mishkin tb11
TRANSCRIPT
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Chapter 11 Economic Analysis of Banking Regulation 131
Chapter 11Economic Analysis of Banking Regulation
)1 Multiple Choice
()a Although the FDIC as create! to pre"ent #ank failures$ its e%istence encourages #anks to()# take too much risk&()c hol! too much capital&
()! open too many #ranches&()e #uy too much stock&Ans er'
uestion tatus' *re"ious E!ition
()f During the #oom years of the 1+,-s$ #ank failures ere .uite()g uncommon$ a"eraging less than 3- per year&()h uncommon$ a"eraging less than 1-- per year&()i common$ a"eraging a#out /-- per year&()0 common$ a"eraging a#out 1--- per year&Ans er'
uestion tatus' *re"ious E!ition()k he fact that #anks operate on a 2se.uential ser"ice constraint means that()l all !epositors share e.ually in the #ank4s fun!s !uring a crisis&()m !epositors arri"ing last are 0ust as likely to recei"e their fun!s as those arri"ing first&()n !epositors arri"ing first ha"e the #est chance of ith!ra ing their fun!s&()o no !epositor can ith!ra fun!s !uring a crisis&()p #anks ran!omly select the !epositors ho ill recei"e all of their fun!s&Ans er'
uestion tatus' 5e
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13, Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition(). Depositors ha"e a strong incenti"e to sho up first to ith!ra their fun!s !uring a #ank
crisis #ecause #anks operate on a()r last8in$ first8out constraint&()s se.uential ser"ice constraint&()t !ou#le8coinci!ence of ants constraint&()u e"eryone8shares8e.ually constraint&
()" first8come$ last8ser"e! constraint&Ans er'
uestion tatus' 5e
() he fact that !epositors cannot !istinguish goo! from #a! #anks is a(n)()% a!"erse selection pro#lem&()y moral ha9ar! pro#lem&()9 asymmetric information pro#lem&()aatoo8#ig8to8fail pro#lem&()## none of the a#o"e&Ans er'
uestion tatus' 5e
()cc Because of asymmetric information$ the failure of one #ank can lea! to runs on other #anks&his is the
()!! too8#ig8to8fail effect&()eemoral ha9ar! pro#lem&()ff a!"erse selection pro#lem&()gg contagion effect&()hh se.uential ser"ice constraint&Ans er'
uestion tatus' 5e
()ii he contagion effect refers to the fact that()00 some #anks are too #ig to fail&()kk #ank runs in"ol"e only soun! #anks&()ll #ank runs in"ol"e only insol"ent #anks&()mm the failure of one #ank can hasten the failure of other #anks&()nn !eposit insurance has eliminate! the pro#lem of #ank failures&Ans er'
uestion tatus' 5e
()oo A system of !eposit insurance()pp attracts risk8taking entrepreneurs into the #anking in!ustry&().. encourages #ank managers to assume increase! risk&()rr increases the incenti"es of !epositors to monitor the riskiness of their #ank4s asset portfolio&()ss !oes all of the a#o"e&()tt !oes only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' tu!y :ui!e
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Chapter 11 Economic Analysis of Banking Regulation 133()uu he primary !ifference #et een the 2payoff an! the 2purchase an! assumption metho!s of
han!ling faile! #anks is()"" that the FDIC guarantees all !eposits$ not 0ust those un!er the ;1--$--- limit$ hen it uses
the 2payoff metho!&() that the FDIC guarantees all !eposits$ not 0ust those un!er the ;1--$--- limit$ hen it uses
the 2purchase an! assumption metho!&
()%% that the FDIC is more likely to use the 2payoff metho! hen the #ank is large an! it fearsthat !epositor losses may spur #usiness #ankruptcies an! other #ank failures&()yy #oth (a) an! (#) of the a#o"e&()99#oth (#) an! (c) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()aaa he primary !ifference #et een the 2payoff an! the 2purchase an! assumption metho!s ofhan!ling faile! #anks is
()### that the FDIC guarantees all !eposits$ not 0ust those un!er the ;1--$--- limit$ hen it usesthe 2payoff metho!&
()ccc that the FDIC guarantees all !eposits$ not 0ust those un!er the ;1--$--- limit$ hen it usesthe 2purchase an! assumption metho!&
()!!! that the FDIC is less likely to use the 2payoff metho! hen the #ank is large an! it fears that!epositor losses may spur #usiness #ankruptcies an! other #ank failures&
()eee #oth (a) an! (#) of the a#o"e&()fff#oth (#) an! (c) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()ggg he primary !ifference #et een the 2payoff an! the 2purchase an! assumption metho!s ofhan!ling faile! #anks is
()hhh that the FDIC guarantees all !eposits$ not 0ust those un!er the ;1--$--- limit$ hen it uses
the 2purchase an! assumption metho!&()iii that the FDIC is more likely to use the 2purchase an! assumption metho! hen the #ank is largean! it fears that !epositor losses may spur #usiness #ankruptcies an! other #ank failures&
()000 that the FDIC guarantees all !eposits$ not 0ust those un!er the ;1--$--- limit$ hen it uses the2payoff metho!&
()kkk #oth (a) an! (#) of the a#o"e&()lll #oth (#) an! (c) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()mmm
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13= Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()rrr 6oral ha9ar! is an important feature of insurance arrangements #ecause the e%istence of
insurance()sss pro"i!es increase! incenti"es for risk taking&()tttis a hin!rance to efficient risk taking&()uuu causes the pri"ate cost of the insure! acti"ity to increase&()""" #oth (a) an! (#) of the a#o"e&
() #oth (#) an! (c) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()%%% ince !epositors$ like any len!er$ only recei"e fi%e! payments hile the #ank keeps anysurplus profits$ they face the >>>>> pro#lem that #anks may take on too >>>>> risk&
()yyy a!"erse selection? little()999 a!"erse selection? much()aaaa moral ha9ar!? little()#### moral ha9ar!? muchAns er'
uestion tatus' *re"ious E!ition()cccc he e%istence of !eposit insurance can increase the likelihoo! that !epositors ill nee!
