ECO 303 AS 8 (Ch. 10) Name______________ Multiple choice @ 1.25 points each. Select the best answer for each of the following questions.
1) Regulations designed to provide information to the marketplace so that investors can make informed decisions
are called
A) disclosure requirements.
B) efficient market requirements.
C) asset restrictions.
D) capital requirements.
2) Regulations that reduced competition between banks included
A) branching restrictions.
B) bank reserve requirements.
C) the dual system of granting bank charters.
D) interest-rate ceilings.
3) Moral hazard is an important concern of insurance arrangements because the existence of insurance
A) provides increased incentives for risk taking.
B) is a hindrance to efficient risk taking.
C) causes the private cost of the insured activity to increase.
D) creates an adverse selection problem but no moral hazard problem.
4) Federal deposit insurance covers deposits up to $250,000, but as part of a doctrine called "too-big-to-fail" the FDIC
sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses the
A) "payoff" method.
B) "purchase and assumption" method.
C) "inequity" method.
D) "Basel" method.
5) The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital
requirement is known as
A) competition in laxity.
B) depositor supervision.
C) regulatory arbitrage.
D) a dual banking system.
6) The chartering process is especially designed to deal with the ________ problem, and regular bank examinations
help to reduce the ________ problem.
A) adverse selection; adverse selection
B) adverse selection; moral hazard
C) moral hazard; adverse selection
D) moral hazard; moral hazard
7) The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is
A) that the FDIC guarantees all deposits when it uses the "payoff" method.
B) that the FDIC guarantees all deposits when it uses the "purchase and assumption" method.
C) that the FDIC is more likely to use the "payoff" method when the bank is large and it fears that depositor losses
may spur business bankruptcies and other bank failures.
D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be
easier to find a purchaser for them compared to large institutions.
8) In the early stages of the 1980s banking crisis, financial institutions were especially harmed by
A) declining interest rates from late 1979 until 1981.
B) the severe recession in 1981-82.
C) the disinflation from mid 1980 to early 1983.
D) the increase in energy prices in the early 80s.
9) Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of
the following EXCEPT
A) they had insufficient funds to close all of the insolvent S&Ls.
B) they were friends with the S&L owners.
C) they hoped the problem would go away.
D) they did not have the authority to close the insolvent S&Ls. 10) The too-big-to-fail policy
A) reduces moral hazard problems.
B) puts large banks at a competitive disadvantage in attracting large deposits.
C) treats large depositors of small banks inequitably when compared to depositors of large banks.
D) allows small banks to take on more risk than large banks.
11) Off-balance-sheet activities
A) generate fee income with no increase in risk.
C) generate fee income but increase a bank's risk. B) increase bank risk but do not increase income.
D) generate fee income and reduce risk. 12) That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be
explained by
A) Congress's unwillingness to allocate the necessary funds to thrift regulators.
B) regulators' reluctance to find the specific problem thrifts that they knew existed.
C) slower growth in lending meant that less regulation was needed.
D) Congress's unwillingness to listen to campaign contributors.
13) Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the
A) too-big-to-fail effect.
B) moral hazard problem.
C) adverse selection problem.
D) contagion effect.
14) During the boom years of the 1920s, bank failures were quite
A) uncommon, averaging less than 30 per year.
B) uncommon, averaging less than 100 per year.
C) common, averaging about 600 per year.
D) common, averaging about 1000 per year.
15) The Resolution Trust Corporation was created by the FIRREA in order to
A) manage and resolve insolvent S&Ls.
B) build up trust in government regulation.
C) regulate the S&L industry.
D) purchase large amounts of government debt.
16) The ability to use the too-big-to-fail policy was curtailed by the passage of the FDICIA. To use this action today,
the FDIC must get approval of a two-thirds majority of both the Board of Governors of the Federal Reserve and
the directors of the FDIC and also the approval of the
A) Secretary of the Treasury.
B) Senate Finance Committee Chairperson.
C) governor of the state in which the failed bank is located.
D) President of the United States.
17) The current supervisory practice toward risk management
A) focuses on the quality of a bank's balance sheet.
B) determines whether capital requirements have been met.
C) evaluates the soundness of a bank's risk-management process.
D) focuses on eliminating all risk.
18) A well-capitalized financial institution has ______ to lose if it fails and thus is______ likely to pursue risky activities.
A) more; more
B) more; less
C) less; more
D) less; less
19) Deposit insurance is only one type of government safety net. All of the following are types of government support for
troubled financial institutions EXCEPT
A) forgiving tax debt.
B) lending from the central bank.
C) lending directly from the government's treasury department.
D) nationalizing and guaranteeing that all creditors will be repaid their loans in full.
20) Competition between banks and other financial intermediaries
A) encourages greater risk taking.
B) encourages conservative bank management.
C) increases bank profitability.
D) eliminates the need for government regulation.

 

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