Reference no: EM131022418

Practice Questions #3

Identifications:

I. Below is a list of terms that is not meant to be inclusive for this group of chapters (9-12): define and explain the significance of each.

Bank failure
Bank panic
Contagion effect
Government safety net
Too Big to Fail
Leverage ratio
Basel Accord
Call reports
Community Reinvestment Act
Depository Institutions Act of 1982
Competitive Equality in Banking Act of 1987
Brokered deposits
Regulatory forbearance
Zombie S & L
Risk-based insurance premiums
Bank Holding Company
Nonbank banks
Edge Act
Edge Act Corporation
International Banking Facilities
Fallen angels
Money market mutual funds
Junk bonds
Commercial paper market
Securitization
Tranches
Transparency
Disintermediation

II. True?False/Uncertain

Read each statement below and decide whether you think it is true, false, or you are uncertain. Explain your position in a paragraph.

1. The United States has always had a group of national banks.
2. The United States has throughout its entire history had a central banking authority.
3. The U.S. banking system significantly differs from the banking systems found in other industrialized countries.
4. The U.S. utilizes a dual banking system.
5. Commercial banks make profits from the interest "spread" between the cost of acquiring funds and the revenue from the use of those funds.
6. Commercial banks also make profits from fees they receive from providing various financial services.
7. Central banks do not make economic profits in most cases.
8. The U.S. banking system evolved in its particular manner due to the haphazard settling of the U.S. frontier and our desire to consolidate financial power.
9. The National Banking Act of 1863 established the Federal Reserve System.
10. The McFadden Act of 1927 limited the branching of banks across state lines.
11. The presence of many banks in the U.S. banking industry indicates that the U.S. banking system is highly competitive.
12. The Glass-Steagall Banking Act of 1933 separated the banking and securities industry.
13. The U.S. banking system is regulated by one regulatory agency.
14. Loophole mining is the attempt to create financial innovations in response to changes in demand or supply conditions in financial markets.
15. NOW accounts and ATS are two examples of financial innovations that allow banks to avoid existing banking regulation.
16. The banking and securities industries should be kept separate from each other.
17. In Germany, the Netherlands, and the United Kingdom there is no separation of the banking and securities industry.
18. A Eurodollar is a dollar denominated deposit in a foreign owned bank.
19. Eurodollars are examples of "offshore" deposits.
20. As banking becomes increasingly internationalized this implies that financial markets throughout the world are becoming increasingly integrated.
21. The role of traditional banking is to borrow long and lend short.
22. Money market mutual funds compete with banks for deposits.
23. Money market mutual funds invest primarily in capital market instruments.
24. Transparency has been significantly increased due to recent innovations in the financial system.
25. Securitization refers to the process of transforming a capital market asset into a money market asset.
26. Securitization significantly increases the liquidity of the financial assets that are securitized.
27. Disintermediation means that banks are no longer providing essential financial services to lenders and borrowers.
28. Bank regulation reduces adverse selection but fails to reduce moral hazard.
29. As long as there is a government safety net, moral hazard problems will persist in the banking industry.
30. Risk-based capital requirements are a more reliable guide to capital requirements than are leverage ratios.
31. If an individual has $120,000 in a bank account and his bank fails, this individual will prefer the payoff method over the purchase and assumption method.
32. The "too-big-to-fail" policy is both a wise and a fair policy.
33. DIDMCA did not contribute to the problems that the S&Ls experienced in the 1980s.
34. The S&L Crisis of the 1980s was due to sharp increases in the interest rate.
35. Before 1980 S&Ls did not have a mismatch between short-term deposits and long-term loans.
36. The S&L industry had the "opportunities, capabilities, and incentives for risk-taking".
37. The deregulation of the banking industry was a sound policy that was undermined by fraud and dishonest behavior.
38. The deregulation of the banking industry failed due to the neglect of safety and soundness regulation and the persistence of regulatory forbearance.
39. FIRREA was primarily concerned with the recapitalization of the bank insurance fund.
40. FIRREA reinstituted restrictions on S&L activities.
41. FDICIA had two purposes: the recapitalization of the bank insurance fund and the reform of both depository insurance and the regulatory system.
42. Financial liberalization is always a beneficial move.
43. Moral hazard incentives create an environment conducive to excessive risk taking.