Economic Analysis of Banking Regulation

Chapter 11Economic Analysis of Banking Regulation131
Chapter 11
Economic Analysis of Banking Regulation
)1
Multiple Choice
()a
Although the FDIC was created to prevent bank failures, its existence encourages banks to
()b take too much risk.
()c hold too much capital.
()d open too many branches.
()e buy too much stock.
Answer:
Question Status: Previous Edition
()f
During the boom years of the 1920s, bank failures were quite
()g uncommon, averaging less than 30 per year.
()h uncommon, averaging less than 100 per year.
()i common, averaging about 600 per year.
()j common, averaging about 1000 per year.
Answer:
()k
The fact that banks operate on a sequential service constraint means that
()l all depositors share equally in the banks funds during a crisis.
()m depositors arriving last are just as likely to receive their funds as those arriving first.
()n depositors arriving first have the best chance of withdrawing their funds.
()o no depositor can withdraw funds during a crisis.
()p banks randomly select the depositors who will receive all of their funds.
Answer:
Question Status: New
132Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition
()q
Depositors have a strong incentive to show up first to withdraw their funds during a bank
crisis because banks operate on a
()r last-in, first-out constraint.
()s sequential service constraint.
()t double-coincidence of wants constraint.
()u everyone-shares-equally constraint.
()v first-come, last-served constraint.
Answer:
()w
The fact that depositors cannot distinguish good from bad banks is a(n)
()x adverse selection problem.
()y moral hazard problem.
()z asymmetric information problem.
()aatoo-big-to-fail problem.
()bb
none of the above.
Answer:
()cc
Because of asymmetric information, the failure of one bank can lead to runs on other banks.
This is the
()dd
too-big-to-fail effect.
()eemoral hazard problem.
()ff adverse selection problem.
()gg
contagion effect.
()hh
sequential service constraint.
Answer:
()ii
The contagion effect refers to the fact that
()jj some banks are too big to fail.
()kk
bank runs involve only sound banks.
()ll bank runs involve only insolvent banks.
()mm the failure of one bank can hasten the failure of other banks.
()nn
deposit insurance has eliminated the problem of bank failures.
Answer:
()oo
A system of deposit insurance
()pp
attracts risk-taking entrepreneurs into the banking industry.
()qq
encourages bank managers to assume increased risk.
()rr increases the incentives of depositors to monitor the riskiness of their banks asset portfolio.
()ss does all of the above.
()tt does only (a) and (b) of the above.
Answer:
Question Status: Study Guide
()uu
The primary difference between the payoff and the purchase and assumption methods of
handling failed banks is
()vv
that the FDIC guarantees all deposits, not just those under the $100,000 limit, when it uses
the payoff method.
()ww that the FDIC guarantees all deposits, not just those under the $100,000 limit, when it uses
the purchase and assumption method.
()xx
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.
()yy
both (a) and (b) of the above.
()zzboth (b) and (c) of the above.
Answer:
()aaa The primary difference between the payoff and the purchase and assumption methods of
()bbb that the FDIC guarantees all deposits, not just those under the $100,000 limit, when it uses
the payoff method.
()ccc that the FDIC guarantees all deposits, not just those under the $100,000 limit, when it uses
()ddd that the FDIC is less 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.
()eee both (a) and (b) of the above.
()fffboth (b) and (c) of the above.
Answer:
()ggg The primary difference between the payoff and the purchase and assumption methods of
()hhh that the FDIC guarantees all deposits, not just those under the $100,000 limit, when it uses
()iii that the FDIC is more likely to use the purchase and assumption method when the bank is large
and it fears that depositor losses may spur business bankruptcies and other bank failures.
()jjj that the FDIC guarantees all deposits, not just those under the $100,000 limit, when it uses the
payoff method.
()kkk both (a) and (b) of the above.
()lll both (b) and (c) of the above.
Answer:
()mmm When one party to a transaction has incentives to engage in activities detrimental to the other
party, there exists a problem of
()nnn moral hazard.
()ooo split incentives.
()ppp ex ante shirking.
()qqq pre-contractual opportunism.
Answer:
()rrr
Moral hazard is an important feature of insurance arrangements because the existence of
insurance
()sss provides increased incentives for risk taking.
()ttt is a hindrance to efficient risk taking.
()uuu causes the private cost of the insured activity to increase.
()vvv both (a) and (b) of the above.
()www both (b) and (c) of the above.
Answer:
()xxx Since depositors, like any lender, only receive fixed payments while the bank keeps any
surplus profits, they face the _____ problem that banks may take on too _____ risk.
()yyy adverse selection; little
()zzz adverse selection; much
()aaaa moral hazard; little
()bbbb moral hazard; much
Answer:
()cccc The existence of deposit insurance can increase the likelihood that depositors will need
deposit protection, as banks with deposit insurance
()dddd are likely to take on greater risks than they otherwise would.
()eeee are likely to be too conservative, reducing the probability of turning a profit.
()ffff are likely to regard deposits as an unattractive source of funds due to depositors demands for
safety.
()gggg are placed at a competitive disadvantage in acquiring funds.
Answer:
()hhhh When bad drivers line up to purchase collision insurance, automobile insurers are subject to
the
()iiii
moral hazard problem.
()jjjj
adverse selection problem.
()kkkk assigned risk problem.
()llll
ill queue problem.
Answer:
()mmmm Deposit insurance
()nnnn attracts risk-prone entrepreneurs to the banking industry.
()oooo encourages bank managers to take on greater risks than they otherwise would.
()pppp reduces the incentives of depositors to monitor the riskiness of their banks asset portfolios.
()qqqq does all of the above.
()rrrr does only (a) and (b) of the above.
Answer:
()ssss Deposit insurance works well in countries with

()tttt a tradition of the rule of law.
()uuuu effective supervision of the financial system.
()vvvv honest governments.
()wwww all of the above.
()xxxx both (a) and (b) of the above.
Answer:
()yyyy The spread of deposit insurance throughout the world provides evidence that
()zzzz deposit insurance always prevents moral hazard problems.
()aaaaa deposit insurance always prevents adverse selection problems.
()bbbbb deposit insurance works well only with a strong institutional environment.
()ccccc all of the above.
()ddddd both (a) and (b) of the above.
Answer:
()eeeee Deposit insurance has not worked well in countries with
()fffff a weak institutional environment.
()ggggg strong supervision and regulation.
()hhhhh a tradition of the rule of law.
()iiiii all of the above.
()jjjjj both (a) and (b) of the above.
Answer:
()kkkkk If the FDIC decides that a bank is too big to fail, it will use the _____ method, effectively
ensuring that _____ depositors will suffer losses.
()lllll payoff; large
()mmmmm
payoff; no
()nnnnn purchase and assumption; large
()ooooo purchase and assumption; no
Answer:
()ppppp One problem of the too-big-to-fail policy is that it
()qqqqq reduces the incentives for moral hazard by big banks.
()rrrrr increases the incentives for moral hazard by big banks.
()sssss reduces the incentives for adverse selection by big banks.
()ttttt increases the incentives for adverse selection by big banks.
Answer:
()uuuuu The result of the too-big-to-fail policy is that _____ banks will take on _____ risks, making
bank failures more likely.
()vvvvv small; fewer
()wwwww
small; greater
()xxxxx big; fewer
()yyyyy big; greater
Answer:
()zzzzz The result of the too-big-to-fail policy is that big banks will take on _____ risks, making
bank failures _____ likely.
()aaaaaa fewer; less
()bbbbbb greater; less
()cccccc fewer; more
()dddddd greater; more
Answer:
()eeeeeeA problem with the too-big-to-fail policy is that it _____ the incentives for _____ by big
banks.
()ffffff increases; moral hazard
()gggggg decreases; moral hazard
()hhhhhh eliminates; moral hazard
()iiiiii increases; adverse selection
()jjjjjj decreases; adverse selection
Answer:
()kkkkkk The too-big-to-fail policy
()llllll exacerbates moral hazard problems.
()mmmmmm
puts small banks at a competitive disadvantage in attracting large deposits.
()nnnnnn treats large depositors of small banks inequitably when compared to depositors of large
banks.
()oooooo does all of the above.
Answer:
()pppppp The too-big-to-fail policy
()qqqqqq puts small banks at a competitive disadvantage in attracting large deposits.
()rrrrrr treats large depositors of small banks inequitably when compared to depositors of large
banks.
()ssssss exacerbates moral hazard problems.
()tttttt does all of the above.
()uuuuuu does only (a) and (b) of the above.
Answer:
()vvvvvv The too-big-to-fail policy