!eposit protection$ as #anks ith !eposit insurance()!!!! are likely to take on greater risks than they other ise oul!&()eeee are likely to #e too conser"ati"e$ re!ucing the pro#a#ility of turning a profit&()ffff are likely to regar! !eposits as an unattracti"e source of fun!s !ue to !epositors4 !eman!s for
safety&()gggg are place! at a competiti"e !isa!"antage in ac.uiring fun!s&Ans er'
uestion tatus' *re"ious E!ition
()hhhh
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Chapter 11 Economic Analysis of Banking Regulation 13@()ssss Deposit insurance orks ell in countries ith()tttt a tra!ition of the rule of la &()uuuu effecti"e super"ision of the financial system&()"""" honest go"ernments&() all of the a#o"e&()%%%% #oth (a) an! (#) of the a#o"e&Ans er'
uestion tatus' 5e
()yyyy he sprea! of !eposit insurance throughout the orl! pro"i!es e"i!ence that()9999 !eposit insurance al ays pre"ents moral ha9ar! pro#lems&()aaaaa !eposit insurance al ays pre"ents a!"erse selection pro#lems&()##### !eposit insurance orks ell only ith a strong institutional en"ironment&()ccccc all of the a#o"e&()!!!!! #oth (a) an! (#) of the a#o"e&Ans er'
uestion tatus' 5e
()eeeee Deposit insurance has not orke! ell in countries ith()fffff a eak institutional en"ironment&()ggggg strong super"ision an! regulation&()hhhhh a tra!ition of the rule of la &()iiiii all of the a#o"e&()00000 #oth (a) an! (#) of the a#o"e&Ans er'
uestion tatus' 5e
()kkkkk If the FDIC !eci!es that a #ank is too #ig to fail$ it ill use the >>>>> metho!$ effecti"elyensuring that >>>>> !epositors ill suffer losses&
()lllll payoff? large()mmmmm payoff? no()nnnnn purchase an! assumption? large()ooooo purchase an! assumption? noAns er'
uestion tatus' *re"ious E!ition
()ppppp ne pro#lem of the too8#ig8to8fail policy is that it()..... re!uces the incenti"es for moral ha9ar! #y #ig #anks&()rrrrr increases the incenti"es for moral ha9ar! #y #ig #anks&()sssss re!uces the incenti"es for a!"erse selection #y #ig #anks&()ttttt increases the incenti"es for a!"erse selection #y #ig #anks&Ans er'
uestion tatus' *re"ious E!ition
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13/ Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()uuuuu he result of the too8#ig8to8fail policy is that >>>>> #anks ill take on >>>>> risks$ making
#ank failures more likely&()""""" small? fe er () small? greater ()%%%%%#ig? fe er ()yyyyy #ig? greater
Ans er'uestion tatus' *re"ious E!ition
()99999 he result of the too8#ig8to8fail policy is that #ig #anks ill take on >>>>> risks$ making #ank failures >>>>> likely&
()aaaaaa fe er? less()###### greater? less()cccccc fe er? more()!!!!!! greater? moreAns er'
uestion tatus' *re"ious E!ition
()eeeeeeA pro#lem ith the too8#ig8to8fail policy is that it >>>>> the incenti"es for >>>>> #y #ig #anks&
()ffffff increases? moral ha9ar!()gggggg !ecreases? moral ha9ar!()hhhhhh eliminates? moral ha9ar!()iiiiii increases? a!"erse selection()000000 !ecreases? a!"erse selectionAns er'
uestion tatus' tu!y :ui!e
()kkkkkk he too8#ig8to8fail policy()llllll e%acer#ates moral ha9ar! pro#lems&()mmmmmm puts small #anks at a competiti"e !isa!"antage in attracting large !eposits&()nnnnnn treats large !epositors of small #anks ine.uita#ly hen compare! to !epositors of large
#anks&()oooooo !oes all of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()pppppp he too8#ig8to8fail policy()...... puts small #anks at a competiti"e !isa!"antage in attracting large !eposits&()rrrrrr treats large !epositors of small #anks ine.uita#ly hen compare! to !epositors of large
#anks&()ssssss e%acer#ates moral ha9ar! pro#lems&()tttttt !oes all of the a#o"e&()uuuuuu !oes only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
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Chapter 11 Economic Analysis of Banking Regulation 13()"""""" he too8#ig8to8fail policy() e%acer#ates moral ha9ar! pro#lems&()%%%%%% puts large #anks at a competiti"e !isa!"antage in attracting large !eposits&()yyyyyy treats large !epositors of small #anks ine.uita#ly hen compare! to !epositors of large
#anks&()999999 !oes only (a) an! (c) of the a#o"e&
Ans er'uestion tatus' *re"ious E!ition
()aaaaaaa he too8#ig8to8fail policy()####### puts small #anks at a competiti"e !isa!"antage relati"e to large #anks in attracting
large !eposits&()ccccccc treats large !epositors of small #anks ine.uita#ly hen compare! to !epositiors of large
#anks&()!!!!!!!ameliorates the moral ha9ar! pro#lem&()eeeeeee !oes all of the a#o"e&()fffffff !oes only (a) an! (#) of the a#o"e&
Ans er'uestion tatus' tu!y :ui!e
()gggggggIn 6ay 1++1$ the FDIC announce! that it oul! sell the go"ernment4s final ,/ stake inContinental Illinois$ en!ing go"ernment o nership of the #ank that it ha! rescue! in 1+ =& heFDIC took control of the #ank$ rather than li.ui!ate it$ #ecause it #elie"e! that ContinentalIllinois
()hhhhhhh as a goo! in"estment opportunity for the go"ernment&()iiiiiii coul! #e the Chicago #ranch of a ne go"ernmentally8o ne! interstate #anking system&()0000000 as too #ig to fail&()kkkkkkkall of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()lllllll
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13 Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()....... he "ie that some #anks are too #ig to fail e%plains()rrrrrrr hy the FDIC uses the 2payoff metho! for !ealing ith faile! #anks that are large&()sssssss hy the FDIC uses the 2purchase an! assumption metho! for !ealing ith faile! #anks that
are large&()ttttttt hy the FDIC is reluctant to use the 2purchase an! assumption metho! for !ealing ith
faile! #anks that are large&
()uuuuuuu none of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()"""""""Fe!eral !eposit insurance co"ers !eposits up to ;1--$---$ #ut as part of a !octrine calle!2too8#ig8to8fail the FDIC sometimes en!s up co"ering all !eposits to a"oi! !isrupting thefinancial system&
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Chapter 11 Economic Analysis of Banking Regulation 13+()llllllll Financial consoli!ation poses challenges to #anking regulation #ecause()mmmmmmmm it increases the num#er of #anks that are too #ig to fail&()nnnnnnnn it e%ten!s the go"ernment safety net to ne acti"ities&()oooooooo it e%ten!s !eposit insurance to stock #rokers&()pppppppp all of the a#o"e&()........ #oth (a) an! (#) of the a#o"e&Ans er'
uestion tatus' 5e
()rrrrrrrr Because the >>>>> costs of #ank failure are greater than #ank4s >>>>> costs$ #anks mayhol! assets that are too risky&
()ssssssss social? social()tttttttt social? pri"ate()uuuuuuuu pri"ate? social()"""""""" pri"ate? pri"ateAns er'
uestion tatus' *re"ious E!ition
() Regulators attempt to re!uce the riskiness of #anks4 asset portfolios #y()%%%%%%%% limiting the amount of loans in particular categories or to in!i"i!ual #orro ers&()yyyyyyyy prohi#iting #anks from hol!ing risky assets such as common stocks&()99999999 esta#lishing a minimum interest rate floor that #anks can earn on certain assets&()aaaaaaaaa !oing all of the a#o"e&()######### !oing only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()ccccccccc Banks !o not ant to hol! too much capital #ecause()!!!!!!!!! they !o not #ear fully the costs of #ank failures&()eeeeeeeee higher returns on e.uity are earne! hen #ank capital is smaller&()fffffffff higher capital le"els attract the scrutiny of regulators&()ggggggggg all of the a#o"e&()hhhhhhhhh only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()iiiiiiiii ol!ing large amounts of #ank capital helps pre"ent #ank failures #ecause()000000000 it means that the #ank has a higher income&()kkkkkkkkk it makes loans easier to sell&()lllllllll it can #e use! to a#sor# the losses resulting from a !eposit outflo &()mmmmmmmmm it makes it easier to call in loans&Ans er'
