Institutions Deregulation and Monetary Control Act of 1980 increased deposit insurance from $40,000 to $100,000, providing greater protection for depositors. It did not restrict thrift institutions to making loans for home mortgages, restrict the use of ATS accounts, or impose restrictive interest-rate ceilings on large agricultural loans.

Question 12

Higher capital requirements will reduce the problems incurred when troubled ________ which had been off-balance sheet activities come back on the balance sheet.

Accepted Answer

Structured investment vehicles (SIVs) are a type of off-balance sheet activity that can cause problems when they come back on the balance sheet during economic downturns. Higher capital requirements can help mitigate these risks. Negotiable CDs, Eurodollars, and Federal funds are not typically associated with off-balance sheet activities.

Question 13

The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to

Accepted Answer

The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to $250,000. This means that if a bank fails, the FDIC will insure up to $250,000 per depositor, per insured bank. This increase was meant to provide greater protection to depositors in the event of a bank failure and help promote financial stability.

Question 14

The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within

Accepted Answer

The Consumer Financial Protection Bureau (CFPB) is an independent agency but is funded by and housed within the Federal Reserve.

Question 15

Agreements such as the ________ are attempts to standardize international banking regulations.

Accepted Answer

The Basel Accord (also known as the Basel Accords) is a set of agreements among countries and central banks that aim to standardize international banking regulations, particularly with regard to capital adequacy, risk management, and supervisory oversight. The Basel Accord includes three iterations: Basel I, Basel II, and Basel III, each of which has updated and expanded upon the previous version's provisions.

Question 16

In order to ensure that borrowers have an ability to repay residential mortgages,the new consumer protection legislation requires lenders to do all of the following except

Accepted Answer

The new consumer protection legislation does not require lenders to verify that the borrower can read and understand a loan contract. However, it does require lenders to verify the income, job status, and credit history of the borrower to ensure that they have the ability to repay the mortgage.

Question 17

During the 1960s,1970s,and early 1980s,traditional bank profitability declined because of

Accepted Answer

Financial innovation during the 1960s, 1970s, and early 1980s increased competition from new financial institutions, which led to a decline in traditional bank profitability. This included the introduction of new financial products such as money market mutual funds and commercial paper, which reduced the demand for traditional bank deposits and loans.

Question 18

How did the increase in the interest rates in the early 80s contribute to the S&L crisis?

Accepted Answer

The answer of How did the increase in the interest...

Question 19

Moral hazard problems increased in prominence in the 1980s

Accepted Answer

The burst of financial innovation in the 1970s and early 1980s created new financial instruments and markets that widened the scope for risk taking, leading to increased moral hazard problems. Deregulation and decreased federal deposit insurance may have contributed to the problem, but they were not the primary factors in increasing moral hazard during this period. Lower interest rates may have reduced the cost of borrowing, but this alone would not necessarily have led to increased moral hazard.

Question 20

The evidence from banking crises in other countries indicates that

Accepted Answer

The evidence from banking crises in other countries shows that a combination of deregulation and poor regulatory supervision raises moral hazard incentives, leading to banking crises. Deposit insurance is not necessarily to blame, and a government safety net for depositors can be implemented without increasing moral hazard. Regulatory forbearance can also lead to problems, but it is not the only cause of banking crises.

Quiz 11: Economic Analysis of Financial Regulation