()wwwwww
exacerbates moral hazard problems.
()xxxxxx puts large banks at a competitive disadvantage in attracting large deposits.
()yyyyyy treats large depositors of small banks inequitably when compared to depositors of large
banks.
()zzzzzz does only (a) and (c) of the above.
Answer:
()aaaaaaa The too-big-to-fail policy
()bbbbbbb
puts small banks at a competitive disadvantage relative to large banks in attracting
large deposits.
()ccccccc treats large depositors of small banks inequitably when compared to depositiors of large
banks.
()dddddddameliorates the moral hazard problem.
()eeeeeee does all of the above.
()fffffff does only (a) and (b) of the above.
Answer:
()gggggggIn May 1991, the FDIC announced that it would sell the governments final 26% stake in
Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The
FDIC took control of the bank, rather than liquidate it, because it believed that Continental
Illinois
()hhhhhhhwas a good investment opportunity for the government.
()iiiiiii could be the Chicago branch of a new governmentally-owned interstate banking system.
()jjjjjjj was too big to fail.
()kkkkkkkall of the above.
Answer:
()lllllll When Continental Illinois became insolvent in 1984, the FDIC guaranteed all deposits, even
those exceeding $100,000. The Comptroller of the Currency defended this action, arguing that
()mmmmmmm the deposits of only the largest eleven banks should not be fully guaranteed.
()nnnnnnnthe deposits of only the largest twenty banks should not be fully guaranteed.
()ooooooothe largest eleven banks were too big to fail.
()ppppppp
the largest twenty banks were too big to fail.
Answer:
()qqqqqqqThe view that some banks are too big to fail explains
()rrrrrrr why the FDIC uses the payoff method for dealing with failed banks that are large.
()sssssss why the FDIC uses the purchase and assumption method for dealing with failed banks that
are large.
()ttttttt why the FDIC is reluctant to use the purchase and assumption method for dealing with
failed banks that are large.
()uuuuuuu
none of the above.
Answer:
()vvvvvvvFederal deposit insurance covers deposits up to $100,000, 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
()wwwwwww
payoff method.
()xxxxxxx
purchase and assumption method.
()yyyyyyyinequity method.
()zzzzzzz Basel method.
Answer:
Question Status: Revised
()aaaaaaaa
In cases when the FDIC determines that a bank is too-big-to-fail, it uses the
()bbbbbbbb
payoff method, effectively covering all depositseven those exceeding the
$100,000 ceiling.
()cccccccc
payoff method, covering only those deposits that do not exceed the $100,000
ceiling.
()dddddddd
purchase and assumption method, effectively covering all depositseven those that
exceed the $100,000 ceiling.
()eeeeeeeepurchase and assumption method, covering only those deposits that do not exceed the
$100,000 ceiling.
()ffffffff regulatory forbearance method, effectively covering all deposits, even those exceeding
$100,000.
Answer:
()gggggggg
Although most bank failures do not involve institutions that the government judges
too big to fail, uninsured deposits are protected when large banks fail because
()hhhhhhhh
the FDIC arranges for a healthy bank to purchase the failed bank and assume all
the deposits.
()iiiiiiii the FDIC believes that it would be inequitable to limit pay outs to $100,000.
()jjjjjjjj of both (a) and (b) of the above.
()kkkkkkkk
of neither (a) nor (b) of the above.
Answer:
()llllllll Financial consolidation poses challenges to banking regulation because

()mmmmmmmm it increases the number of banks that are too big to fail.
()nnnnnnnn
it extends the government safety net to new activities.
()oooooooo
it extends deposit insurance to stock brokers.
()pppppppp
all of the above.
()qqqqqqqq
Answer:
()rrrrrrrr Because the _____ costs of bank failure are greater than banks _____ costs, banks may
hold assets that are too risky.
()ssssssss social; social
()tttttttt social; private
()uuuuuuuu
private; social
()vvvvvvvv
private; private
Answer:
()wwwwwwww Regulators attempt to reduce the riskiness of banks asset portfolios by
()xxxxxxxx
limiting the amount of loans in particular categories or to individual borrowers.
()yyyyyyyy
prohibiting banks from holding risky assets such as common stocks.
()zzzzzzzz
establishing a minimum interest rate floor that banks can earn on certain assets.
()aaaaaaaaa
doing all of the above.
()bbbbbbbbb
doing only (a) and (b) of the above.
Answer:
()ccccccccc
Banks do not want to hold too much capital because
()ddddddddd
they do not bear fully the costs of bank failures.
()eeeeeeeee
higher returns on equity are earned when bank capital is smaller.
()fffffffff higher capital levels attract the scrutiny of regulators.
()ggggggggg
all of the above.
()hhhhhhhhh
only (a) and (b) of the above.
Answer:
()iiiiiiiii Holding large amounts of bank capital helps prevent bank failures because
()jjjjjjjjj it means that the bank has a higher income.
()kkkkkkkkk
it makes loans easier to sell.
()lllllllll it can be used to absorb the losses resulting from a deposit outflow.
()mmmmmmmmm
it makes it easier to call in loans.
Answer:
()nnnnnnnnn
A bank failure is less likely to occur when
()ooooooooo
a bank holds less U.S. government securities.
()ppppppppp
a bank suffers large deposit outflows.
()qqqqqqqqq
a bank holds more excess reserves.
()rrrrrrrrr a bank has more bank capital.
Answer:
()sssssssss
The leverage ratio is the ratio of a banks
()tttttttttassets divided by its liabilities.
()uuuuuuuuu
income divided by its assets.
()vvvvvvvvv
capital divided by its total assets.
()wwwwwwwww capital divided by its total liabilities.
()xxxxxxxxx
capital divided by its earnings.
Answer:
()yyyyyyyyy
A banks regulatory capital requirements include
()zzzzzzzzz
a banks leverage ratio.
()aaaaaaaaaa
risk-based capital requirements.
()bbbbbbbbbb
a banks own models of risk exposure.
()cccccccccc
all of the above.
()dddddddddd
Answer:
()eeeeeeeeee
A well-capitalized bank has _____ to lose if it fails and thus is _____ likely to
pursue risky activities.
()ffffffffff more; more
()gggggggggg
more; less
()hhhhhhhhhh
less; more
()iiiiiiiiii less; less
()jjjjjjjjjj nothing; more
Answer:
()kkkkkkkkkk
Off-balance-sheet activities
()llllllllll generate fee income with no increase in risk.
()mmmmmmmmmm
increase bank risk but do not increase income.
()nnnnnnnnnn
generate fee income but increase a banks risk.
()oooooooooo
reduce a banks income and risk.
()pppppppppp
generate fee income and reduce risk.
Answer:
()qqqqqqqqqq
Bank capital requirements take three forms. The first type is
()rrrrrrrrrr
based on the so-called leverage ratio, the amount of capital divided by the banks
total assets.
()ssssssssss
a risk-based capital requirement that is linked to off-balance-sheet activities.
()tttttttttt a capital requirement to cover risk in trading activities.
()uuuuuuuuuu
none of the above.
Answer:
()vvvvvvvvvv
Bank capital requirements take three forms. The second type is
(a) based on the so-called leverage ratio, the amount of capital divided by the banks total assets.
(b) a risk-based capital requirement that is linked to off-balance-sheet activities.
(c) a capital requirement to cover risk in trading activities.
(d) none of the above.
Answer:
()wwwwwwwwww
Bank capital requirements take three forms. The third type is
(a) based on the so-called leverage ratio, the amount of capital divided by the banks total assets.
(b) a risk-based capital requirement that is linked to off-balance-sheet activities.
(c) a capital requirement to cover risk in trading activities.
(d) none of the above.
Answer:
()xxxxxxxxxx
The 1988 Basel Accord has resulted in
()yyyyyyyyyy
increased risk taking.
()zzzzzzzzzz
reduced risk taking.
()aaaaaaaaaaa
no change in risk taking.
()bbbbbbbbbbb a prohibition against off-balance-sheet lending.
()ccccccccccc
capital requirements that are not related to asset risk.
Answer:
()ddddddddddd The increased integration of financial markets across countries and the need to
make the playing field equal for banks from different countries led to the Basel agreement in June
1988 to
()eeeeeeeeeee
standardize bank capital requirements internationally.
()fffffffffffreduce, across the board, bank capital requirements in all countries.
()ggggggggggg sever the link between risk and capital requirements.
()hhhhhhhhhhh do all of the above.
Answer:
()iiiiiiiiiii The stated purposes of the Basel Plan include:

()jjjjjjjjjjj coordinating supervisory definitions of capital, risk assessments, and standards for capital
adequacy across countries.
()kkkkkkkkkkk linking a banks capital requirements systematically to the riskiness of its activities.
()lllllllllll devising monitoring mechanisms to prevent collusion among banks in international markets.
()mmmmmmmmmmm
all of the above.
()nnnnnnnnnnn only (a) and (b) of the above.
Answer:
()ooooooooooo Which of the following was not a stated purpose for bringing banking officials
from 12 countries together in Basel, Switzerland in June 1988?
()ppppppppppp Coordinating supervisory definitions of capital, risk assessments, and standards for
capital adequacy across countries
()qqqqqqqqqqq Linking a banks capital requirements systematically to the riskiness of its activities
()rrrrrrrrrrr
Devising monitoring mechanisms to prevent collusion among banks in international
markets
()sssssssssss
All of the above
()ttttttttttt Only (a) and (b) of the above
Answer:
()uuuuuuuuuuu Under the Basel Plan,
()vvvvvvvvvvv assets and off-balance-sheet activities are assigned to different categories to reflect
the degree of credit risk.
()wwwwwwwwwww
a banks core capital must equal or exceed 10 percent of total riskadjusted assets.
()xxxxxxxxxxx a banks total capital must equal or exceed 8 percent of total risk-adjusted assets.
()yyyyyyyyyyy all of the above.
()zzzzzzzzzzz
only (a) and (c) of the above.
Answer:
()aaaaaaaaaaaa Of the following assets, the one that has the highest capital requirement under the
Basel
Accord is
()bbbbbbbbbbbb municipal bonds.
()cccccccccccc residential mortgages.
()dddddddddddd commercial paper.
()eeeeeeeeeeee
securities issued by government agencies.
Answer:
()ffffffffffff
Of the following assets, the one that has the lowest capital requirement under the
Basel Accord is
()gggggggggggg municipal bonds.
()hhhhhhhhhhhh residential mortgages.
()iiiiiiiiiiii commercial paper.
()jjjjjjjjjjjj securities issued by government agencies.
Answer:
()kkkkkkkkkkkk Of the following assets, the one that has the lowest capital requirement under the
Basel Accord is
()llllllllllll commercial paper.
()mmmmmmmmmmmm government securities.
()nnnnnnnnnnnn municipal bonds.
()oooooooooooo residential mortgages.
Answer:
()pppppppppppp The practice of keeping high-risk assets on a banks books while removing low-risk
assets with the same capital requirement is know as
()qqqqqqqqqqqq competition in laxity.
()rrrrrrrrrrrr
depositor supervision.
()ssssssssssss
regulatory arbitrage.
()tttttttttttt
a duel banking system.
()uuuuuuuuuuuu cooking the books.
Answer:
()vvvvvvvvvvvv Banks engage in regulatory arbitrage by
()wwwwwwwwwwww
keeping high-risk assets on their books while removing low-risk assets with
the same capital requirement.
()xxxxxxxxxxxx keeping low-risk assets on their books while removing high-risk assets with the
same capital requirement.
()yyyyyyyyyyyy selling risky assets to arbitrageurs.
()zzzzzzzzzzzz buying risky assets from arbitrageurs.
()aaaaaaaaaaaaa hiding risky assets from regulators.
Answer:
()bbbbbbbbbbbbb Because banks engage in regulatory arbitrage, the Basel Accord on risk-based
capital requirements may result in
()ccccccccccccc reduced risk taking by banks.
()ddddddddddddd reduced supervision of banks by regulators.
()eeeeeeeeeeeee increased fraudulent behavior by banks.
()fffffffffffff
increased risk taking by banks.
()ggggggggggggg both (a) and (b) of the above.
Answer:
()hhhhhhhhhhhhh The chartering process is especially designed to deal with the _____ problem, and
regular bank examinations help to reduce the _____ problem.
()iiiiiiiiiiiii
adverse selection; adverse selection
()jjjjjjjjjjjjj
adverse selection; moral hazard
()kkkkkkkkkkkkk moral hazard; adverse selection
()lllllllllllll
moral hazard; moral hazard
Answer:
()mmmmmmmmmmmmm The chartering process is especially designed to deal with the _____
problem, and restrictions on asset holdings help to reduce the _____ problem.
()nnnnnnnnnnnnn adverse selection; adverse selection
()ooooooooooooo adverse selection; moral hazard
()ppppppppppppp moral hazard; adverse selection
()qqqqqqqqqqqqq moral hazard; moral hazard
Answer:
()rrrrrrrrrrrrr
Examinations of banks are conducted by
()sssssssssssss
the Office of the Comptroller of the Currency.
()ttttttttttttt
the Federal Reserve System.
()uuuuuuuuuuuuu the FDIC.
()vvvvvvvvvvvvv all of the above.
()wwwwwwwwwwwww both (a) and (b) of the above.
Answer:
()xxxxxxxxxxxxx The federal agencies that examine banks include
()yyyyyyyyyyyyy the Federal Reserve System.
()zzzzzzzzzzzzz the Internal Revenue Service.
()aaaaaaaaaaaaaa the Office of the Comptroller of the Currency.
()bbbbbbbbbbbbbb
all of the above.
()cccccccccccccc both (a) and (c) of the above.
Answer:
()dddddddddddddd
Regular bank examinations and restrictions on asset holdings help to
indirectly reduce the _____ problem because, given fewer opportunities to take on risk, risk-prone
entrepreneurs will be discouraged from entering the banking industry.
()eeeeeeeeeeeeee moral hazard
()ffffffffffffff
adverse selection
()gggggggggggggg
ex post shirking
()hhhhhhhhhhhhhh
post-contractual opportunism.
Answer:
()iiiiiiiiiiiiii
Regular bank examinations and restrictions on asset holdings help to indirectly
_____ the adverse selection problem because, given fewer opportunities to take on risk, riskprone entrepreneurs will be _____ from entering the banking industry.
()jjjjjjjjjjjjjj
increase; encouraged
()kkkkkkkkkkkkkk
increase; discouraged
()llllllllllllll
reduce; encouraged
()mmmmmmmmmmmmmm
reduce; discouraged
Answer:
()nnnnnnnnnnnnnn
The __________ problem is reduced by regular bank examinations, and
examination also indirectly helps reduce the _______________ because risk taking entrepreneurs
will be discouraged from entering the banking industry.
()oooooooooooooo
adverse selection; adverse selection
()pppppppppppppp
adverse selection; moral hazard.
()qqqqqqqqqqqqqq
moral hazard; adverse selection
()rrrrrrrrrrrrrr
moral hazard; moral hazard
()ssssssssssssss adverse selection; disintermediation
Answer:
()tttttttttttttt
Ways in which bank regulations reduce the adverse selection and moral hazard
problems in banking include
()uuuuuuuuuuuuuu
a chartering process designed to prevent crooks from getting control of a
bank.
()vvvvvvvvvvvvvv
restrictions that prevent banks from acquiring certain risky assets, such as
common stocks.
()wwwwwwwwwwwwww high bank capital requirements to increase the cost of bank failure to the
owners.
()xxxxxxxxxxxxxx
all of the above.
()yyyyyyyyyyyyyy
Answer:
()zzzzzzzzzzzzzz Bank regulators attempt to align the incentives of banks and their depositors by
requiring banks to
()aaaaaaaaaaaaaaa
maintain a relatively high amount of equity capital.
()bbbbbbbbbbbbbbb
diversify its loan portfolio.
()ccccccccccccccc submit to regular examinations.
()ddddddddddddddd
do all of the above.
Answer:
()eeeeeeeeeeeeeee One way for bank regulators to assure depositors that banks are not taking on too
much risk is to require that banks
()fffffffffffffff
diversify their loan portfolios.
()ggggggggggggggg
reduce their equity capitals.
()hhhhhhhhhhhhhhh
reduce the size of their loan portfolios.
()iiiiiiiiiiiiiii
do both (a) and (b) of the above.
()jjjjjjjjjjjjjjj
do both (b) and (c) of the above.
Answer:
()kkkkkkkkkkkkkkk
The current supervisory practice toward risk management
()lllllllllllllll
focuses on the quality of a banks balance sheet.
()mmmmmmmmmmmmmmm
determines whether capital requirements have been met.
()nnnnnnnnnnnnnnn
evaluates the soundness of a banks risk-management process.
()ooooooooooooooo
all of the above.
()ppppppppppppppp
both (b) and (c) of the above.
Answer:
()qqqqqqqqqqqqqqq
Competition between banks
()rrrrrrrrrrrrrrr
encourages greater risk taking.
()sssssssssssssss encourages conservative bank management.
()ttttttttttttttt
increases bank profitability.
()uuuuuuuuuuuuuuu
all of the above.
()vvvvvvvvvvvvvvv
both (a) and (c) of the above.
Answer:
()wwwwwwwwwwwwwww
Regulations that reduce competition between banks include
()xxxxxxxxxxxxxxx
branching restrictions.
()yyyyyyyyyyyyyyy
prohibitions preventing nonbank institutions from engaging in banking
activities.
()zzzzzzzzzzzzzzz the dual system of granting bank charters.
()aaaaaaaaaaaaaaaa
all of the above.
()bbbbbbbbbbbbbbbb
Answer:
()cccccccccccccccc
The main motive behind the forces that have shaped the development of the
current regulatory system has been the
()dddddddddddddddd
desire to prevent monopolistic practices.
()eeeeeeeeeeeeeeeedesire to ensure a sound banking system.
()ffffffffffffffff
desire to create an interstate banking system.
()gggggggggggggggg
desire to foster a highly competitive banking system.
Answer:
()hhhhhhhhhhhhhhhh
The Act that required separation of commercial and investment banking
was
()iiiiiiiiiiiiiiii
the Federal Reserve Act.
()jjjjjjjjjjjjjjjj
the Glass-Steagall Act.
()kkkkkkkkkkkkkkkk
the Bank Holding Company Act.
()llllllllllllllll
the Monetary Control Act.
()mmmmmmmmmmmmmmmm FIRREA.
Answer:
()nnnnnnnnnnnnnnnn
The Depository Institutions Deregulation and Monetary Control Act of
1980
()oooooooooooooooo
approved NOW accounts nationwide.
()pppppppppppppppp
restricted the use of ATS accounts.
()qqqqqqqqqqqqqqqq
imposed restrictive usury ceilings on large agricultural loans.
()rrrrrrrrrrrrrrrr did all of the above.
Answer:
()ssssssssssssssss The Depository Institutions Deregulation and Monetary Control Act of 1980
()tttttttttttttttt
approved NOW accounts nationwide.
()uuuuuuuuuuuuuuuu
imposed uniform reserve requirements.
()vvvvvvvvvvvvvvvv
mandated the phase out of interest rate ceilings on deposits.
()wwwwwwwwwwwwwwww
did all of the above.
()xxxxxxxxxxxxxxxx
did only (a) and (b) of the above.
Answer:
()yyyyyyyyyyyyyyyy
As a way of stemming the decline in the number of savings and loans and
mutual savings banks, the Garn-St. Germain Act of 1982 allowed
()zzzzzzzzzzzzzzzz
MMCs.
()aaaaaaaaaaaaaaaaa
MMMFs.
()bbbbbbbbbbbbbbbbb MMDAs.
()ccccccccccccccccc
NOWs.
Answer:
()ddddddddddddddddd
An impact of the Garn-St. Germain Act of 1982 has been to
()eeeeeeeeeeeeeeeee
put savings and loans at a competitive disadvantage.
()fffffffffffffffff make the banking system more competitive.
()ggggggggggggggggg
give money market mutual funds a competitive advantage.
()hhhhhhhhhhhhhhhhh
do both (a) and (b) of the above.
()iiiiiiiiiiiiiiiii
do both (a) and (c) of the above.
Answer:
()jjjjjjjjjjjjjjjjj
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.
()kkkkkkkkkkkkkkkkk
two
()lllllllllllllllll
three
()mmmmmmmmmmmmmmmmm five
()nnnnnnnnnnnnnnnnn
ten
()ooooooooooooooooo
twenty
Answer:
()ppppppppppppppppp Moral hazard and adverse selection problems increased in prominence in
the 1980s
()qqqqqqqqqqqqqqqqq
as deregulation opened up more avenues to savings and loans and mutual
savings banks to take on more risk.
()rrrrrrrrrrrrrrrrr following a burst of financial innovation in the 1970s and early 1980s that
produced new financial instruments and markets, thereby widening the scope for risk taking.
()sssssssssssssssss
following an increase in federal deposit insurance from $40,000 to
$100,000.
()ttttttttttttttttt
all of the above.
()uuuuuuuuuuuuuuuuu only (a) and (b) of the above.
Answer:
()vvvvvvvvvvvvvvvvv
Moral hazard and adverse selection problems increased in prominence in
the 1980s
()wwwwwwwwwwwwwwwww as deregulation opened up more avenues to savings and loans and
mutual savings banks to take on more risk.
()xxxxxxxxxxxxxxxxx following a burst of financial innovation in the 1970s and early 1980s that
produced new financial instruments and markets, thereby widening the scope for risk taking.
()yyyyyyyyyyyyyyyyy
following a decrease in federal deposit insurance from $100,000 to
$40,000.
()zzzzzzzzzzzzzzzzz
all of the above.
()aaaaaaaaaaaaaaaaaa
Answer:
()bbbbbbbbbbbbbbbbbb In the 1980s, high-rolling banks and S&Ls were aided in their quest for
rapid growth by
()cccccccccccccccccc
legislation that raised federal deposit insurance from $40,000 to $100,000.
()dddddddddddddddddd legislation that phased out Regulation Q deposit rate ceilings.
()eeeeeeeeeeeeeeeeee
a financial innovation that widened the scope for risk taking.
()ffffffffffffffffff all of the above.
()gggggggggggggggggg only (a) and (b) of the above.
Answer:
()hhhhhhhhhhhhhhhhhh In the early stages of the 1980s banking crisis, financial institutions were
especially hurt by
()iiiiiiiiiiiiiiiiii
the sharp increases in interest rates from late 1979 until 1981.
()jjjjjjjjjjjjjjjjjj
the severe recession in 1981-82.
()kkkkkkkkkkkkkkkkkk the sharp decline in the price level from mid 1980 to early 1983.
()llllllllllllllllll
all of the above.
()mmmmmmmmmmmmmmmmmm
Answer:
()nnnnnnnnnnnnnnnnnn In the early stages of the 1980s banking crisis, financial institutions were
especially harmed by
()oooooooooooooooooo declining interest rates from late 1979 until 1981.
()pppppppppppppppppp the severe recession in 1981-82.
()qqqqqqqqqqqqqqqqqq the disinflation from mid 1980 to early 1983.
()rrrrrrrrrrrrrrrrrr all of the above.
Answer:
()ssssssssssssssssss
Although as many as half of the S&Ls in the U.S. had a negative net worth
and were thus insolvent by the end of 1982, regulators adopted a policy of _____, which
amounted to _____ capital requirements.
()tttttttttttttttttt
regulatory forbearance; raising
()uuuuuuuuuuuuuuuuuu regulatory forbearance; lowering
()vvvvvvvvvvvvvvvvvv regulatory agnosticism; raising
()wwwwwwwwwwwwwwwwww regulatory agnosticism; lowering
Answer:
()xxxxxxxxxxxxxxxxxx Which of the following reasons explain why federal regulators adopted a
policy of regulatory forbearance toward insolvent financial institutions in the early 1980s?
()yyyyyyyyyyyyyyyyyy The FSLIC lacked sufficient funds to cover insured deposits in the
insolvent S&Ls.
()zzzzzzzzzzzzzzzzzz
The regulators were reluctant to close the firms that justified their
regulatory existence.
()aaaaaaaaaaaaaaaaaaa The Federal Home Loan Bank Board and the FSLIC were reluctant to
admit that they were in over their heads with problems.
()bbbbbbbbbbbbbbbbbbb All of the above.
()ccccccccccccccccccc
Only (a) and (b) of the above.
Answer:
()ddddddddddddddddddd The policy of _____ exacerbated _____ problems as savings and loans
took on increasingly huge levels of risk on the slim chance of returning to solvency.
()eeeeeeeeeeeeeeeeeee
regulatory forbearance; moral hazard
()fffffffffffffffffff regulatory forbearance; adverse hazard
()ggggggggggggggggggg regulatory agnosticism; moral hazard
()hhhhhhhhhhhhhhhhhhh regulatory agnosticism; adverse hazard
Answer:
()iiiiiiiiiiiiiiiiiii
The policy of regulatory forbearance
()jjjjjjjjjjjjjjjjjjj
meant delaying the closing of zombie S&Ls as their losses mounted during the
1980s.
()kkkkkkkkkkkkkkkkkkk benefited zombie S&Ls at the expense of healthy S&Ls, as healthy
institutions lost deposits to insolvent institutions.
()lllllllllllllllllll
contributed to declining profitability in the S&L industry and an increase in the
number of zombie S&Ls.
()mmmmmmmmmmmmmmmmmmm
all of the above.
()nnnnnnnnnnnnnnnnnnn only (a) and (b) of the above.
Answer:
()ooooooooooooooooooo The policy of regulatory forbearance
()ppppppppppppppppppp meant delaying the closing of zombie S&Ls as their losses mounted
during the 1980s.
()qqqqqqqqqqqqqqqqqqq benefited zombie S&Ls at the expense of healthy S&Ls, as healthy
institutions lost deposits to insolvent institutions.
()rrrrrrrrrrrrrrrrrrr had the advantage that it benefited healthy S&Ls by giving them the opportunity to
attract deposits that began to leave the zombie S&Ls.
()sssssssssssssssssss
()ttttttttttttttttttt both (a) and (c) of the above.
Answer:
()uuuuuuuuuuuuuuuuuuu Regulatory forbearance
()vvvvvvvvvvvvvvvvvvv meant delaying the closing of zombie S&Ls as their losses mounted
during the 1980s.
()wwwwwwwwwwwwwwwwwww
had the advantage of benefiting healthy S&Ls at the
expense of zombie S&Ls, as insolvent institutions lost deposits to health institutions.
()xxxxxxxxxxxxxxxxxxx had the advantage of permitting many insolvent S&Ls the opportunity to
return to profitability, saving the FSLIC billions of dollars.
()yyyyyyyyyyyyyyyyyyy means all of the above.
()zzzzzzzzzzzzzzzzzzz
means (a) and (c) of the above.
Answer:
()aaaaaaaaaaaaaaaaaaaa In 1987, Far West Savings & Loan Association, with a negative net worth
of $290 million, persuaded the Federal Home Loan Bank of Seattle to lend the thrift more than $1
billion. This regulatory response to insolvency is an example of
()bbbbbbbbbbbbbbbbbbbb
loophole mining.
()cccccccccccccccccccc regulatory forbearance.
()dddddddddddddddddddd securitization.
()eeeeeeeeeeeeeeeeeeee
none of the above.
Answer:
()ffffffffffffffffffff The Competitive Equality Banking Act of 1987
()gggggggggggggggggggg provided insufficient funds to the FSLIC to close down insolvent S&Ls.
()hhhhhhhhhhhhhhhhhhhh actually directed S&L regulators to continue to pursue regulatory
forbearance, further delaying the closing of insolvent S&Ls.
()iiiiiiiiiiiiiiiiiiii created a new agency, the Resolution Trust Corporation, to manage insolvent
thrifts.
()jjjjjjjjjjjjjjjjjjjj did all of the above.
()kkkkkkkkkkkkkkkkkkkk did only (a) and (b) of the above.
Answer:
()llllllllllllllllllll The major provisions of the Competitive Equality Banking Act of 1987 include
()mmmmmmmmmmmmmmmmmmmm
expanding the responsibilities of the FDIC, which is now
the sole administrator of the federal deposit insurance system.
()nnnnnnnnnnnnnnnnnnnn the establishment of the Resolution Trust Corporation to manage and
resolve insolvent thrifts placed in conservatorship or receivership.
()oooooooooooooooooooo directing the Federal Home Loan Bank Board to continue to pursue
regulatory forbearance.
()pppppppppppppppppppp
all of the above.
()qqqqqqqqqqqqqqqqqqqq only (a) and (b) of the above.
Answer:
()rrrrrrrrrrrrrrrrrrrr
The major provisions of the Competitive Equality Banking Act of 1987
include
()ssssssssssssssssssss
the abolishment of the Federal Home Loan Bank Board and the FSLIC.
()tttttttttttttttttttt transferring the regulatory role of the Federal Home Loan Bank Board to the Office
of Thrift Supervision, a bureau within the U.S. Treasury Department.
()uuuuuuuuuuuuuuuuuuuu
the establishment of the Resolution Trust Corporation to manage
and resolve insolvent thrifts placed in conservatorship or receivership.
()vvvvvvvvvvvvvvvvvvvv all of the above.
()wwwwwwwwwwwwwwwwwwww
none of the above.
Answer:
()xxxxxxxxxxxxxxxxxxxx
Provisions of the 1987 Competitive Equality Banking Act included
()yyyyyyyyyyyyyyyyyyyy provision of an additional $10.8 billion to the FSLIC.
()zzzzzzzzzzzzzzzzzzzz directing the Federal Home Loan Bank Board to hasten the closing of
insolvent S&Ls.
()aaaaaaaaaaaaaaaaaaaaa transferring the regulatory responsibility of the FSLIC to the FDIC.
()bbbbbbbbbbbbbbbbbbbbb
all of the above.
()ccccccccccccccccccccc both (b) and (c) of the above.
Answer:
()ddddddddddddddddddddd
Responsibility for the high cost of the savings and loan bailout
rests with
()eeeeeeeeeeeeeeeeeeeee thrift regulators.
()fffffffffffffffffffff depositors.
()ggggggggggggggggggggg
politicians.
()hhhhhhhhhhhhhhhhhhhhh
thrift officials.
Answer:
()iiiiiiiiiiiiiiiiiiiii Bureaucratic gambling refers to
()jjjjjjjjjjjjjjjjjjjjj the strategy of thrift managers that they would not be audited by thrift regulators in
the 1980s due to the relatively weak bureaucratic power of thrift regulators.
()kkkkkkkkkkkkkkkkkkkkk
the risk that thrift regulators took in publicizing the plight of the
S&L industry in the early 1980s.
()lllllllllllllllllllll 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.
()mmmmmmmmmmmmmmmmmmmmm none of the above.
Answer:
()nnnnnnnnnnnnnnnnnnnnn
That taxpayers were poorly served by thrift regulators in the
1980s is now quite clear. This poor performance is explained by
()ooooooooooooooooooooo
regulators desire to escape blame for poor performance, leading to
a perverse strategy of bureaucratic gambling.
()ppppppppppppppppppppp
regulators incentives to accede to pressures imposed by
politicians, who sought to keep regulators from imposing tough regulations on institutions that
were major campaign contributors.
()qqqqqqqqqqqqqqqqqqqqq
Congresss unwillingness to appropriate sufficient funds to permit
regulators to examine the many thrift institutions that needed monitoring.
()rrrrrrrrrrrrrrrrrrrrr
all of the above.
()sssssssssssssssssssss
Answer:
()ttttttttttttttttttttt Taxpayers were served poorly by thrift regulators in the 1980s. This poor
performance cannot be explained by
()uuuuuuuuuuuuuuuuuuuuu
regulators desire to escape blame for poor performance, leading to
a perverse strategy of bureaucratic gambling.
()vvvvvvvvvvvvvvvvvvvvv
regulators incentives to accede to pressures imposed by
politicians, who sought to keep regulators from imposing tough regulations on institutions that
were major campaign contributors.
()wwwwwwwwwwwwwwwwwwwww
Congresss dogged determination to protect taxpayers
from the unsound banking practices of managers at many of the nations savings and loans.
()xxxxxxxxxxxxxxxxxxxxx
any of the above.
Answer:
()yyyyyyyyyyyyyyyyyyyyy
An analysis of the political economy of the savings and loan crisis
helps one to understand
()zzzzzzzzzzzzzzzzzzzzz why politicians hampered the efforts of thrift regulators, cutting regulatory
appropriations and encouraging regulatory forbearance.
()aaaaaaaaaaaaaaaaaaaaaa
why thrift regulators were so reluctant to admit that any problem
even existed in the thrift industry.
()bbbbbbbbbbbbbbbbbbbbbb
why thrift regulators willingly acceded to pressures placed upon
them by members of Congress.
()cccccccccccccccccccccc all of the above.
()dddddddddddddddddddddd
Answer:
()eeeeeeeeeeeeeeeeeeeeee An analysis of the political economy of the savings and loan crisis helps
one to understand
()ffffffffffffffffffffff
why politicians aided the efforts of thrift regulators, raising regulatory
appropriations and encouraging closing of insolvent thrifts.
()gggggggggggggggggggggg
why thrift regulators were so quick to inform Congress of the
problems that existed in the thrift industry.
()hhhhhhhhhhhhhhhhhhhhhh
why thrift regulators willingly acceded to pressures placed upon
them by members of Congress.
()iiiiiiiiiiiiiiiiiiiiii all of the above.
Answer:
()jjjjjjjjjjjjjjjjjjjjjj That several hundred S&Ls were not even examined once in the period January
1984 through June 1986 can be explained by
()kkkkkkkkkkkkkkkkkkkkkk
Congresss unwillingness to allocate the necessary funds to thrift
regulators.
()llllllllllllllllllllll the strong S&L lobby which contributed heavily to members of Congress and asked
Congress to encourage regulatory forbearance.
()mmmmmmmmmmmmmmmmmmmmmm prohibitions against onerous regulatory restrictions against
S&Ls as mandated in the Competitive Banking Equality Act.
()nnnnnnnnnnnnnnnnnnnnnn
all of the above.
()oooooooooooooooooooooo
Answer:
()pppppppppppppppppppppp
That several hundred S&Ls were not even examined once in the
period January 1984 through June 1986 can be explained by
()qqqqqqqqqqqqqqqqqqqqqq
Congresss unwillingness to allocate the necessary funds to thrift
regulators.
()rrrrrrrrrrrrrrrrrrrrrr
regulators reluctance to find the specific problem thrifts that they knew
existed.
()ssssssssssssssssssssss prohibitions against onerous regulatory restrictions against S&Ls as
mandated in the Competitive Banking Equality Act.
()tttttttttttttttttttttt all of the above.
()uuuuuuuuuuuuuuuuuuuuuu
Answer:
()vvvvvvvvvvvvvvvvvvvvvv
The bailout of the savings and loan industry was much delayed
and, therefore, much more costly to taxpayers because
()wwwwwwwwwwwwwwwwwwwwww of regulators initial attempts to downplay the seriousness
of problems within the thrift industry.
()xxxxxxxxxxxxxxxxxxxxxx
politicians who received generous campaign contributions from the
savings and loan industry, like regulators, hoped that the problems in the industry would ease over
time.
()yyyyyyyyyyyyyyyyyyyyyy
Congress encouraged, and thrift regulators acceded to, a policy of
()zzzzzzzzzzzzzzzzzzzzzz of all of the above.
()aaaaaaaaaaaaaaaaaaaaaaa
of only (a) and (b) of the above.
Answer:
()bbbbbbbbbbbbbbbbbbbbbbb
The bailout of the savings and loan industry was much delayed
and, therefore, much more costly to taxpayers because
()ccccccccccccccccccccccc
of regulators initial attempts to downplay the seriousness of
problems within the thrift industry.
()ddddddddddddddddddddddd
politicians who received generous campaign contributions from the
savings and loan industry, like regulators, hoped that the problems in the industry would ease over
time.
()eeeeeeeeeeeeeeeeeeeeeee Congress did not wait long enough for many of the problems in the thrift
industry to correct themselves.
()fffffffffffffffffffffff
of all of the above.
()ggggggggggggggggggggggg
of only (a) and (b) of the above.
Answer:
()hhhhhhhhhhhhhhhhhhhhhhh
Prior to August 1989, the agency that regulated the nations
savings and loan associations was the
()iiiiiiiiiiiiiiiiiiiiiii Federal Home Loan Bank Board.
()jjjjjjjjjjjjjjjjjjjjjjj Office of Thrift Supervision.
()kkkkkkkkkkkkkkkkkkkkkkk
Resolution Trust Corporation.
()lllllllllllllllllllllll Comptroller of the Currency.
Answer:
()mmmmmmmmmmmmmmmmmmmmmmm
The Federal Home Loan Bank Board and the
FSLIC, both of which failed in their regulatory tasks, were abolished by the
()nnnnnnnnnnnnnnnnnnnnnnn
Competitive Equality Banking Act of 1987.
()ooooooooooooooooooooooo
Financial Institutions Reform, Recovery and Enforcement Act of
1989.
()ppppppppppppppppppppppp
Office of Thrift Supervision.
()qqqqqqqqqqqqqqqqqqqqqqq
Office of the Comptroller of the Currency.
Answer:
()rrrrrrrrrrrrrrrrrrrrrrr
The major provisions of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 include
()sssssssssssssssssssssss the abolishment of the Federal Home Loan Bank Board and the FSLIC.
()ttttttttttttttttttttttt transferring the regulatory role of the Federal Home Loan Bank Board to the Office
of Thrift Supervision, a bureau within the U.S. Treasury Department.
()uuuuuuuuuuuuuuuuuuuuuuu
expanding the responsibilities of the FDIC, which is now the sole
administrator of the federal deposit insurance system.
()vvvvvvvvvvvvvvvvvvvvvvv
all of the above.
()wwwwwwwwwwwwwwwwwwwwwww only (a) and (b) of the above.
Answer:
()xxxxxxxxxxxxxxxxxxxxxxx
The major provisions of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 include
()yyyyyyyyyyyyyyyyyyyyyyy
the abolishment of the Federal Home Loan Bank Board and the
FSLIC.
()zzzzzzzzzzzzzzzzzzzzzzz
transferring the regulatory role of the Federal Home Loan Bank
Board to the Office of Thrift Supervision, a bureau within the U.S. Treasury Department.
()aaaaaaaaaaaaaaaaaaaaaaaa
()bbbbbbbbbbbbbbbbbbbbbbbb all of the above.
()cccccccccccccccccccccccc
Answer:
()dddddddddddddddddddddddd
The major provisions of the Financial Institutions Reform,
()eeeeeeeeeeeeeeeeeeeeeeee
transferring the regulatory role of the Federal Home Loan Bank
Board to the Office of Thrift Supervision, a bureau within the U.S. Treasury Department.
()ffffffffffffffffffffffff
()gggggggggggggggggggggggg
()hhhhhhhhhhhhhhhhhhhhhhhh
all of the above.
()iiiiiiiiiiiiiiiiiiiiiiii only (a) and (b) of the above.
Answer:
()jjjjjjjjjjjjjjjjjjjjjjjj The major provisions of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 include
()kkkkkkkkkkkkkkkkkkkkkkkk
()llllllllllllllllllllllll the establishment of the Resolution Trust Corporation to manage and resolve
insolvent thrifts placed in conservatorship or receivership.
()mmmmmmmmmmmmmmmmmmmmmmmm
directing the Federal Home Loan Bank Board to
continue to pursue regulatory forbearance.
()nnnnnnnnnnnnnnnnnnnnnnnn
all of the above.
()oooooooooooooooooooooooo
Answer:
()pppppppppppppppppppppppp The major provisions of the Financial Institutions Reform,