uestion tatus' *re"ious E!ition
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1=- Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()nnnnnnnnn A #ank failure is less likely to occur hen()ooooooooo a #ank hol!s less G& & go"ernment securities&()ppppppppp a #ank suffers large !eposit outflo s&()......... a #ank hol!s more e%cess reser"es&()rrrrrrrrr a #ank has more #ank capital&Ans er'
uestion tatus' *re"ious E!ition
()sssssssss he le"erage ratio is the ratio of a #ank4s()tttttttttassets !i"i!e! #y its lia#ilities&()uuuuuuuuu income !i"i!e! #y its assets&()""""""""" capital !i"i!e! #y its total assets&() capital !i"i!e! #y its total lia#ilities&()%%%%%%%%% capital !i"i!e! #y its earnings&Ans er'
uestion tatus' 5e
()yyyyyyyyy A #ank4s regulatory capital re.uirements inclu!e()999999999 a #ank4s le"erage ratio&()aaaaaaaaaa risk8#ase! capital re.uirements&()########## a #ank4s o n mo!els of risk e%posure&()cccccccccc all of the a#o"e&()!!!!!!!!!! #oth (a) an! (#) of the a#o"e&Ans er'
uestion tatus' 5e
()eeeeeeeeee A ell8capitali9e! #ank has >>>>> to lose if it fails an! thus is >>>>> likely to pursue risky acti"ities&
()ffffffffff more? more()gggggggggg more? less()hhhhhhhhhh less? more()iiiiiiiiii less? less()0000000000 nothing? moreAns er'
uestion tatus' tu!y :ui!e
()kkkkkkkkkk ff8#alance8sheet acti"ities()llllllllll generate fee income ith no increase in risk&()mmmmmmmmmm increase #ank risk #ut !o not increase income&()nnnnnnnnnn generate fee income #ut increase a #ank4s risk&()oooooooooo re!uce a #ank4s income an! risk&()pppppppppp generate fee income an! re!uce risk&Ans er'
uestion tatus' 5e
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Chapter 11 Economic Analysis of Banking Regulation 1=1().......... Bank capital re.uirements take three forms& he first type is()rrrrrrrrrr #ase! on the so8calle! le"erage ratio$ the amount of capital !i"i!e! #y the #ank4s
total assets&()ssssssssss a risk8#ase! capital re.uirement that is linke! to off8#alance8sheet acti"ities&()tttttttttt a capital re.uirement to co"er risk in tra!ing acti"ities&()uuuuuuuuuu none of the a#o"e&
Ans er'uestion tatus' *re"ious E!ition
()"""""""""" Bank capital re.uirements take three forms& he secon! type is(a) #ase! on the so8calle! le"erage ratio$ the amount of capital !i"i!e! #y the #ank4s total assets&(#) a risk8#ase! capital re.uirement that is linke! to off8#alance8sheet acti"ities&(c) a capital re.uirement to co"er risk in tra!ing acti"ities&(!) none of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
() Bank capital re.uirements take three forms& he thir! type is
(a) #ase! on the so8calle! le"erage ratio$ the amount of capital !i"i!e! #y the #ank4s total assets&(#) a risk8#ase! capital re.uirement that is linke! to off8#alance8sheet acti"ities&(c) a capital re.uirement to co"er risk in tra!ing acti"ities&(!) none of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()%%%%%%%%%% he 1+ Basel Accor! has resulte! in()yyyyyyyyyy increase! risk taking&()9999999999 re!uce! risk taking&()aaaaaaaaaaa no change in risk taking&()########### a prohi#ition against off8#alance8sheet len!ing&()ccccccccccc capital re.uirements that are not relate! to asset risk&Ans er'
uestion tatus' 5e
()!!!!!!!!!!! he increase! integration of financial markets across countries an! the nee! tomake the playing fiel! e.ual for #anks from !ifferent countries le! to the Basel agreement in Hune1+ to
()eeeeeeeeeee stan!ar!i9e #ank capital re.uirements internationally&()fffffffffffre!uce$ across the #oar!$ #ank capital re.uirements in all countries&()ggggggggggg se"er the link #et een risk an! capital re.uirements&()hhhhhhhhhhh !o all of the a#o"e&
Ans er'uestion tatus' *re"ious E!ition
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1=, Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()iiiiiiiiiii he state! purposes of the Basel *lan inclu!e'()00000000000 coor!inating super"isory !efinitions of capital$ risk assessments$ an! stan!ar!s for capital
a!e.uacy across countries&()kkkkkkkkkkk linking a #ank4s capital re.uirements systematically to the riskiness of its acti"ities&()lllllllllll !e"ising monitoring mechanisms to pre"ent collusion among #anks in international markets&()mmmmmmmmmmm all of the a#o"e&
()nnnnnnnnnnn only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()ooooooooooo
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Chapter 11 Economic Analysis of Banking Regulation 1=3()ffffffffffff f the follo ing assets$ the one that has the lo est capital re.uirement un!er the
Basel Accor! is()gggggggggggg municipal #on!s&()hhhhhhhhhhhh resi!ential mortgages&()iiiiiiiiiiii commercial paper&()000000000000 securities issue! #y go"ernment agencies&
Ans er'uestion tatus' *re"ious E!ition
()kkkkkkkkkkkk f the follo ing assets$ the one that has the lo est capital re.uirement un!er theBasel Accor! is
()llllllllllll commercial paper&()mmmmmmmmmmmm go"ernment securities&()nnnnnnnnnnnn municipal #on!s&()oooooooooooo resi!ential mortgages&Ans er'
uestion tatus' *re"ious E!ition
()pppppppppppp he practice of keeping high8risk assets on a #ank4s #ooks hile remo"ing lo 8risk assets ith the same capital re.uirement is kno as
()............ competition in la%ity&()rrrrrrrrrrrr !epositor super"ision&()ssssssssssss regulatory ar#itrage&()tttttttttttt a !uel #anking system&()uuuuuuuuuuuu cooking the #ooks&Ans er'
uestion tatus' 5e
()"""""""""""" Banks engage in regulatory ar#itrage #y() keeping high8risk assets on their #ooks hile remo"ing lo 8risk assets ith
the same capital re.uirement&()%%%%%%%%%%%% keeping lo 8risk assets on their #ooks hile remo"ing high8risk assets ith the
same capital re.uirement&()yyyyyyyyyyyy selling risky assets to ar#itrageurs&()999999999999 #uying risky assets from ar#itrageurs&()aaaaaaaaaaaaa hi!ing risky assets from regulators&Ans er'
uestion tatus' 5e
()############# Because #anks engage in regulatory ar#itrage$ the Basel Accor! on risk8#ase!
capital re.uirements may result in()ccccccccccccc re!uce! risk taking #y #anks&()!!!!!!!!!!!!! re!uce! super"ision of #anks #y regulators&()eeeeeeeeeeeee increase! frau!ulent #eha"ior #y #anks&()fffffffffffff increase! risk taking #y #anks&()ggggggggggggg #oth (a) an! (#) of the a#o"e&Ans er'
uestion tatus' 5e
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1== Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()hhhhhhhhhhhhh he chartering process is especially !esigne! to !eal ith the >>>>> pro#lem$ an!
regular #ank e%aminations help to re!uce the >>>>> pro#lem&()iiiiiiiiiiiii a!"erse selection? a!"erse selection()0000000000000 a!"erse selection? moral ha9ar!()kkkkkkkkkkkkk moral ha9ar!? a!"erse selection()lllllllllllll moral ha9ar!? moral ha9ar!
