Ch. 14 terms

Question 1

Liquidity

Answer 1

Ability to turn assets into cash

Question 2

Solvency

Answer 2

Ability to cover liabilities (Assets vs. Liabilities)

Question 3

FDIC insurance amount for depositors to prevent bank runs

Answer 3

$250,000

Question 4

How FDIC resolves failed institutions:

Answer 4

—Pay-off method: Bank pays off depositors and then sells assets to recoup costs.

—Purchase & assumption: FDIC pays another bank to take over the failed bank. (seamless transition)

Question 5

Government support (safety net)

Answer 5

• —FDIC insurance
• –Regulation (protect bank customers form monopolistic exploitation.
• —Lender of last resort.

Question 6

Supervisor use this to evaluate riskiness of banks

Answer 6

CAMELS score

Question 7

CAMELS score explained

Answer 7

Scale of 1-5 (1 is Best)
–Used to calculate insurance premium.

C- Capital adequacy 
A- Asset quality
M- Management
E- Earnings
L- Liquidity
S- Sensitivity to risk

Question 8

National banking act of 1863

Answer 8

Wildcat banking leads to this,

• Federal Gov issues its own currency.
• Banks must charter
• -10% tax imposed on currency not issued by the Federal Government

Question 9

Fed reserve act of 1913

Answer 9

• Created FED
• Lender of Last resort
• National banks must join Fed.

Question 10

McFadden act of 1927

Answer 10

Geographic restriction

Question 11

Glass Stegall act of 1933

Answer 11

-Banks can’t underwrite securities except safe (muni bonds, US bonds)

• Instituted Regulation Q (ceiling on interest rates banks could offer on deposits)
• ILLEGAL to pay interest on checking accounts.
• Prohibits banks from holding corporate debt or equity.
• Set coverage to $2500

Question 12

DIDMCA

Answer 12

• 6 year phase out of regulation Q
• Authorized interest bearing checking accounts.
• Uniform reserve requirements.

Question 13

SNL crisis:

Answer 13

–Oil crisis in TX and OK caused by Real Estate bubble

–Midwest crisis — Caused Reigle Neal

Question 14

Reigle Neal act of 1994

Answer 14

–Could acquire other banks across states

–Banks allowed to merge with other banks.

Question 15

Gramm-Leach Bliley act of 1999

Answer 15

–Citit bought travelers.

–Allowed banks to own IB and insurance.

–The money could not flow through these new financial services.

Question 16

Dodd-Frank Act of 2010

Answer 16

—Financial stability oversight council created to monitor systemic risk.

–Expanded authority of government to force liquidation of financial institutions .

–Volcker rule (limits bank investment in hedge funds and proprietary trading).

–Federal Insurance Office created to monitor insurance industry

Question 17

Basel III 2011

Answer 17

—Liquidity coverage ratio must be greater than 100%

–Net Stable Funding Ratio must be greater than 100%

–Requires banks to report contractual maturity mismatch, concentration of funding, and available unencumbered assets

Question 18

Regulation Q

Answer 18

(ceiling on interest rates banks could offer on deposits)