Question 1

The Depository Institutions Deregulation and Monetary Control Act of 1980

Accepted Answer

The Depository Institutions Deregulation and Monetary Control Act of 1980 increased the deposit insurance from $40,000 to $100,000. This was done to provide greater protection to depositors in case of a bank failure. The act did not separate investment banks and commercial banks, restrict the use of ATS accounts, or impose restrictive usury ceilings on large agricultural loans.

Question 2

Savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called

Accepted Answer

Goodwill was allowed to be included in the capital calculations by savings and loan regulators. This allowed S&Ls to appear more financially stable than they actually were, contributing to their eventual collapse in the 1980s.

Question 3

In the early stages of the 1980s banking crisis,financial institutions were especially harmed by

Accepted Answer

The severe recession in 1981-82 caused many businesses to fail and individuals to default on loans, leading to a significant increase in bank failures during this time. While declining interest rates and disinflation may have contributed to the crisis, the recession was the most significant factor. The increase in energy prices also had an impact, but it was not as significant as the recession.

Question 4

When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them,they were pursuing a policy of

Accepted Answer

When regulators allow insolvent S&Ls to continue to operate, they are practicing regulatory forbearance, which means delaying or refraining from taking action against a financial institution even though it may be in violation of regulations or laws. This was a common practice during the S&L crisis of the 1980s and early 1990s, as regulators were hesitant to close down institutions and cause upheaval in the financial markets. However, this policy ultimately led to larger losses and a longer recovery period for the industry.

Question 5

The major provisions of the Competitive Equality Banking Act of 1987 include

Accepted Answer

The answer of The major provisions of the Competitive Equality...

Question 6

The S&L Crisis can be analyzed as a principal-agent problem.The agents in this case,the ________,did not have the same incentive to minimize cost to the economy as the principals,the ________.

Accepted Answer

Politicians and regulators were the agents and taxpayers were the principals in the S&L crisis. The politicians and regulators did not have the same incentive to minimize cost to the economy as the taxpayers, who ultimately bore the cost of the crisis.

Question 7

Moral hazard and adverse selection problems increased in prominence in the 1980s

Accepted Answer

The burst of financial innovation in the 1970s and early 1980s led to the creation of new financial instruments and markets, which widened the scope for risk taking. As a result, moral hazard and adverse selection problems increased in prominence.

Question 8

That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by

Accepted Answer

The fact that several hundred S&Ls were not examined in a two-year period can be explained by Congress's unwillingness to allocate the necessary funds to thrift regulators. The lack of funds led to a shortage of personnel, which would ultimately lead to fewer examinations.

Question 9

An analysis of the political economy of the savings and loan crisis helps one to understand

Accepted Answer

The political economy analysis of the savings and loan crisis reveals the complex interplay between thrift regulators and political pressures, showing why regulators might have yielded to congressional pressures, rather than acting solely on the basis of independent regulatory judgment or in direct response to taxpayer concerns. This reflects the influence of political relationships and pressures on regulatory actions.

Question 10

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

Accepted Answer

Financial innovation during the 1960s, 1970s, and early 1980s led to the rise of new financial institutions that increased competition for traditional banks. This competition put pressure on traditional bank profitability, leading to a decline.

Question 11

The bailout of the savings and loan industry was much delayed and,therefore,much more costly to taxpayers because

Accepted Answer

Regulators initially downplayed the seriousness of problems within the thrift industry, leading to a delay in the bailout and a higher cost to taxpayers.

Question 12

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 states that regulators in other countries can take action against a foreign bank if they feel it lacks effective oversight. The best choice to fit this context is "restrict," as it implies limiting or restraining the operations of the bank. "Encourage," "renegotiate," and "enhance" do not fit this context.

Question 13

"Bureaucratic gambling" refers to

Accepted Answer

"Bureaucratic gambling" refers to the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. This strategy was a risk because it relied on the assumption that the industry would improve, and if it did not, it would lead to even greater losses for the federal government.

Question 14

Taxpayers were served poorly by thrift regulators in the 1980s.This poor performance cannot be explained by

Accepted Answer

The passage states that taxpayers were served poorly by thrift regulators in the 1980s. It specifically mentions the regulators' desire to escape blame for poor performance and politicians' incentives to act in their own interests. However, there is no mention of Congress's dogged determination to protect taxpayers in the passage, which makes option C the correct answer.

Question 15

One of the problems experienced by the savings and loan industry during the 1980s was

Accepted Answer

Many savings and loan managers lacked the expertise to manage the risks associated with new lines of business, such as commercial real estate lending, which contributed to the industry's problems during the 1980s.

Question 16

The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.

Accepted Answer

Regulatory forbearance refers to a policy in which regulatory authorities allow financial institutions to take on more risk than they would typically be allowed to in order to help them recover from financial difficulties. This approach created a moral hazard, which is the idea that when individuals or organizations are shielded from the consequences of their risky behavior, they are more likely to take even greater risks in the future. The savings and loan industry took advantage of the leniency of regulatory authorities and took on increasingly risky investments, exacerbating their financial problems.

Question 17

Regulatory forbearance

Accepted Answer

The answer of Regulatory forbearance
...

Question 18

Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following EXCEPT

Accepted Answer

The answer of Reasons regulators chose to follow regulatory forbearance...

Question 19

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 20

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

Accepted Answer

Prior to the 1980s, S&Ls (Savings and Loans) and mutual savings banks were primarily focused on providing home mortgages to individuals. This was due to the regulations and laws in place at the time, which restricted them from engaging in other types of lending.

Quiz 10: Economic Analysis of Financial Regulation