Ans er'uestion tatus' *re"ious E!ition
()mmmmmmmmmmmmm he chartering process is especially !esigne! to !eal ith the >>>>> pro#lem$ an! restrictions on asset hol!ings help to re!uce the >>>>> pro#lem&
()nnnnnnnnnnnnn a!"erse selection? a!"erse selection()ooooooooooooo a!"erse selection? moral ha9ar!()ppppppppppppp moral ha9ar!? a!"erse selection()............. moral ha9ar!? moral ha9ar!Ans er'
uestion tatus' *re"ious E!ition
()rrrrrrrrrrrrr E%aminations of #anks are con!ucte! #y()sssssssssssss the ffice of the Comptroller of the Currency&()ttttttttttttt the Fe!eral Reser"e ystem&()uuuuuuuuuuuuu the FDIC&()""""""""""""" all of the a#o"e&() #oth (a) an! (#) of the a#o"e&Ans er'
uestion tatus' 5e
()%%%%%%%%%%%%% he fe!eral agencies that e%amine #anks inclu!e()yyyyyyyyyyyyy the Fe!eral Reser"e ystem&()9999999999999 the Internal Re"enue er"ice&()aaaaaaaaaaaaaa the ffice of the Comptroller of the Currency&()############## all of the a#o"e&()cccccccccccccc #oth (a) an! (c) of the a#o"e&Ans er'
uestion tatus' 5e
()!!!!!!!!!!!!!! Regular #ank e%aminations an! restrictions on asset hol!ings help toin!irectly re!uce the >>>>> pro#lem #ecause$ gi"en fe er opportunities to take on risk$ risk8proneentrepreneurs ill #e !iscourage! from entering the #anking in!ustry&
()eeeeeeeeeeeeee moral ha9ar!
()ffffffffffffff a!"erse selection()gggggggggggggg e% post shirking()hhhhhhhhhhhhhh post8contractual opportunism&Ans er'
uestion tatus' *re"ious E!ition
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Chapter 11 Economic Analysis of Banking Regulation 1=@()iiiiiiiiiiiiii Regular #ank e%aminations an! restrictions on asset hol!ings help to in!irectly
>>>>> the a!"erse selection pro#lem #ecause$ gi"en fe er opportunities to take on risk$ risk8 prone entrepreneurs ill #e >>>>> from entering the #anking in!ustry&
()00000000000000 increase? encourage!()kkkkkkkkkkkkkk increase? !iscourage!()llllllllllllll re!uce? encourage!
()mmmmmmmmmmmmmm re!uce? !iscourage!Ans er'
uestion tatus' *re"ious E!ition
()nnnnnnnnnnnnnn he >>>>>>>>>> pro#lem is re!uce! #y regular #ank e%aminations$ an!e%amination also in!irectly helps re!uce the >>>>>>>>>>>>>>> #ecause risk taking entrepreneurs
ill #e !iscourage! from entering the #anking in!ustry&()oooooooooooooo a!"erse selection? a!"erse selection()pppppppppppppp a!"erse selection? moral ha9ar!&().............. moral ha9ar!? a!"erse selection()rrrrrrrrrrrrrr moral ha9ar!? moral ha9ar!()ssssssssssssss a!"erse selection? !isinterme!iationAns er'
uestion tatus' tu!y :ui!e
()tttttttttttttt
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1=/ Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()eeeeeeeeeeeeeee ne ay for #ank regulators to assure !epositors that #anks are not taking on too
much risk is to re.uire that #anks()fffffffffffffff !i"ersify their loan portfolios&()ggggggggggggggg re!uce their e.uity capitals&()hhhhhhhhhhhhhhh re!uce the si9e of their loan portfolios&()iiiiiiiiiiiiiii !o #oth (a) an! (#) of the a#o"e&
()000000000000000 !o #oth (#) an! (c) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()kkkkkkkkkkkkkkk he current super"isory practice to ar! risk management()lllllllllllllll focuses on the .uality of a #ank4s #alance sheet&()mmmmmmmmmmmmmmm !etermines hether capital re.uirements ha"e #een met&()nnnnnnnnnnnnnnn e"aluates the soun!ness of a #ank4s risk8management process&()ooooooooooooooo all of the a#o"e&()ppppppppppppppp #oth (#) an! (c) of the a#o"e&Ans er'
uestion tatus' 5e
()............... Competition #et een #anks()rrrrrrrrrrrrrrr encourages greater risk taking&()sssssssssssssss encourages conser"ati"e #ank management&()ttttttttttttttt increases #ank profita#ility&()uuuuuuuuuuuuuuu all of the a#o"e&()""""""""""""""" #oth (a) an! (c) of the a#o"e&Ans er'
uestion tatus' 5e
() Regulations that re!uce competition #et een #anks inclu!e()%%%%%%%%%%%%%%% #ranching restrictions&()yyyyyyyyyyyyyyy prohi#itions pre"enting non#ank institutions from engaging in #anking
acti"ities&()999999999999999 the !ual system of granting #ank charters&()aaaaaaaaaaaaaaaa all of the a#o"e&()################ #oth (a) an! (#) of the a#o"e&Ans er'
uestion tatus' 5e
()cccccccccccccccc he main moti"e #ehin! the forces that ha"e shape! the !e"elopment of thecurrent regulatory system has #een the
()!!!!!!!!!!!!!!!! !esire to pre"ent monopolistic practices&()eeeeeeeeeeeeeeee!esire to ensure a soun! #anking system&()ffffffffffffffff !esire to create an interstate #anking system&()gggggggggggggggg !esire to foster a highly competiti"e #anking system&Ans er'
uestion tatus' *re"ious E!ition
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Chapter 11 Economic Analysis of Banking Regulation 1=()hhhhhhhhhhhhhhhh he Act that re.uire! separation of commercial an! in"estment #anking
as()iiiiiiiiiiiiiiii the Fe!eral Reser"e Act&()0000000000000000 the :lass8 teagall Act&()kkkkkkkkkkkkkkkk the Bank ol!ing Company Act&()llllllllllllllll the 6onetary Control Act&
()mmmmmmmmmmmmmmmm FIRREA&Ans er'
uestion tatus' Re"ise!
()nnnnnnnnnnnnnnnn he Depository Institutions Deregulation an! 6onetary Control Act of1+ -
()oooooooooooooooo appro"e! 5 < accounts nation i!e&()pppppppppppppppp restricte! the use of A accounts&()................ impose! restricti"e usury ceilings on large agricultural loans&()rrrrrrrrrrrrrrrr !i! all of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition()ssssssssssssssss he Depository Institutions Deregulation an! 6onetary Control Act of 1+ -()tttttttttttttttt appro"e! 5 < accounts nation i!e&()uuuuuuuuuuuuuuuu impose! uniform reser"e re.uirements&()"""""""""""""""" man!ate! the phase out of interest rate ceilings on !eposits&() !i! all of the a#o"e&()%%%%%%%%%%%%%%%% !i! only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()yyyyyyyyyyyyyyyy As a ay of stemming the !ecline in the num#er of sa"ings an! loans an!mutual sa"ings #anks$ the :arn8 t& :ermain Act of 1+ , allo e!
