Question 1

The government purchasing ownership stakes in a faltering financial institution in order to prop up the financial system is an example of:

Accepted Answer

A capital injection is when a government or entity purchases ownership stakes in a troubled financial institution in order to shore up the system and increase stability. This is different from a giveaway of public funds, which implies that money is being donated without any expectation of return, or risky lending, which refers to lending to borrowers who may not be able to repay the loan. It is also not an example of conventional monetary policy, which typically involves adjusting interest rates, the money supply, and other tools to manage inflation and economic growth.

Question 2

a.What is the difference between an illiquid bank and an insolvent bank?
b.Would the Federal Reserve's lender of last resort function be the most appropriate remedy for an illiquid or an insolvent bank? Explain.c.Would the FDIC's resolution authority be the most appropriate remedy for an illiquid or an insolvent bank? Explain.

Accepted Answer

The answer of a.What is the difference between an illiquid...

Question 3

In the event that a bank converted previously issued CoCo bonds (contingent convertible debt),then holders of the bonds would change from _____ of the bank.

Accepted Answer

CoCo bonds are a form of hybrid security that can be converted into equity instruments (i.e. shares) under certain circumstances, typically when the bank's capital falls below a certain level. If a bank were to convert these bonds into equity, the bondholders would become part owners of the bank, rather than simply creditors owed debt.

Question 4

One justification for greater regulation of traditional chartered banks than of shadow banks is the:

Accepted Answer

The existence of government insurance of bank deposits provides a safety net for depositors and incentivizes banks to take on riskier investments, which can have economy-wide repercussions if the bank fails. Shadow banks do not have this type of government insurance or safety net, which limits their opportunities for excessive risk-taking and reduces the potential impact of their failure on the economy. Therefore, traditional chartered banks are subject to greater regulation to mitigate these risks.

Question 5

Proponents of restricting the size of financial institutions believe this policy will _____,while opponents believe this policy will _____.

Accepted Answer

Proponents argue that smaller financial institutions would lead to a more stable financial system by reducing the risk posed by "too big to fail" entities. Opponents argue that restrictions could increase operational costs due to the loss of economies of scale and other efficiencies.

Question 6

A key obstacle facing regulators who want to prevent financial institutions from taking excessive risks is the difficulty in:

Accepted Answer

The difficulty in drawing the line between excessive and appropriate risk taking is a major challenge for regulators trying to prevent financial institutions from taking too many risks. It can be subjective and influenced by factors such as market conditions, the institution's history, and management's risk appetite.

Question 7

The potential problem faced by the rest of Europe in the event of a Greek debt default is:

Accepted Answer

If Greece defaults on its debt, the banks holding Greek debt will suffer losses which could potentially make them insolvent. This would not only affect these banks but also pose a risk for the overall European banking system as the banks are interconnected.

Question 8

The Treasury used most of the funds allocated by the Troubled Asset Relief Program (TARP)to:

Accepted Answer

The Treasury used most of the funds allocated by the Troubled Asset Relief Program (TARP) to make equity injections into troubled financial institutions, such as banks and insurance companies. This was done to help stabilize the financial system and prevent further economic collapse in the aftermath of the 2008 financial crisis. While some funds were also used to purchase mortgage-backed securities and other assets, the bulk of the TARP funds were directed towards equity injections.

Question 9

The Volcker rule restricts excessive risk taking by chartered banks by:

Accepted Answer

The Volcker Rule specifically prohibits banks from engaging in proprietary trading and from owning or investing in hedge funds or private equity funds, which are considered speculative investments.

Question 10

In 2013,the Parliamentary Budget Office estimated that I: Canada's federal government fiscal policy was unsustainable.II: taken as a group,Canada's provincial and territorial government fiscal policy was unsustainable.

Accepted Answer

The answer of In 2013,the Parliamentary Budget Office estimated that...

Question 11

The benefit of stricter capital requirements for shadow banks is _____,while the cost is _____.

Accepted Answer

Stricter capital requirements for shadow banks can enhance financial stability as it reduces the risk of shadow banks being undercapitalized and unable to meet their financial obligations during a financial crisis. However, it can also impede financial intermediation as shadow banks may find it more difficult to obtain funding or may have to pass on higher costs to their customers. The other options mentioned in the answer choices do not accurately reflect the benefits and costs of stricter capital requirements for shadow banks.

Question 12

Deposit insurance is an example of ______ used to prop up the financial system.

Accepted Answer

The answer of Deposit insurance is an example of ______...

Question 13

Prior to the financial crisis of 2008-2009 in the United States,financial regulation in that country consisted of a _____ system of regulators,which the Dodd-Frank Act sought to improve upon by _____ the number of regulatory bodies.

Accepted Answer

The answer of Prior to the financial crisis of 2008-2009...