()qqqqqqqqqqqqqqqqqqqqqqqq
reducing the regulatory responsibilities of the FDIC.
()rrrrrrrrrrrrrrrrrrrrrrrr
the establishment of the Resolution Trust Corporation to manage and
resolve insolvent thrifts placed in conservatorship or receivership.
()ssssssssssssssssssssssss directing the Federal Home Loan Bank Board to continue to pursue
()tttttttttttttttttttttttt
all of the above.
()uuuuuuuuuuuuuuuuuuuuuuuu only (a) and (b) of the above.
Answer:
()vvvvvvvvvvvvvvvvvvvvvvvv
The 1989 Financial Institutions Reform, Recovery and
Enforcement Act
()wwwwwwwwwwwwwwwwwwwwwwww
transferred the regulatory role of the Office of
Thrift Supervision to the Federal Home Loan Bank Board.
()xxxxxxxxxxxxxxxxxxxxxxxx significantly reduced the responsibilities of the FDIC, which no
longer administers the federal deposit insurance system.
()yyyyyyyyyyyyyyyyyyyyyyyy
established the Resolution Trust Corporation to manage and
resolve insolvent thrifts placed into conservatorship or receivership.
()zzzzzzzzzzzzzzzzzzzzzzzz
all of the above.
()aaaaaaaaaaaaaaaaaaaaaaaaa
Answer:
()bbbbbbbbbbbbbbbbbbbbbbbbb Many economists are mildly critical of FIRREA because
()ccccccccccccccccccccccccc
it reduces the efficiency of financial intermediation in the United
States.
()ddddddddddddddddddddddddd it does little to deal with the underlying adverse selection and
moral hazard problems created by deposit insurance.
()eeeeeeeeeeeeeeeeeeeeeeeee
it significantly reduces the powers of thrift regulators and makes it
more difficult to remove incompetent thrift managers.
()fffffffffffffffffffffffff
of all of the above.
()ggggggggggggggggggggggggg of only (a) and (b) of the above.
Answer:
()hhhhhhhhhhhhhhhhhhhhhhhhh The Federal Deposit Insurance Corporation Improvement Act of
1991
()iiiiiiiiiiiiiiiiiiiiiiiiiincreased the FDICs ability to borrow from the Treasury to deal with failed banks.
()jjjjjjjjjjjjjjjjjjjjjjjjjreduced the scope of deposit insurance in several ways.
()kkkkkkkkkkkkkkkkkkkkkkkkk eliminated governmentally-administered deposit insurance.
()llllllllllllllllllllllllldid only (a) and (b) of the above.
Answer:
()mmmmmmmmmmmmmmmmmmmmmmmmm The Federal Deposit Insurance Corporation