()9999999999999999 66Cs&()aaaaaaaaaaaaaaaaa 666Fs&()################# 66DAs&()ccccccccccccccccc 5
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1= Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()00000000000000000 In the ten year perio! 1+ 181++-$ 1,-, commercial #anks ere close!$ ith a peak
of ,-/ failures in 1+ +& his rate of failures as appro%imately >>>> times greater than that inthe perio! from 1+3= to 1+ -&
()kkkkkkkkkkkkkkkkk t o()lllllllllllllllll three()mmmmmmmmmmmmmmmmm fi"e
()nnnnnnnnnnnnnnnnn ten()ooooooooooooooooo t entyAns er'
uestion tatus' *re"ious E!ition
()ppppppppppppppppp 6oral ha9ar! an! a!"erse selection pro#lems increase! in prominence inthe 1+ -s
()................. as !eregulation opene! up more a"enues to sa"ings an! loans an! mutualsa"ings #anks to take on more risk&
()rrrrrrrrrrrrrrrrr follo ing a #urst of financial inno"ation in the 1+ -s an! early 1+ -s that pro!uce! ne financial instruments an! markets$ there#y i!ening the scope for risk taking&
()sssssssssssssssss follo ing an increase in fe!eral !eposit insurance from ;=-$--- to;1--$---&
()ttttttttttttttttt all of the a#o"e&()uuuuuuuuuuuuuuuuu only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()""""""""""""""""" 6oral ha9ar! an! a!"erse selection pro#lems increase! in prominence inthe 1+ -s
() as !eregulation opene! up more a"enues to sa"ings an! loans an!mutual sa"ings #anks to take on more risk&
()%%%%%%%%%%%%%%%%% follo ing a #urst of financial inno"ation in the 1+ -s an! early 1+ -s that
pro!uce! ne financial instruments an! markets$ there#y i!ening the scope for risk taking&()yyyyyyyyyyyyyyyyy follo ing a !ecrease in fe!eral !eposit insurance from ;1--$--- to;=-$---&
()99999999999999999 all of the a#o"e&()aaaaaaaaaaaaaaaaaa only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()################## In the 1+ -s$ high8rolling #anks an! KJs ere ai!e! in their .uest forrapi! gro th #y
()cccccccccccccccccc legislation that raise! fe!eral !eposit insurance from ;=-$--- to ;1--$---&()!!!!!!!!!!!!!!!!!! legislation that phase! out Regulation !eposit rate ceilings&()eeeeeeeeeeeeeeeeee a financial inno"ation that i!ene! the scope for risk taking&()ffffffffffffffffff all of the a#o"e&()gggggggggggggggggg only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' Re"ise!
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Chapter 11 Economic Analysis of Banking Regulation 1=+()hhhhhhhhhhhhhhhhhh In the early stages of the 1+ -s #anking crisis$ financial institutions ere
especially hurt #y()iiiiiiiiiiiiiiiiii the sharp increases in interest rates from late 1+ + until 1+ 1&()000000000000000000 the se"ere recession in 1+ 18 ,&()kkkkkkkkkkkkkkkkkk the sharp !ecline in the price le"el from mi! 1+ - to early 1+ 3&()llllllllllllllllll all of the a#o"e&
()mmmmmmmmmmmmmmmmmm only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()nnnnnnnnnnnnnnnnnn In the early stages of the 1+ -s #anking crisis$ financial institutions ereespecially harme! #y
()oooooooooooooooooo !eclining interest rates from late 1+ + until 1+ 1&()pppppppppppppppppp the se"ere recession in 1+ 18 ,&().................. the !isinflation from mi! 1+ - to early 1+ 3&()rrrrrrrrrrrrrrrrrr all of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition()ssssssssssssssssss Although as many as half of the KJs in the G& & ha! a negati"e net orth
an! ere thus insol"ent #y the en! of 1+ ,$ regulators a!opte! a policy of >>>>>$ hichamounte! to >>>>> capital re.uirements&
()tttttttttttttttttt regulatory for#earance? raising()uuuuuuuuuuuuuuuuuu regulatory for#earance? lo ering()"""""""""""""""""" regulatory agnosticism? raising() regulatory agnosticism? lo eringAns er'
uestion tatus' *re"ious E!ition
()%%%%%%%%%%%%%%%%%%
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1@- Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()!!!!!!!!!!!!!!!!!!! he policy of >>>>> e%acer#ate! >>>>> pro#lems as sa"ings an! loans
took on increasingly huge le"els of risk on the slim chance of returning to sol"ency&()eeeeeeeeeeeeeeeeeee regulatory for#earance? moral ha9ar!()fffffffffffffffffff regulatory for#earance? a!"erse ha9ar!()ggggggggggggggggggg regulatory agnosticism? moral ha9ar!()hhhhhhhhhhhhhhhhhhh regulatory agnosticism? a!"erse ha9ar!
Ans er'uestion tatus' *re"ious E!ition
()iiiiiiiiiiiiiiiiiii he policy of regulatory for#earance()0000000000000000000 meant !elaying the closing of 29om#ie KJs as their losses mounte! !uring the
1+ -s&()kkkkkkkkkkkkkkkkkkk #enefite! 29om#ie KJs at the e%pense of healthy KJs$ as healthy
institutions lost !eposits to insol"ent institutions&()lllllllllllllllllll contri#ute! to !eclining profita#ility in the KJ in!ustry an! an increase in the
num#er of 29om#ie KJs &()mmmmmmmmmmmmmmmmmmm all of the a#o"e&()nnnnnnnnnnnnnnnnnnn only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()ooooooooooooooooooo he policy of regulatory for#earance()ppppppppppppppppppp meant !elaying the closing of 29om#ie KJs as their losses mounte!
!uring the 1+ -s&()................... #enefite! 29om#ie KJs at the e%pense of healthy KJs$ as healthy
institutions lost !eposits to insol"ent institutions&()rrrrrrrrrrrrrrrrrrrha! the a!"antage that it #enefite! healthy KJs #y gi"ing them the opportunity to
attract !eposits that #egan to lea"e the 29om#ie KJs &()sssssssssssssssssss #oth (a) an! (#) of the a#o"e&
()ttttttttttttttttttt #oth (a) an! (c) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()uuuuuuuuuuuuuuuuuuu Regulatory for#earance()""""""""""""""""""" meant !elaying the closing of 29om#ie KJs as their losses mounte!
