Question 1

The Financial Institutions Reform,Recovery,and Enforcement Act (FIRREA)restructured the savings association deposit insurance fund and transferred its management to the FDIC.

Accepted Answer

FIRREA did indeed restructure the savings association deposit insurance fund and transferred its management to the FDIC.

Question 2

Since its inception,the FDIC deposit insurance fund has never fallen to a negative balance.

Accepted Answer

The FDIC deposit insurance fund has fallen to a negative balance before, notably during the financial crisis that began in 2008, due to a high number of bank failures.

Question 3

The average cost to the FDIC of each bank failure during the decade of the 1980s was larger than the total cost of all bank failures during the period 1933-79.

Accepted Answer

The average cost of each bank failure in the 1980s was around $260 million, whereas the total cost of all bank failures in the period 1933-79 was around $8.2 billion. Therefore, the average cost of bank failures in the 1980s surpassed the total cost of bank failures in the earlier period.

Question 4

Moral hazard encourages the FI to take less,rather than more,risk.

Accepted Answer

Moral hazard occurs when one party takes more risks because they are protected from the negative consequences of their actions. In the case of a financial institution, if they believe they will be bailed out by the government or creditors, they may take on more risk because they are not fully responsible for the losses that may occur.

Question 5

The Federal safety net to protect the integrity of the payments system consists of deposit insurance and social welfare.

Accepted Answer

The Federal safety net primarily consists of deposit insurance and access to central bank credit to protect the integrity of the payments system, not social welfare.

Question 6

Contagious runs on bank deposits are directed at FIs,whether they are failing or healthy.

Accepted Answer

Contagious runs on bank deposits can occur even if the FIs in question are healthy, as they are often driven by fear and panic among depositors.

Question 7

Moral hazard provides an incentive for bank owners to accept greater asset risks because they have less to lose,and potentially more to gain.

Accepted Answer

Moral hazard occurs when an individual or institution takes greater risks because they are not fully responsible for the potential losses. In the case of bank owners, they may be willing to accept greater asset risks knowing that if the investments fail, the government or other stakeholders will likely bail them out. This creates an incentive for them to take more risks in pursuit of higher profits, but at the same time, it puts the financial system at risk if these risks fail to pay off.

Question 8

As a result of the Financial Institutions Reform,Recovery,and Enforcement Act (FIRREA),the deposit insurance fund for the savings and loan industry has been combined with the deposit insurance fund for the commercial banking industry.

Accepted Answer

The answer of As a result of the Financial Institutions...

Question 9

The risk of moral hazard decreases when capital levels are low.

Accepted Answer

The risk of moral hazard increases when capital levels are low, as banks may be incentivized to take on riskier activities in order to increase profits and improve their capital position.

Question 10

Explicit deposit insurance premiums applied by regulators can involve restricting and more closely monitoring the risky activities of banks.

Accepted Answer

The answer of Explicit deposit insurance premiums applied by regulators...

Question 11

A major cause of the FSLIC insolvency in the 1980s was the dramatic rise in interest rates in 1979-82 that created extensive duration mismatches of assets and liabilities in the savings and loan industry.

Accepted Answer

The rapid rise in interest rates in the late 1970s and early 1980s caused many savings and loans to lend long-term at fixed rates while borrowing short-term at variable rates, leading to significant duration mismatches that ultimately contributed to the insolvency of the FSLIC.

Question 12

Deposit insurance is often blamed for the deterioration in depositor discipline that allowed FIs to accept more risk in the asset selection process.

Accepted Answer

Deposit insurance can create a moral hazard problem where depositors are less vigilant in monitoring their bank's risk-taking behavior because they believe their deposits are insured. This can lead to FIs taking on more risk in their asset selection process, knowing depositors are less likely to withdraw their funds in the event of a loss.

Question 13

Pricing insurance premiums in an actuarially fair manner involves assessing the risk-taking profile of the financial institution.

Accepted Answer

Actuarial fairness requires considering the risks associated with providing insurance coverage and setting premiums accordingly. This involves analyzing data on past losses, assessing the likelihood and potential magnitude of future losses, and factoring in expenses and profits.

Question 14

A run on a bank is not necessarily a bad occurrence.

Accepted Answer

A run on a bank can indicate that depositors have confidence in the bank and are withdrawing funds for a specific reason, such as an upcoming expense or investment opportunity. However, if a run on a bank is due to fears of insolvency or lack of trust in the bank, it can be a negative occurrence.

Question 15

The adverse effects of a contagious run include the restrictions on the ability of individuals to transfer wealth through time and a negative impact on the level or rate of savings.

Accepted Answer

Contagious runs can lead to individuals being forced to withdraw their savings, which can affect their ability to transfer wealth through time. Additionally, people may become hesitant to save due to the risk of a potential run, causing a negative impact on the overall level or rate of savings.

Question 16

After nearly failing,the FDIC's Bank Insurance Fund (BIF)achieved record levels of reserves during the 1990s.

Accepted Answer

This statement is true. After the savings and loan crisis of the late 1980s, which nearly depleted the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC), the BIF built up its reserves and achieved record levels during the 1990s.

Question 17

During the financial crisis of 2008-2009,deposit balances at DIs increased.

Accepted Answer

During times of economic uncertainty, individuals and businesses often seek to hold onto their money in more secure institutions, such as banks, leading to an increase in deposit balances.

Question 18

If regulators provide more protection against bank runs,the incidence of moral hazard is likely to increase.

Accepted Answer

When regulators provide more protection against bank runs, such as implementing deposit insurance, banks may engage in riskier behavior knowing that their depositors are protected. This is known as moral hazard.

Question 19

The number of bank failures in the period of 1933-79 was less than the number of failures from 1980-1989.

Accepted Answer

The answer of The number of bank failures in the...

Question 20

A major reason for the deterioration of the deposit insurance funds in the 1980s was the downturn in the technology,manufacturing,and real estate industries.

Accepted Answer

The answer of A major reason for the deterioration of...

Quiz 19: Deposit Insurance and Other Liability Guarantees