Improvement Act of 1991
()nnnnnnnnnnnnnnnnnnnnnnnnn reduced the scope of deposit insurance in several ways.
()ooooooooooooooooooooooooo eliminated restrictions on nationwide banking.
()ppppppppppppppppppppppppp allowed well-capitalized banks to have to do some securities
underwriting.
()qqqqqqqqqqqqqqqqqqqqqqqqq did only (a) and (b) of the above.
()rrrrrrrrrrrrrrrrrrrrrrrrr did only (a) and (c) of the above.
Answer:
()sssssssssssssssssssssssss The Federal Deposit Insurance Corporation Improvement Act of 1991
()ttttttttttttttttttttttttt
reduced the scope of deposit insurance in several ways.
()uuuuuuuuuuuuuuuuuuuuuuuuu limited the FDICs ability to use the too-big-to-fail policy.
()vvvvvvvvvvvvvvvvvvvvvvvvv requires the FDIC to intervene earlier when a bank gets into
trouble.
()wwwwwwwwwwwwwwwwwwwwwwwww
did all of the above.
Answer:
()xxxxxxxxxxxxxxxxxxxxxxxxx The Federal Deposit Insurance Corporation Improvement Act of
1991
()yyyyyyyyyyyyyyyyyyyyyyyyy instructed the FDIC to come up with risk-based deposit insurance
premiums.
()zzzzzzzzzzzzzzzzzzzzzzzzz
expanded the FDICs ability to use the too-big-to-fail policy.
()aaaaaaaaaaaaaaaaaaaaaaaaaa instructed the FDIC to wait longer before intervening when a bank
gets into trouble.
()bbbbbbbbbbbbbbbbbbbbbbbbbb did all of the above.
Answer:
()cccccccccccccccccccccccccc
An examination of banking crises in the Scandinavian countries
Norway, Sweden, and Finland
indicates that, as in the U.S., an important factor in the crises was the
()dddddddddddddddddddddddddd decline in real interest rates that occurred in the 1980s.
()eeeeeeeeeeeeeeeeeeeeeeeeee
financial liberalization that occurred in the 1980s.
()ffffffffffffffffffffffffff
high inflation that occurred in the 1980s.
()gggggggggggggggggggggggggg sluggish economic growth that occurred in the 1980s.
Answer:
()hhhhhhhhhhhhhhhhhhhhhhhhhh As in the United States, an important factor in the banking crises

