HW questions Flashcards
A bank failure is less likely to occur when
a bank has more bank capital
A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.
increases; moral hazard
Although the FDIC was created to prevent bank failures, its existence encourages banks to
take too much risk.
Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the
contagion effect.
Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for
liquidity.
When bad drivers line up to purchase collision insurance, automobile insurers are subject to the
adverse selection problem.
The leverage ratio is the ratio of a bank’s
capital divided by its total assets.
The FDIC must take steps to close down banks whose equity capital is less than ________ of assets.
2%
Conditions that likely contributed to a credit crunch during the global financial crisis include
capital shortfalls caused in part by falling real estate prices.
A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and the bank’s ________ by $100.
reserves
A bank is insolvent when
its liabilities exceed its assets.
Asset transformation can be described as
borrowing short and lending long.
Bank’s make their profits primarily by issuing
loans.
Banks hold excess and secondary reserves to
provide for unexpected deposit outflows.
What is the primary concerns of the bank manager?
maintaining sufficient reserves to minimize the cost to the bank of deposit outflows
Which of the following statements is FALSE?
A bank’s assets are its uses of funds.
A bank issues liabilities to acquire funds.
The bank’s assets provide the bank with income.
Correct:
Bank capital is recorded as an asset on the bank balance sheet.
A ________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there are losses on the underlying assets.
CDO
A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system
causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.
A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a
financial crisis.
A serious consequence of a financial crisis is
a contraction in economic activity.
A possible sequence for the three stages of a financial crisis might be ________ leads to ________ leads to ________.
asset price declines; banking crises; unanticipated decline in price level
Debt deflation occurs when
an economic downturn causes the price level to fall and a deterioration in firms’ net worth because of the increased burden of indebtedness.
If uncertainty about banks’ health causes depositors to begin to withdraw their funds from banks, the country experiences a(n)
banking crisis.
In a bank panic, the source of contagion is the
asymmetric information problem.
The growth of the subprime mortgage market led to
increased demand for houses and helped fuel the boom in housing prices.
The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression.
credit spread
Microprudential supervision focuses on the safety and soundness of
individual financial institutions.
All ________ are required to be members of the Fed.
national banks chartered by the Office of the Comptroller of the Currency
An important function of the regional Federal Reserve Banks is
setting reserve requirements.
clearing checks
determining monetary policy.
setting margin requirements
clearing checks.
Banks subject to reserve requirements set by the Federal Reserve System include
all banks whether or not they are members of the Federal Reserve System.
Critics of the current system of Fed independence contend that
the current system is undemocratic.
Each Fed bank president attends FOMC meetings; although only ________ Fed bank presidents vote on policy, all ________ provide input.
five; twelve
Each Federal Reserve bank has nine directors. Of these ________ are appointed by the member banks and ________ are appointed by the Board of Governors.
three; six
Goal independence is the ability of ________ to set monetary policy ________.
the central bank; goals
The Federal Reserve Bank of ________ houses the open market desk.
NYC
The Federal Reserve Banks are ________ institutions since they are owned by the ________.
quasi-public; private commercial banks in the district where the Reserve Bank is located
The majority of members of the Federal Open Market Committee are
the seven members of the Board of Governors.
Under the European System of Central Banks, the Governing Council is similar in structure to the ________ of the Federal Reserve System.
FOMC
Which of the followings is NOT a current duty of the Board of Governors of the Federal Reserve System?
setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash
setting the maximum interest rates payable on certain types of time deposits under Regulation Q
Correct answer
approving the discount rate “established” by the Federal Reserve banks
voting on the conduct of open market operation
setting the maximum interest rates payable on certain types of time deposits under Regulation Q
The trend in recent years is that more and more governments
have been granting greater independence to their central banks.
The three largest Federal Reserve banks (New York, Chicago, and San Francisco) combined hold more than ________ percent of the assets of the Federal Reserve System.
50
The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the
FOMC
The central bank which is generally regarded as the most independent in the world because its charter cannot be changed by legislation is the
European Central Bank.
