Question 1

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

Accepted Answer

This is because savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called goodwill. Goodwill is an intangible asset that represents the excess of a company's purchase price over the fair value of its identifiable net assets. S&Ls were able to count this as capital because it was believed to enhance the institution's ability to generate earnings and repay depositors.

Question 2

All of the following would reduce the agency problems of the originate-to-distribute model except

Accepted Answer

Encouraging more complex mortgage products can actually increase the agency problems of the originate-to-distribute model, as it can lead to greater asymmetry of information between the borrower and lender, and increase the potential for default or foreclosure. The other options all address the root causes of agency problems in the model by promoting transparency, accountability, and responsible borrowing practices.

Question 3

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. This was done in order to improve the stability of the banking system and restore public confidence in it.

Question 4

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 off-balance sheet activities that were a major contributor to the 2008 financial crisis. Higher capital requirements will reduce the risk of these vehicles causing problems when they come back on the balance sheet. Negatiable CDs, Eurodollars, and Federal funds are not typically associated with off-balance sheet activities.

Question 5

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

Accepted Answer

The existence of a government safety net, usually in the form of deposit insurance or lender-of-last-resort guarantees, leads to moral hazard where financial institutions take on excessive risk knowing that the government will bail them out in case of losses. This increases the likelihood of banking crisis episodes. While the other options (B, C, and D) may also contribute to banking crises, the presence of a government safety net is consistently identified as a common element in such episodes.

Question 6

Currently,Fannie Mae and Freddie Mac are

Accepted Answer

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that were created to provide liquidity to the secondary mortgage market. Although they are publicly traded companies, they were chartered by Congress and their operations are regulated by the Federal Housing Finance Agency (FHFA).

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 created new financial instruments and markets, which widened the scope for risk-taking and increased the need for lenders to manage the potential for moral hazard and adverse selection problems. Deregulation may have had some impact, but it was the expansion of financial innovation that made these issues more prominent. The decrease in federal deposit insurance may have exacerbated moral hazard issues but did not directly cause their increase. The decrease in interest rates would have reduced the incentive for risk-taking, making it less likely that moral hazard and adverse selection problems would be exacerbated.

Question 8

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 9

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

Accepted Answer

Financial innovation during this time period led to increased competition from new financial institutions such as money market funds, mutual funds, and investment banks. This competition eroded traditional banks' profitability. Interest rates did decrease during this time period, but it was not the primary reason for the decline in traditional bank profitability. Deposit insurance actually increased during this time period with the creation of the FDIC in 1961. While increased regulation did occur, it was not the primary reason for the decline in traditional bank profitability.

Question 10

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 11

Moral hazard 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 provided more opportunities for risk-taking. This increased the likelihood of moral hazard problems, where individuals or institutions take excessive risks knowing that they will not bear the full costs of their actions.

Question 12

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 is the policy where regulators allow insolvent financial institutions (such as S&Ls) to continue their operations and delay closure in the hope that the institution will recover its financial position. This was the policy pursued by regulators during the S&L crisis in the 1980s and early 1990s, which ultimately led to the failure of many S&Ls and a taxpayer bailout costing billions of dollars.

Question 13

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 coverage from $40,000 to $100,000 for individual depositors, which helped to bolster public confidence in the banking system. It did not separate investment banks and commercial banks or restrict the use of ATS accounts. It also did not impose usury ceilings on large agricultural loans.

Question 14

The subprime financial crisis showed the need for increased financial regulation,however,too much or poorly designed regulation could

Accepted Answer

While increased financial regulation was necessary in response to the subprime financial crisis, excessive or poorly designed regulation could stifle financial innovation. Too much regulation could make it more difficult for businesses to access loans and other financial services, which could harm economic growth. Therefore, choice A is the best answer.

Question 15

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 16

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

Accepted Answer

The severe recession in 1981-82 had a significant impact on financial institutions and was one of the primary causes of the banking crisis in the early 1980s. During the recession, many borrowers were unable to repay loans, leading to an increase in loan defaults and a decline in the value of assets held by financial institutions. Additionally, declining economic activity reduced demand for credit, further exacerbating the financial turmoil.

Question 17

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

Accepted Answer

The savings and loan industry ventured into new lines of business without having the expertise to manage the risk involved. This resulted in a high number of failed S&Ls during the 1980s.

Question 18

Investment banks that are part of ________ are regulated and supervised like banks.

Accepted Answer

Investment banks that are part of bank holding companies are regulated and supervised like banks. Bank holding companies are subject to the same regulatory requirements as banks, including capital requirements, liquidity requirements, and stress testing. Investment banks that are not part of a bank holding company are subject to different regulatory requirements and may have more flexibility in their operations.

Question 19

The inaccurate ratings provided by credit-rating agencies

Accepted Answer

The inaccurate ratings provided by credit-rating agencies mean that investors did not have the information they needed to make informed choices about their investments, which can lead to significant financial losses. This was a contributing factor to the 2008 financial crisis.

Question 20

The evidence from banking crises in other countries indicates that

Accepted Answer

Evidence from banking crises in other countries shows that deregulation combined with poor regulatory supervision raises incentives for moral hazard. This is because banks may take on excessive risk knowing that the government will bail them out if they fail. Deposit insurance and government safety nets for depositors have not been shown to be the primary cause of banking crises in other countries. Regulatory forbearance, or the practice of delaying enforcement of regulations, has been shown to contribute to banking problems.

Quiz 11: Economic Analysis of Financial Regulation

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

All of the following would reduce the agency problems of the originate-to-distribute model except

The Depository Institutions Deregulation and Monetary Control Act of 1980

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

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

Currently,Fannie Mae and Freddie Mac are

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

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

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

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.

Moral hazard problems increased in prominence in the 1980s

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

The Depository Institutions Deregulation and Monetary Control Act of 1980

The subprime financial crisis showed the need for increased financial regulation,however,too much or poorly designed regulation could

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

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

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

Investment banks that are part of ________ are regulated and supervised like banks.

The inaccurate ratings provided by credit-rating agencies

The evidence from banking crises in other countries indicates that