Quiz 10 Flashcards
(20 cards)
To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance.
FDIC
The primary difference between the ‘payoff’ and the ‘purchase and assumption’ methods of handling failed banks is:
B. the FDIC guarantees all deposits when it uses the ‘purchase and assumption’ method.
Moral hazard is an important concern of insurance arrangements because the existence of insurance:
A. provides increased incentives for risk taking.
Although the FDIC was created to prevent bank failures, its existence encourages banks to:
A. take too much risk.
The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry.
An adverse selection
In May 1991, the FDIC announced that it would sell the government’s final 26% stake in Continental Illinois, ending government ownership of the bank it rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois:
C. was too big to fail.
If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.
D. purchase and assumption; no
Regulators attempt to reduce the riskiness of banks’ asset portfolios by:
A. limiting the amount of loans in particular categories or to individual borrowers.
A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.
B. more; less
A bank failure is less likely to occur when:
D. a bank has more bank capital.
The leverage ratio is the ratio of a bank’s:
C. capital divided by its total assets.
To be considered well capitalized, a bank’s leverage ratio must exceed:
C. 5%
The Basel Accord, an international agreement, requires banks to hold capital based on:
A. risk-weighted assets.
The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem.
B. adverse selection; moral hazard
Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for:
B. liquidity.
The federal agencies that examine banks include:
A. the Federal Reserve System.
Regulations designed to provide information to the marketplace so that investors can make informed decisions are called:
A. disclosure requirements.
Consumer protection legislation includes legislation to:
A. reduce discrimination in credit markets.
Regulations that reduced competition between banks included:
A. branching restrictions.
The ________ that required separation of commercial and investment banking was repealed in 1999.
B. Glass-Steagall Act.