!uring the 1+ -s&() ha! the a!"antage of #enefiting healthy KJs at the
e%pense of 29om#ie KJs $ as insol"ent institutions lost !eposits to health institutions&()%%%%%%%%%%%%%%%%%%% ha! the a!"antage of permitting many insol"ent KJs the opportunity to
return to profita#ility$ sa"ing the F JIC #illions of !ollars&()yyyyyyyyyyyyyyyyyyy means all of the a#o"e&()9999999999999999999 means (a) an! (c) of the a#o"e&Ans er'
uestion tatus' tu!y :ui!e
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Chapter 11 Economic Analysis of Banking Regulation 1@1()aaaaaaaaaaaaaaaaaaaa In 1+ $ Far
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1@, Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()%%%%%%%%%%%%%%%%%%%% *ro"isions of the 1+ Competiti"e E.uality Banking Act inclu!e!()yyyyyyyyyyyyyyyyyyyy pro"ision of an a!!itional ;1-& #illion to the F JIC&()99999999999999999999 !irecting the Fe!eral ome Joan Bank Boar! to hasten the closing of
insol"ent KJs&()aaaaaaaaaaaaaaaaaaaaa transferring the regulatory responsi#ility of the F JIC to the FDIC&()##################### all of the a#o"e&
()ccccccccccccccccccccc #oth (#) an! (c) of the a#o"e&Ans er'
uestion tatus' tu!y :ui!e
()!!!!!!!!!!!!!!!!!!!!! Responsi#ility for the high cost of the sa"ings an! loan #ailoutrests ith
()eeeeeeeeeeeeeeeeeeeee thrift regulators&()fffffffffffffffffffff !epositors&()ggggggggggggggggggggg politicians&()hhhhhhhhhhhhhhhhhhhhh thrift officials&Ans er'
uestion tatus' Re"ise!()iiiiiiiiiiiiiiiiiiiii 2Bureaucratic gam#ling refers to()000000000000000000000 the strategy of thrift managers that they oul! not #e au!ite! #y thrift regulators in
the 1+ -s !ue to the relati"ely eak #ureaucratic po er of thrift regulators&()kkkkkkkkkkkkkkkkkkkkk the risk that thrift regulators took in pu#lici9ing the plight of the
KJ in!ustry in the early 1+ -s&()lllllllllllllllllllll the strategy a!opte! #y thrift regulators of lo ering capital re.uirements an!
pursuing regulatory for#earance in the 1+ -s in the hope that con!itions in the KJ in!ustryoul! impro"e&
()mmmmmmmmmmmmmmmmmmmmm none of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()nnnnnnnnnnnnnnnnnnnnn hat ta%payers ere poorly ser"e! #y thrift regulators in the1+ -s is no .uite clear& his poor performance is e%plaine! #y
()ooooooooooooooooooooo regulators4 !esire to escape #lame for poor performance$ lea!ing toa per"erse strategy of 2#ureaucratic gam#ling &
()ppppppppppppppppppppp regulators4 incenti"es to acce!e to pressures impose! #y politicians$ ho sought to keep regulators from imposing tough regulations on institutions that
ere ma0or campaign contri#utors&()..................... Congress4s un illingness to appropriate sufficient fun!s to permit
regulators to e%amine the many thrift institutions that nee!e! monitoring&()rrrrrrrrrrrrrrrrrrrrr all of the a#o"e&()sssssssssssssssssssss only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' Re"ise!
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Chapter 11 Economic Analysis of Banking Regulation 1@3()ttttttttttttttttttttt a%payers ere ser"e! poorly #y thrift regulators in the 1+ -s& his poor
performance cannot #e e%plaine! #y()uuuuuuuuuuuuuuuuuuuuu regulators4 !esire to escape #lame for poor performance$ lea!ing to
a per"erse strategy of 2#ureaucratic gam#ling &()""""""""""""""""""""" regulators4 incenti"es to acce!e to pressures impose! #y
politicians$ ho sought to keep regulators from imposing tough regulations on institutions that
ere ma0or campaign contri#utors&() Congress4s !ogge! !etermination to protect ta%payersfrom the unsoun! #anking practices of managers at many of the nations sa"ings an! loans&
()%%%%%%%%%%%%%%%%%%%%% any of the a#o"e&Ans er'
uestion tatus' Re"ise!
()yyyyyyyyyyyyyyyyyyyyy An analysis of the political economy of the sa"ings an! loan crisishelps one to un!erstan!
()999999999999999999999 hy politicians hampere! the efforts of thrift regulators$ cutting regulatoryappropriations an! encouraging regulatory for#earance&
()aaaaaaaaaaaaaaaaaaaaaa hy thrift regulators ere so reluctant to a!mit that any pro#lem
e"en e%iste! in the thrift in!ustry&()###################### hy thrift regulators illingly acce!e! to pressures place! upon
them #y mem#ers of Congress&()cccccccccccccccccccccc all of the a#o"e&()!!!!!!!!!!!!!!!!!!!!!! only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()eeeeeeeeeeeeeeeeeeeeee An analysis of the political economy of the sa"ings an! loan crisis helpsone to un!erstan!
()ffffffffffffffffffffff hy politicians ai!e! the efforts of thrift regulators$ raising regulatoryappropriations an! encouraging closing of insol"ent thrifts&
()gggggggggggggggggggggg hy thrift regulators ere so .uick to inform Congress of the pro#lems that e%iste! in the thrift in!ustry&
()hhhhhhhhhhhhhhhhhhhhhh hy thrift regulators illingly acce!e! to pressures place! uponthem #y mem#ers of Congress&
()iiiiiiiiiiiiiiiiiiiiii all of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
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1@= Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()0000000000000000000000 hat se"eral hun!re! KJs ere not e"en e%amine! once in the perio! Hanuary
1+ = through Hune 1+ / can #e e%plaine! #y()kkkkkkkkkkkkkkkkkkkkkk Congress4s un illingness to allocate the necessary fun!s to thrift
regulators&()llllllllllllllllllllll the strong KJ lo##y hich contri#ute! hea"ily to mem#ers of Congress an! aske!
Congress to encourage regulatory for#earance&
()mmmmmmmmmmmmmmmmmmmmmmprohi#itions against onerous regulatory restrictions againstKJs as man!ate! in the Competiti"e Banking E.uality Act&()nnnnnnnnnnnnnnnnnnnnnn all of the a#o"e&()oooooooooooooooooooooo only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()pppppppppppppppppppppp hat se"eral hun!re! KJs ere not e"en e%amine! once in the perio! Hanuary 1+ = through Hune 1+ / can #e e%plaine! #y
()...................... Congress4s un illingness to allocate the necessary fun!s to thriftregulators&
()rrrrrrrrrrrrrrrrrrrrrr regulators4 reluctance to fin! the specific pro#lem thrifts that they knee%iste!&
()ssssssssssssssssssssss prohi#itions against onerous regulatory restrictions against KJs asman!ate! in the Competiti"e Banking E.uality Act&
()tttttttttttttttttttttt all of the a#o"e&()uuuuuuuuuuuuuuuuuuuuuu only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()"""""""""""""""""""""" he #ailout of the sa"ings an! loan in!ustry as much !elaye!an!$ therefore$ much more costly to ta%payers #ecause
() of regulators4 initial attempts to !o nplay the seriousness
of pro#lems ithin the thrift in!ustry&()%%%%%%%%%%%%%%%%%%%%%% politicians ho recei"e! generous campaign contri#utions from thesa"ings an! loan in!ustry$ like regulators$ hope! that the pro#lems in the in!ustry oul! ease o"er time&
()yyyyyyyyyyyyyyyyyyyyyy Congress encourage!$ an! thrift regulators acce!e! to$ a policy ofregulatory for#earance&
()9999999999999999999999 of all of the a#o"e&()aaaaaaaaaaaaaaaaaaaaaaa of only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
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Chapter 11 Economic Analysis of Banking Regulation 1@@()####################### he #ailout of the sa"ings an! loan in!ustry as much !elaye!
