HW questions Flashcards
(43 cards)
A bank failure is less likely to occur when
a bank has more bank capital
A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.
increases; moral hazard
Although the FDIC was created to prevent bank failures, its existence encourages banks to
take too much risk.
Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the
contagion effect.
Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for
liquidity.
When bad drivers line up to purchase collision insurance, automobile insurers are subject to the
adverse selection problem.
The leverage ratio is the ratio of a bank’s
capital divided by its total assets.
The FDIC must take steps to close down banks whose equity capital is less than ________ of assets.
2%
Conditions that likely contributed to a credit crunch during the global financial crisis include
capital shortfalls caused in part by falling real estate prices.
A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and the bank’s ________ by $100.
reserves
A bank is insolvent when
its liabilities exceed its assets.
Asset transformation can be described as
borrowing short and lending long.
Bank’s make their profits primarily by issuing
loans.
Banks hold excess and secondary reserves to
provide for unexpected deposit outflows.
What is the primary concerns of the bank manager?
maintaining sufficient reserves to minimize the cost to the bank of deposit outflows
Which of the following statements is FALSE?
A bank’s assets are its uses of funds.
A bank issues liabilities to acquire funds.
The bank’s assets provide the bank with income.
Correct:
Bank capital is recorded as an asset on the bank balance sheet.
A ________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there are losses on the underlying assets.
CDO
A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system
causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.
A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a
financial crisis.
A serious consequence of a financial crisis is
a contraction in economic activity.
A possible sequence for the three stages of a financial crisis might be ________ leads to ________ leads to ________.
asset price declines; banking crises; unanticipated decline in price level
Debt deflation occurs when
an economic downturn causes the price level to fall and a deterioration in firms’ net worth because of the increased burden of indebtedness.
If uncertainty about banks’ health causes depositors to begin to withdraw their funds from banks, the country experiences a(n)
banking crisis.
In a bank panic, the source of contagion is the
asymmetric information problem.