in Norway, Sweden, and Finland was the
()iiiiiiiiiiiiiiiiiiiiiiiiii
financial liberalization that occurred in the 1980s.
()jjjjjjjjjjjjjjjjjjjjjjjjjj
decline in real interest rates that occurred in the 1980s.
()kkkkkkkkkkkkkkkkkkkkkkkkkk high inflation that occurred in the 1980s.
()llllllllllllllllllllllllll
sluggish economic growth that occurred in the 1980s.
Answer:
()mmmmmmmmmmmmmmmmmmmmmmmmmm As in the United States, an important factor in the
banking crises in Latin America was the
()nnnnnnnnnnnnnnnnnnnnnnnnnn financial liberalization that occurred in the 1980s.
()oooooooooooooooooooooooooo decline in real interest rates that occurred in the 1980s.
()pppppppppppppppppppppppppp high inflation that occurred in the 1980s.
()qqqqqqqqqqqqqqqqqqqqqqqqqq sluggish economic growth that occurred in the 1980s.
Answer:
()rrrrrrrrrrrrrrrrrrrrrrrrrr When comparing the banking crisis in the United States to the crises in
Mexico and Venezuela, the cost to the taxpayers of the government bailouts was
()ssssssssssssssssssssssssss
higher in Mexico and the United States than in Venezuela.
()tttttttttttttttttttttttttt
higher in Mexico and Venezuela than in the United States.
()uuuuuuuuuuuuuuuuuuuuuuuuuu higher in Venezuela and the United States than in Mexico.
()vvvvvvvvvvvvvvvvvvvvvvvvvv higher in the United States than in Mexico and Venezuela.
Answer:
()wwwwwwwwwwwwwwwwwwwwwwwwww
In the recent banking crises in Venezuela, the cost
to the taxpayers of the government bailouts could exceed ______ percent of GDP.
()xxxxxxxxxxxxxxxxxxxxxxxxxx 50
()yyyyyyyyyyyyyyyyyyyyyyyyyy 30
()zzzzzzzzzzzzzzzzzzzzzzzzzz
10
()aaaaaaaaaaaaaaaaaaaaaaaaaaa 5
Answer:
()bbbbbbbbbbbbbbbbbbbbbbbbbbb
Common to all the recent banking crises in the United
States, Scandinavia, Latin America, Japan, Russia, and Eastern Europe was the
()ccccccccccccccccccccccccccc the financial liberalization that occurred in the 1980s.
()ddddddddddddddddddddddddddd the banks lack of expertise in screening borrowers and monitoring
loans.
()eeeeeeeeeeeeeeeeeeeeeeeeeee
the regulators lack of expertise in monitoring banking activities.
()fffffffffffffffffffffffffff
all of the above.
()ggggggggggggggggggggggggggg only (a) and (b) of the above.
Answer:
()hhhhhhhhhhhhhhhhhhhhhhhhhhh The evidence from banking crises in other countries indicates that
()iiiiiiiiiiiiiiiiiiiiiiiiiii
deposit insurance is to blame in each country.
()jjjjjjjjjjjjjjjjjjjjjjjjjjj
a government safety net for depositors need not increase moral hazard.
()kkkkkkkkkkkkkkkkkkkkkkkkkkk expertise in screening borrowers cannot prevent loan losses.
()lllllllllllllllllllllllllll
deregulation combined with poor regulatory supervision raises moral
hazard incentives.
()mmmmmmmmmmmmmmmmmmmmmmmmmmm
regulatory forbearance never leads to
problems.
Answer:
Internet Appendix
126) A system of coinsurance would
(a) eliminate deposit insurance.
(b) reduce deposit insurance to $40,000.
(c) Increase deposit insurance to $130,000.
(d) provide 100% deposit insurance for all deposits.
(e) limit deposit insurance to only a percentage of a deposit.
Answer:
127) Eliminating or reducing deposit insurance may fail to provide the desired discipline because
(a) depositors may be incapable of monitoring banks.
(b) banks would be subject to runs and a large number of failures.
(c) such an action increases banks incentives to assume high risk.
(d) all of the above.
(e) both (a) and (b) of the above.
Answer:
128) Big banks are not subject to enough discipline from uninsured depositors because of
(a) regulatory forbearance.
(b) bureaucratic gambling.
(c) the too-big-to-fail policy.
(d) the principal-agent problem.
(e) prudential supervision.
Answer:
129) Risk-based deposit insurance premiums