an!$ therefore$ much more costly to ta%payers #ecause()ccccccccccccccccccccccc of regulators4 initial attempts to !o nplay the seriousness of
pro#lems ithin the thrift in!ustry&()!!!!!!!!!!!!!!!!!!!!!!! politicians ho recei"e! generous campaign contri#utions from the
sa"ings an! loan in!ustry$ like regulators$ hope! that the pro#lems in the in!ustry oul! ease o"er
time&()eeeeeeeeeeeeeeeeeeeeeee Congress !i! not ait long enough for many of the pro#lems in the thriftin!ustry to correct themsel"es&
()fffffffffffffffffffffff of all of the a#o"e&()ggggggggggggggggggggggg of only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()hhhhhhhhhhhhhhhhhhhhhhh *rior to August 1+ +$ the agency that regulate! the nation4ssa"ings an! loan associations as the
()iiiiiiiiiiiiiiiiiiiiiii Fe!eral ome Joan Bank Boar!&()00000000000000000000000 ffice of hrift uper"ision&()kkkkkkkkkkkkkkkkkkkkkkk Resolution rust Corporation&()lllllllllllllllllllllll Comptroller of the Currency&Ans er'
uestion tatus' *re"ious E!ition
()mmmmmmmmmmmmmmmmmmmmmmm he Fe!eral ome Joan Bank Boar! an! theF JIC$ #oth of hich faile! in their regulatory tasks$ ere a#olishe! #y the
()nnnnnnnnnnnnnnnnnnnnnnn Competiti"e E.uality Banking Act of 1+ &()ooooooooooooooooooooooo Financial Institutions Reform$ Reco"ery an! Enforcement Act of
1+ +&()ppppppppppppppppppppppp ffice of hrift uper"ision&
()....................... ffice of the Comptroller of the Currency&Ans er'
uestion tatus' *re"ious E!ition
()rrrrrrrrrrrrrrrrrrrrrrr he ma0or pro"isions of the Financial Institutions Reform$ Reco"ery an!Enforcement Act of 1+ + inclu!e
()sssssssssssssssssssssss the a#olishment of the Fe!eral ome Joan Bank Boar! an! the F JIC&()ttttttttttttttttttttttt transferring the regulatory role of the Fe!eral ome Joan Bank Boar! to the ffice
of hrift uper"ision$ a #ureau ithin the G& & reasury Department&()uuuuuuuuuuuuuuuuuuuuuuu e%pan!ing the responsi#ilities of the FDIC$ hich is no the sole
a!ministrator of the fe!eral !eposit insurance system&()""""""""""""""""""""""" all of the a#o"e&() only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
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1@/ Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()%%%%%%%%%%%%%%%%%%%%%%% he ma0or pro"isions of the Financial Institutions Reform$
Reco"ery an! Enforcement Act of 1+ + inclu!e()yyyyyyyyyyyyyyyyyyyyyyy the a#olishment of the Fe!eral ome Joan Bank Boar! an! the
F JIC&()99999999999999999999999 transferring the regulatory role of the Fe!eral ome Joan Bank
Boar! to the ffice of hrift uper"ision$ a #ureau ithin the G& & reasury Department&
()aaaaaaaaaaaaaaaaaaaaaaaa the esta#lishment of the Resolution rust Corporation to managean! resol"e insol"ent thrifts place! in conser"atorship or recei"ership&()######################## all of the a#o"e&()cccccccccccccccccccccccc only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()!!!!!!!!!!!!!!!!!!!!!!!! he ma0or pro"isions of the Financial Institutions Reform$Reco"ery an! Enforcement Act of 1+ + inclu!e
()eeeeeeeeeeeeeeeeeeeeeeee transferring the regulatory role of the Fe!eral ome Joan BankBoar! to the ffice of hrift uper"ision$ a #ureau ithin the G& & reasury Department&
()ffffffffffffffffffffffff e%pan!ing the responsi#ilities of the FDIC$ hich is no the solea!ministrator of the fe!eral !eposit insurance system&
()gggggggggggggggggggggggg the esta#lishment of the Resolution rust Corporation to managean! resol"e insol"ent thrifts place! in conser"atorship or recei"ership&
()hhhhhhhhhhhhhhhhhhhhhhhh all of the a#o"e&()iiiiiiiiiiiiiiiiiiiiiiii only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()000000000000000000000000 he ma0or pro"isions of the Financial Institutions Reform$ Reco"ery an!Enforcement Act of 1+ + inclu!e
()kkkkkkkkkkkkkkkkkkkkkkkk e%pan!ing the responsi#ilities of the FDIC$ hich is no the sole
a!ministrator of the fe!eral !eposit insurance system&()llllllllllllllllllllllll the esta#lishment of the Resolution rust Corporation to manage an! resol"einsol"ent thrifts place! in conser"atorship or recei"ership&
()mmmmmmmmmmmmmmmmmmmmmmmm !irecting the Fe!eral ome Joan Bank Boar! tocontinue to pursue regulatory for#earance&
()nnnnnnnnnnnnnnnnnnnnnnnn all of the a#o"e&()oooooooooooooooooooooooo only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
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Chapter 11 Economic Analysis of Banking Regulation 1@()pppppppppppppppppppppppp he ma0or pro"isions of the Financial Institutions Reform$
Reco"ery an! Enforcement Act of 1+ + inclu!e()........................ re!ucing the regulatory responsi#ilities of the FDIC&()rrrrrrrrrrrrrrrrrrrrrrrr the esta#lishment of the Resolution rust Corporation to manage an!
resol"e insol"ent thrifts place! in conser"atorship or recei"ership&()ssssssssssssssssssssssss !irecting the Fe!eral ome Joan Bank Boar! to continue to pursue
regulatory for#earance&()tttttttttttttttttttttttt all of the a#o"e&()uuuuuuuuuuuuuuuuuuuuuuuu only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()"""""""""""""""""""""""" he 1+ + Financial Institutions Reform$ Reco"ery an!Enforcement Act
() transferre! the regulatory role of the ffice ofhrift uper"ision to the Fe!eral ome Joan Bank Boar!&
()%%%%%%%%%%%%%%%%%%%%%%%% significantly re!uce! the responsi#ilities of the FDIC$ hilonger a!ministers the fe!eral !eposit insurance system&
()yyyyyyyyyyyyyyyyyyyyyyyy esta#lishe! the Resolution rust Corporation to manage an!resol"e insol"ent thrifts place! into conser"atorship or recei"ership&
()999999999999999999999999 all of the a#o"e&()aaaaaaaaaaaaaaaaaaaaaaaaa #oth (a) an! (#) of the a#o"e&Ans er'
uestion tatus' tu!y :ui!e
()######################### 6any economists are mil!ly critical of FIRREA #ecause()ccccccccccccccccccccccccc it re!uces the efficiency of financial interme!iation in the Gnite!
tates&()!!!!!!!!!!!!!!!!!!!!!!!!! it !oes little to !eal ith the un!erlying a!"erse selection an!
