EXAM 3 Terms

Question 1

Who stated that the financial market has a “Lemon” problem, and that low quality can sell higher, while high quality can sell lower.

Answer 1

George Akerlof

Question 2

When firms take short-term deposits and use them to make long-term loans.

Answer 2

Asset transformation

Question 3

What is the Principal-Agent problem?

Answer 3

Principle (Stockholders) have less information, Agents (Managers) have more information.

Question 4

Firms that pool resources of their partners and use the funds to help budding entrepreneurs start a business.

Answer 4

Venture Capital Firms

Question 5

What are the 4 signs of financial repression?

Answer 5

1. Poor system of legal rights
2. Poor legal system
3. Weak accounting standards
4. Government interventions through credit programs

Question 6

What are the 6 general principles of bank management?

Answer 6

1. Liquidity management
2. Asset management
3. Liability management
4. Capital adequacy management
5. Credit risk
6. Interest-rate risk

Question 7

Required fraction of deposits banks must hold.

Answer 7

Required reserves

Question 8

Percentage of all deposits (only) that must be held as reserves.

Answer 8

Required reserve ratio

Question 9

Required reserve ratio falls below the required percentage, which can lead to slower credit growth.

Answer 9

Shortfall

Question 10

Checkable deposits have ___ as a source of bank funds, where securities and loan markets have _____.

Answer 10

1. Decreased

2. Increased

Question 11

___________ helps prevent bank failure, which leads to it being regulated.

Answer 11

Bank capital

Question 12

Bank capital is a _______ for bad loans or non-paying assets.

Answer 12

Cushion

Question 13

Banks want to hold as ______ of capital as possible. Leverage boosts _____.

Answer 13

1. Little

2. Profits

Question 14

Failure of government functions, which leads to government agencies becoming subservant of their industries.

Answer 14

Regulatory capture

Question 15

Measures the gap for several maturities subintervals.

Answer 15

Maturity bucked approach

Question 16

The phenomenon of spreading panic on the part of depositors.

Answer 16

Contagion

Question 17

Bank failures averaged ____ per year in the 1920s.

Answer 17

600

Question 18

(Method) The FDIC allows banks to fail, paying back depositors up to $250,000.

Answer 18

Payoff method

Question 19

(Method) The FDIC reorganizes the bank, finds a partner that takes over the risk and sweetens the pot by buying the partner’s weaker loans.

Answer 19

Purchase and assumption method

Question 20

When banks shop for the most lenient regulator.

Answer 20

Regulatory arbitrage

Question 21

Bank leverage is considered well-capitalized at ____%, whereas ___% and lower triggers increased regulatory restrictions.

Answer 21

1. 5

2. 3

Question 22

Similar to screening, regulators restricting risky asset holdings.

Answer 22

Chartering

Question 23

The bank must file periodic (usually quarterly) call reports, showing financial information

Answer 23

Supervision

Question 24

Bank regulatory agencies assess bank financial conditions once a year.

Answer 24

Examination

Question 25

What are the terms for CAMELS?

Answer 25

``` Capital adequacy Asset quality Management Earnings Liquidity Sensitivity to risk ```

Question 26

Basel 2 accord and SEC emphasis ______ requirements.

Answer 26

Disclosure

Question 27

Safety and soundness of individual financial institutions.

Answer 27

Microprudential supervision

Question 28

Safety and soundness of the financial system in aggregate.

Answer 28

Macroprudential supervision

Question 29

FIRREA and FDICIA provided ______ to savings and loans/commercial banks.

Answer 29

Bailouts

Question 30

Bailouts costed $______ billion, making up %__ of GDP.

Answer 30

1. 150 | 2. 3

Question 31

The most comprehensive financial reform since the Great Depression.

Answer 31

Dodd-Frank Wall Street Reform

Question 32

Limits banks on trading with their own money, and can only own small percentages of hedge and private equity firms.

Answer 32

Volcker rule

Question 33

During Glass-Steagall, ____ allowed commercial banks to underwrite securities as long as revenue didn't exceed the threshold.

Answer 33

Section 20

Question 34

What legislation abolished Glass-Steagall, allowing security firms and insurance companies to purchase banks, allowing the banks to underwrite securities and insurance?

Answer 34

Gramm-Leach-Bliley Services Modernization Act of 1999

Question 35

Special subsidiaries engaged primarily in international banking.

Answer 35

Edge Act corporation

Question 36

Approved by Fed within the U.S.; no reserve requirements or restrictions on payments.

Answer 36

IBF

Question 37

Federally charted banks are supervised by the _____.

Answer 37

Office of the Comptroller of the Currency

Question 38

Bank lending has been funded via the securities market instead of depositors.

Answer 38

Shadow Banking system

Question 39

Financial institutes research and develop new products and services to meet customer needs.

Answer 39

Financial engineering

Question 40

Seller agrees to provide a certain commodity to the buyer at an agreed price and time.

Answer 40

Futures contract

Question 41

Bonds that were above Baa ratings eventually felling below.

Answer 41

Fallen Angels

Question 42

Fastest growing money market instrument.

Answer 42

Commercial paper

Question 43

To transform otherwise illiquid financial assets into marketable capital market securities.

Answer 43

Securitization

Question 44

Process of avoiding regulations.

Answer 44

Loophole mining

Question 45

Any balances above a certain amount in a firm checking account at the end of a business day are "swept out" and invested into overnight securities that pay interest. (not subject to reserve requirements)

Answer 45

Sweep account

Question 46

Legislation that constituted strong anticompetitive forces in the commercial banking industry, allowing small banks to survive.

Answer 46

McFadden Act

Question 47

A corporation that owns several different companies; can own a controlling interest in numerous banks without the issuing branching.

Answer 47

Bank holding company

Question 48

ATMs avoid ______ of branching.

Answer 48

Restrictions

Question 49

The term for bank holding companies that have begun to rival the money center banks in size but whose headquarters are not in one of the money center cities.

Answer 49

Superregional banks

Question 50

The ability to use one resource to provide many different products and services.

Answer 50

Economies of scope