Topic 10

Question 1

Why do banks fail?

Answer 1

bad loans, bad investments, illliquidity (slide 5)

Question 2

Prevention of Bank Failures

Answer 2

• restrictions on assets (to make them less risky)
• Fed acts as lender of last resort
• deposit insurance (FDIC)
• restrict entry through chartering process
• bank inspections

Question 3

Bank Capital

Answer 3

the buffer that protects depositors and the FDIC when a bank suffers losses

Question 4

Regulations for Nat’l bank

Answer 4

Federal charter, FDIC Insured, Fed Reserve member

Question 5

Regulations for State Member bank

Answer 5

State charter, FDIC Insured, Fed Reserve Member

Question 6

Regulations of State Non-Member Bank

Answer 6

FDIC Insured

Question 7

Regulations of State Bank

Answer 7

non-FDIC insured, regulated by state banking office

Question 8

CAMELS Rating

Answer 8

Capital Adequacy
Asset Quality
Management Quality
Earnings (Profitability)
Liquidity
Sensitivity to Market Risk

**ranked from 1 (good) to 5 (bad). 3, 4, or 5 requires bank actions to change

Question 9

Payoff Method by FDIC

Answer 9

1) Pay off insured depositors with FDIC funds
2) Liquidate assets
3) uninsured depositors get unins deposits/total deposits
4) FDIC gets whats left of assets

Question 10

Methods used by FDIC for Bank Failures

Answer 10

a) payoff method
b) purchase & assumption method
c) assist or takeover bank

Question 11

Purchase & Assumption Method

Answer 11

Makes up the loss from assets - liabilities and then sells bank to the highest bidder

Question 12

Bank Holding Companies

Answer 12

formed to get around restrictions on branching and banking activities (Glass-Steagall Act of 1933)