moral ha9ar! pro#lems create! #y !eposit insurance&()eeeeeeeeeeeeeeeeeeeeeeeee it significantly re!uces the po ers of thrift regulators an! makes itmore !ifficult to remo"e incompetent thrift managers&
()fffffffffffffffffffffffff of all of the a#o"e&()ggggggggggggggggggggggggg of only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()hhhhhhhhhhhhhhhhhhhhhhhhh he Fe!eral Deposit Insurance Corporation Impro"ement Act of1++1
()iiiiiiiiiiiiiiiiiiiiiiiiiincrease! the FDIC4s a#ility to #orro from the reasury to !eal ith faile! #anks&()0000000000000000000000000re!uce! the scope of !eposit insurance in se"eral ays&()kkkkkkkkkkkkkkkkkkkkkkkkk eliminate! go"ernmentally8a!ministere! !eposit insurance&()lllllllllllllllllllllllll!i! only (a) an! (#) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
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1@ Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()mmmmmmmmmmmmmmmmmmmmmmmmm he Fe!eral Deposit Insurance Corporation
Impro"ement Act of 1++1()nnnnnnnnnnnnnnnnnnnnnnnnn re!uce! the scope of !eposit insurance in se"eral ays&()ooooooooooooooooooooooooo eliminate! restrictions on nation i!e #anking&()ppppppppppppppppppppppppp allo e! ell8capitali9e! #anks to ha"e to !o some securities
un!er riting&
()......................... !i! only (a) an! (#) of the a#o"e&()rrrrrrrrrrrrrrrrrrrrrrrrr !i! only (a) an! (c) of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()sssssssssssssssssssssssss he Fe!eral Deposit Insurance Corporation Impro"ement Act of 1++1()ttttttttttttttttttttttttt re!uce! the scope of !eposit insurance in se"eral ays&()uuuuuuuuuuuuuuuuuuuuuuuuu limite! the FDIC4s a#ility to use the 2too8#ig8to8fail policy&()""""""""""""""""""""""""" re.uires the FDIC to inter"ene earlier hen a #ank gets into
trou#le&() !i! all of the a#o"e&
Ans er'uestion tatus' *re"ious E!ition
()%%%%%%%%%%%%%%%%%%%%%%%%% he Fe!eral Deposit Insurance Corporation Impro"ement Act of1++1
()yyyyyyyyyyyyyyyyyyyyyyyyy instructe! the FDIC to come up ith risk8#ase! !eposit insurance premiums&
()9999999999999999999999999 e%pan!e! the FDIC4s a#ility to use the 2too8#ig8to8fail policy&()aaaaaaaaaaaaaaaaaaaaaaaaaa instructe! the FDIC to ait longer #efore inter"ening hen a #ank
gets into trou#le&()########################## !i! all of the a#o"e&Ans er'
uestion tatus' *re"ious E!ition
()cccccccccccccccccccccccccc An e%amination of #anking crises in the can!ina"ian countries 5or ay$ e!en$ an! Finlan!
in!icates that$ as in the G& &$ an important factor in the crises as the()!!!!!!!!!!!!!!!!!!!!!!!!!! !ecline in real interest rates that occurre! in the 1+ -s&()eeeeeeeeeeeeeeeeeeeeeeeeee financial li#erali9ation that occurre! in the 1+ -s&()ffffffffffffffffffffffffff high inflation that occurre! in the 1+ -s&()gggggggggggggggggggggggggg sluggish economic gro th that occurre! in the 1+ -s&Ans er'
uestion tatus' *re"ious E!ition
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Chapter 11 Economic Analysis of Banking Regulation 1@+()hhhhhhhhhhhhhhhhhhhhhhhhhh As in the Gnite! tates$ an important factor in the #anking crises
in 5or ay$ e!en$ an! Finlan! as the()iiiiiiiiiiiiiiiiiiiiiiiiii financial li#erali9ation that occurre! in the 1+ -s&()00000000000000000000000000 !ecline in real interest rates that occurre! in the 1+ -s&()kkkkkkkkkkkkkkkkkkkkkkkkkk high inflation that occurre! in the 1+ -s&()llllllllllllllllllllllllll sluggish economic gro th that occurre! in the 1+ -s&
Ans er'uestion tatus' *re"ious E!ition
()mmmmmmmmmmmmmmmmmmmmmmmmmm As in the Gnite! tates$ an important factor in the #anking crises in Jatin America as the
()nnnnnnnnnnnnnnnnnnnnnnnnnn financial li#erali9ation that occurre! in the 1+ -s&()oooooooooooooooooooooooooo !ecline in real interest rates that occurre! in the 1+ -s&()pppppppppppppppppppppppppp high inflation that occurre! in the 1+ -s&().......................... sluggish economic gro th that occurre! in the 1+ -s&Ans er'
uestion tatus' *re"ious E!ition
()rrrrrrrrrrrrrrrrrrrrrrrrrr
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1/- Fre!eric & 6ishkin 7 Economics of Money, Banking, and Financial Markets, e"enth E!ition()hhhhhhhhhhhhhhhhhhhhhhhhhhh he e"i!ence from #anking crises in other countries in!icates that()iiiiiiiiiiiiiiiiiiiiiiiiiii !eposit insurance is to #lame in each country&()000000000000000000000000000 a go"ernment safety net for !epositors nee! not increase moral ha9ar!&()kkkkkkkkkkkkkkkkkkkkkkkkkkk e%pertise in screening #orro ers cannot pre"ent loan losses&()lllllllllllllllllllllllllll !eregulation com#ine! ith poor regulatory super"ision raises moral
ha9ar! incenti"es&
()mmmmmmmmmmmmmmmmmmmmmmmmmmm regulatory for#earance ne"er lea!s to pro#lems&
Ans er'uestion tatus' tu!y :ui!e
Internet Appendix
1,/) A system of coinsurance oul!(a) eliminate !eposit insurance&(#) re!uce !eposit insurance to ;=-$---&(c) Increase !eposit insurance to ;13-$---&
(!) pro"i!e 1-- !eposit insurance for all !eposits&(e) limit !eposit insurance to only a percentage of a !eposit&Ans er'
uestion tatus' 5e
1, ) Eliminating or re!ucing !eposit insurance may fail to pro"i!e the !esire! !iscipline #ecause(a) !epositors may #e incapa#le of monitoring #anks&(#) #anks oul! #e su#0ect to runs an! a large num#er of failures&(c) such an action increases #anks4 incenti"es to assume high risk&(!) all of the a#o"e&(e) #oth (a) an! (#) of the a#o"e&
Ans er'uestion tatus' 5e
1, ) Big #anks are not su#0ect to enough !iscipline from uninsure! !epositors #ecause of (a) regulatory for#earance&(#) #ureaucratic gam#ling&(c) the too8#ig8to8fail policy&(!) the principal8agent pro#lem&(e) pru!ential super"ision&Ans er'
uestion tatus' 5e
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Chapter 11 Economic Analysis of Banking Regulation 1/11,+) Risk8#ase! !eposit insurance premiums
(a) re!uce moral ha9ar! incenti"es&(#) encourage #anks to hol! more capital&(c) re!uce the a!"erse selection pro#lem for regulators&(!) all of the a#o"e&(e) #oth (a) an! (#) of the a#o"e&Ans er'
uestion tatus' 5e
13-) 6arket8"alue accounting has a num#er of a!"antages o"er historical8cost accounting$ inclu!ing(a) gi"ing regulators the a#ility to close a #ank #efore its net orth falls to 9ero&(#) re!ucing the inci!ence in the num#er of #anks that 2#et8the8#ank #y taking e%cessi"e risks in
hopes of staying in operation&(c) making it more !ifficult for #ank officials to hi!e insol"encies&(!) making it more !ifficult for regulators an! politicians to hi!e insol"encies&(e) all of the a#o"eAns er'
uestion tatus' *re"ious E!ition
)2 Essay Questions
()a he go"ernment safety net is consi!ere! a mi%e! #lessing& Discuss the pros an! cons of thesafety net&
()#