ECO 303 – Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the

Question1) Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is theA) too-big-to-fail effect. B) moral hazard problem.C) adverse selection problem. D) contagion effect.2) During the boom years of the 1920s, bank failures were quiteA) 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.3) In the early stages of the 1980s banking crisis, financial institutions were especially harmed byA) 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.4) That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained byA) 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.5) 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 theA) 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.6) Competition between banks and other financial intermediariesA) encourages greater risk taking. B) encourages conservative bank management.C) increases bank profitability. D) eliminates the need for government regulation.7) Regulations that reduced competition between banks includedA) branching restrictions. B) bank reserve requirements.C) the dual system of granting bank charters. D) interest-rate ceilings.8) Regulations designed to provide information to the marketplace so that investors can make informed decisions are calledA) disclosure requirements. B) efficient market requirements.C) asset restrictions. D) capital requirements.9) The current supervisory practice toward risk managementA) 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.10) The primary difference between the “payoff” and the “purchase and assumption” methods of handling failed banks isA) 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 beeasier to find a purchaser for them compared to large institutions.11) Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following EXCEPTA) 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.12) The too-big-to-fail policyA) 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.13) 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; less14) 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 theA) “payoff” method. B) “purchase and assumption” method.C) “inequity” method. D) “Basel” method.15) Moral hazard is an important concern of insurance arrangements because the existence of insuranceA) 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.16) The practice of keeping high-risk assets on a bank’s books while removing low-risk assets with the same capitalrequirement is known asA) competition in laxity. B) depositor supervision.C) regulatory arbitrage. D) a dual banking system.17) Off-balance-sheet activitiesA) generate fee income with no increase in risk. B) increase bank risk but do not increase income.C) generate fee income but increase a bank’s risk. D) generate fee income and reduce risk.18) The Resolution Trust Corporation was created by the FIRREA in order toA) 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.

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