Question 1

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 properly manage risk in new lines of business, such as commercial and real estate lending. This led to large losses and failures in the industry.

Question 2

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 word "regulators" implies a regulatory action, which in this context would most likely be to limit, control, or restrict the foreign bank's operations. The other options, such as "encourage" and "enhance," do not fit the context of the sentence. "Renegotiate" is also unlikely as it does not address the issue of oversight, which is the main concern of the regulators.

Question 3

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

Accepted Answer

Goodwill is a commonly used intangible asset in accounting that represents the value of a company's reputation, customer relationships, and brand recognition. It was also allowed to be included in the capital calculations of S&Ls during the regulatory period. The other options (salvation, kindness, retribution) have no relevance to S&Ls or capital calculations.

Question 4

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 5

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 6

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

Accepted Answer

The passage clearly states that taxpayers were served poorly by thrift regulators in the 1980s despite Congress's determination to protect them. This implies that Congress was trying to impose tough regulations but the regulators were not performing up to the mark. Therefore, option C is the correct answer. Options A, B, and D explain alternative reasons for poor performance which are not supported by the passage.

Question 7

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 once in the period January 1984 through June 1986 can be explained by Congress's unwillingness to allocate the necessary funds to thrift regulators. Without sufficient funds, regulators would not have had the resources to examine all of the S&Ls under their jurisdiction.

Question 8

Regulatory forbearance

Accepted Answer

The answer of Regulatory forbearance
...

Question 9

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 restricted almost entirely to home mortgages.

Question 10

"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. The regulators took this risk as they were gambling on the hope that the S&L industry would recover and they would not have to face the consequences of their leniency.

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, causing the bailout to be delayed.

Question 12

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 widened the scope for risk-taking, leading to increased moral hazard and adverse selection problems. Deregulation could also contribute to these issues, but it is not specifically mentioned in the given choices. The decrease in federal deposit insurance may have affected risk-taking behavior, but it is not likely the main cause of the increased prominence of moral hazard and adverse selection problems. Decreased interest rates may have affected risk-taking behavior, but again, it is not likely the main cause of the increase in these problems.

Question 13

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 14

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

Accepted Answer

During this time period there was an increase in competition from new financial institutions due to financial innovation. This led to a decline in traditional bank profitability as they faced new and innovative competitors.

Question 15

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 16

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

Regulatory forbearance refers to the decision by regulators to refrain from utilizing their full authority to close or take over insolvent financial institutions. In the case of the S&L crisis, regulators chose to allow many insolvent S&Ls to continue to operate in the hope that they would eventually recover and repay their obligations. This policy contributed to the extent of the crisis by allowing weak institutions to continue to operate and take on additional risks.

Question 17

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 18

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

Accepted Answer

The severe recession in 1981-82 caused significant damage to financial institutions during the early stages of the 1980s banking crisis. This led to a large number of bank failures and consolidation in the industry. While declining interest rates, disinflation, and energy prices may have also affected the economy during this time, the severe recession was the main cause of harm to financial institutions.

Question 19

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. There were no provisions in the Act related to separating investment banks and commercial banks or restricting the use of ATS accounts, and the Act did not impose restrictive usury ceilings on large agricultural loans.

Question 20

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, which is the practice of regulatory agencies not enforcing certain rules in order to allow financial institutions to recover, exacerbated the moral hazard problem. Moral hazard occurs when financial institutions take on excessive risk with the expectation that they will be bailed out by the government if things go wrong. This was exactly the case with the savings and loans crisis, as many institutions took on huge levels of risk in the hopes of returning to profitability.

Quiz 10: Economic Analysis of Financial Regulation