Question 14

One advantage of CoCo bonds (contingent convertible debt),over alternative methods for recapitalizing banks,is that:

Accepted Answer

CoCo bonds provide banks with capital from private rather than taxpayer funds. This means that the burden of recapitalizing banks does not fall on taxpayers, but rather on private investors who purchase the bonds.

Question 15

The government making loans that are secured by collateral of dubious value to prop up the financial system is an example of:

Accepted Answer

Making loans that are secured by collateral of dubious value is a risky lending practice as there is a high possibility of the borrower defaulting on the loan, which can lead to significant losses for the lender. This can ultimately lead to a financial crisis if the losses are too significant and widespread in the financial system.

Question 16

The resolution authority over shadow banks given to the deposit-insurance agency in the United States,the FDIC,as part of the Dodd-Frank Act,gives the FDIC authority to:

Accepted Answer

The Dodd-Frank Act gives the FDIC the authority to take over and close shadow banks that could create systemic risk for the economy through the orderly liquidation process. This is aimed at preventing the failure of a single financial institution from causing widespread economic harm, as happened during the 2008 financial crisis. The FDIC does not provide deposit insurance to shadow banks, require them to hold more capital, or serve as a lender of last resort.

Question 17

When dealing with failing financial institutions I: policymakers should avoid having depositors suffer losses
II: policymakers should avoid having shareholders suffer losses.

Accepted Answer

The first statement is true as policymakers try to avoid depositors suffering losses in failing financial institutions to maintain public trust and stability in the financial system. The second statement is not necessarily true as shareholder losses may be incurred, as they are the owners of the institution and take on risks and potential losses.

Question 18

Which of the following policies are intended to reduce the likelihood of future financial crises?

Accepted Answer

All of the policies listed - restricting the size of financial firms, limiting excessive risk taking, and reforming regulatory agencies - are intended to reduce the likelihood of future financial crises. Restricting the size of financial firms and limiting excessive risk taking can help prevent large shocks to the financial system, while reforming regulatory agencies can help ensure that there is adequate oversight and enforcement of financial regulations. However, it is worth noting that there may be trade-offs involved in implementing these policies, and that they may also have unintended consequences.

Question 19

Two policies that are intended to make the financial system more stable by restricting the size of financial institutions are:

Accepted Answer

Restricting mergers among large banks and requiring higher capital requirements for large banks are both policies intended to limit the size and risk-taking of individual financial institutions. This can make the overall financial system more stable and reduce the likelihood of a large institution's failure leading to a broader financial crisis. Offering cheaper loans or larger capital injections to large banks, lowering the cost of deposit insurance, or allowing higher leverage for large banks could encourage risk-taking and actually increase the likelihood of financial instability. Providing incentives for speculative investments could also increase risk-taking and instability in the financial system.

Question 20

Sovereign debt refers to debt issued:

Accepted Answer

Sovereign debt refers to debt issued by governments.

Quiz 20: The Financial System

The government purchasing ownership stakes in a faltering financial institution in order to prop up the financial system is an example of:

In the event that a bank converted previously issued CoCo bonds (contingent convertible debt) ,then holders of the bonds would change from _____ of the bank.

One justification for greater regulation of traditional chartered banks than of shadow banks is the:

Proponents of restricting the size of financial institutions believe this policy will _,while opponents believe this policy will _.

A key obstacle facing regulators who want to prevent financial institutions from taking excessive risks is the difficulty in:

The potential problem faced by the rest of Europe in the event of a Greek debt default is:

The Treasury used most of the funds allocated by the Troubled Asset Relief Program (TARP) to:

The Volcker rule restricts excessive risk taking by chartered banks by:

In 2013,the Parliamentary Budget Office estimated that I: Canada's federal government fiscal policy was unsustainable.II: taken as a group,Canada's provincial and territorial government fiscal policy was unsustainable.

The benefit of stricter capital requirements for shadow banks is _,while the cost is _.

Deposit insurance is an example of ______ used to prop up the financial system.

Prior to the financial crisis of 2008-2009 in the United States,financial regulation in that country consisted of a _ system of regulators,which the Dodd-Frank Act sought to improve upon by _ the number of regulatory bodies.

One advantage of CoCo bonds (contingent convertible debt) ,over alternative methods for recapitalizing banks,is that:

The government making loans that are secured by collateral of dubious value to prop up the financial system is an example of:

The resolution authority over shadow banks given to the deposit-insurance agency in the United States,the FDIC,as part of the Dodd-Frank Act,gives the FDIC authority to:

When dealing with failing financial institutions I: policymakers should avoid having depositors suffer losses II: policymakers should avoid having shareholders suffer losses.

Which of the following policies are intended to reduce the likelihood of future financial crises?

Two policies that are intended to make the financial system more stable by restricting the size of financial institutions are:

Sovereign debt refers to debt issued: