Chapter 10

Question 1

“Too Big to Fail”

Answer 1

• Government provides guarantees of repayment to large uninsured creditors of the largest financial institutions even when they are not entitled to this guarantee.
• Uses the purchase and assumption method
• Increases moral hazard incentives for big banks

Question 2

Types of Financial Regulation

Answer 2

1) Restrictions on asset holdings
2) Capital requirements
3) Financial supervision: Chartering and examination
4) Assessment of risk management
5) Disclosure requirements
6) Consumer protection
7) Restrictions on competition
8) Macroprudential vs. microprudential supervision

Question 3

Chartering

Answer 3

(screening of proposals to open new financial institutions) to prevent adverse selection

Question 4

Examinations

Answer 4

scheduled and unscheduled) to monitor capital requirements and restrictions on asset holding to prevent moral hazard
-Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to market risk

Question 5

Microprudential supervision

Answer 5

focused on the safety and soundness of individual financial institutions

Question 6

Macroprudential supervision

Answer 6

which focuses on the safety and soundness of the financial system in the aggregate; need for this was clear after the global financial crisis

Question 7

1980’s Savings and Loan and Banking Crisis - Factors

Answer 7

1) Financial innovation and new financial instruments increased risk taking
2) Increased deposit insurance led to increased moral hazard
3) Deregulation
- Depository Institutions Deregulation and Monetary Control Act of 1980
- Depository Institutions Act of 1982

Question 8

Bank crises throughout the world

Answer 8

The common feature of these crises is the existence of a government safety net, where the government stands ready to bail out troubled financial institutions