(a) reduce moral hazard incentives.
(b) encourage banks to hold more capital.
(c) reduce the adverse selection problem for regulators.
(d) all of the above.
(e) both (a) and (b) of the above.
Answer:
130) Market-value accounting has a number of advantages over historical-cost accounting, including
(a) giving regulators the ability to close a bank before its net worth falls to zero.
(b) reducing the incidence in the number of banks that bet-the-bank by taking excessive risks in
hopes of staying in operation.
(c) making it more difficult for bank officials to hide insolvencies.
(d) making it more difficult for regulators and politicians to hide insolvencies.
(e) all of the above
Answer:
)2
Essay Questions
()a
The government safety net is considered a mixed blessing. Discuss the pros and cons of the
safety net.
()b
What factors account for the banking crisis of the 1980s?
()c
Banking regulation suffers from the principal-agent problem. Describe how this problem
relates to regulators and politicians.

Economic Analysis of Banking Regulation

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Chapter 11Economic Analysis of Banking Regulation131

132Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

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()ssss Deposit insurance works well in countries with

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()vvvvvv The too-big-to-fail policy

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()llllllll Financial consolidation poses challenges to banking regulation because

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()iiiiiiiiiii The stated purposes of the Basel Plan include:

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()pppppppppppppppppppppppp The major provisions of the Financial Institutions Reform,

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()mmmmmmmmmmmmmmmmmmmmmmmmm The Federal Deposit Insurance Corporation

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()hhhhhhhhhhhhhhhhhhhhhhhhhh As in the United States, an important factor in the banking crises

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129) Risk-based deposit insurance premiums

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