98 notecards = 25 pages (4 cards per page)
Depositors lack of information about the quality of bank assets can lead to
The fact that banks operate on a "sequential service constraint" means that
Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a
Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the
The contagion effect refers to the fact that
During the boom years of the 1920s, bank failures were quite
To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance.
The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is
Deposit insurance has not worked well in countries with
When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of
Moral hazard is an important concern of insurance arrangements because the existence of insurance
When bad drivers line up to purchase collision insurance, automobile insurers are subject to the
Deposit insurance is only one type of government safety net. All of the following are types of government support for troubled financial institutions EXCEPT
Although the FDIC was created to prevent bank failures, its existence encourages banks to
A system of deposit insurance
The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry.
Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk.
Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government
The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance
In May 1991, the FDIC announced that it would sell the government's final 26% stake in Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois
If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.
Federal deposit insurance covers deposits up to $250,000, but as part of a doctrine called "too-big-to-fail" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses the
The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely.
A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.
The too-big-to-fail policy
The government safety net creates both an adverse selection problem and a moral hazard problem. Explain.
Answer: The adverse selection problem occurs because risk-loving individuals might view the banking system as a wonderful opportunity to use other peoples' funds knowing that those funds are protected. The moral hazard problem comes about because depositors will not impose discipline on the banks since their funds are protected and the banks knowing this will be tempted to take on more risk than they would otherwise.
Regulators attempt to reduce the riskiness of banks' asset portfolios by
A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.
A bank failure is less likely to occur when
The leverage ratio is the ratio of a bank's
To be considered well capitalized, a bank's leverage ratio must exceed
The FDIC must take steps to close down banks whose equity capital is less than ________ of assets.
The Basel Accord, an international agreement, requires banks to hold capital based on
The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets.
Under the Basel Accord, assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________.
The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is known as
Banks engage in regulatory arbitrage by
Because banks engage in regulatory arbitrage, the Basel Accord on risk-based capital requirements may result in
One of the criticisms of Basel 2 is that it is procyclical. That means that
Overseeing who operates banks and how they are operated is called
The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem.
The chartering process is similar to ________ potential borrowers and the restriction of risk assets by regulators is similar to ________ in private financial markets.
Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for
The federal agencies that examine banks include
Banks are required to file ________ usually quarterly that list information on the bank's assets and liabilities, income and dividends, and so forth.
Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry.
The current supervisory practice toward risk management
Regulations designed to provide information to the marketplace so that investors can make informed decisions are called
With ________, firms value assets on their balance sheet at what they would sell for in the market.
During times of financial crisis, mark-to-market accounting
Consumer protection legislation includes legislation to
An important factor in producing the global financial crisis was
Competition between banks
Regulations that reduced competition between banks included
The ________ that required separation of commercial and investment banking was repealed in 1999.
Which of the following is NOT a reason financial regulation and supervision is difficult in real life?
Who has regulatory responsibility when a bank operates branches in many countries?
The collapse of the Bank of Credit and Commerce International, BCCI, showed the difficulty of international banking regulation. BCCI operated in more than ________ countries and was supervised by the small country of ________.
Agreements such as the ________ are attempts to standardize international banking regulations.
The Basel Committee ruled that regulators in other countries can ________ the operations of a foreign bank if they believe that it lacks effective oversight.
In the ten year period 1981-1990, 1202 commercial banks were closed, with a peak of 206 failures in 1989. This rate of failures was approximately ________ times greater than that in the period from 1934 to 1980.
Moral hazard and adverse selection problems increased in prominence in the 1980s
During the 1960s, 1970s, and early 1980s, traditional bank profitability declined because of
The Depository Institutions Deregulation and Monetary Control Act of 1980
Prior to the 1980s, S&Ls and mutual savings banks were restricted almost entirely to
One of the problems experienced by the savings and loan industry during the 1980s was
In the early stages of the 1980s banking crisis, financial institutions were especially harmed by
When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them, they were pursuing a policy of
Savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called
Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following EXCEPT
The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.
The major provisions of the Competitive Equality Banking Act of 1987 include
The S&L Crisis can be analyzed as a principal-agent problem. The agents in this case, the ________, did not have the same incentive to minimize cost to the economy as the principals, the ________.
"Bureaucratic gambling" refers to
That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by
The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers because
An analysis of the political economy of the savings and loan crisis helps one to understand
Taxpayers were served poorly by thrift regulators in the 1980s. This poor performance cannot be explained by
The Federal Home Loan Bank Board and the FSLIC, both of which failed in their regulatory tasks, were abolished by the
The Resolution Trust Corporation was created by the FIRREA in order to
FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to
The Federal Deposit Insurance Corporation Improvement Act of 1991
The ability to use the too-big-to-fail policy was curtailed by the passage of the FDICIA. To use this action today, the FDIC must get approval of a two-thirds majority of both the Board of Governors of the Federal Reserve and the directors of the FDIC and also the approval of the
The directive of prompt corrective action means that
FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk.
How did the increase in the interest rates in the early 80s contribute to the S&L crisis?
Answer: The S&Ls suffered from an interest-rate risk problem. They had many fixed-rate mortgages with low interest rates. As interest rates in the economy began to climb, S&Ls began to lose profitability. Because of deregulation and financial innovation, it became possible for the S&Ls to undertake more risky ventures to try to regain their profitability. Many of them lacked expertise in judging credit risk in the new loan areas resulting in large losses.
The evidence from banking crises in other countries indicates that
All of the following are common to banking crises in different countries EXCEPT
A common element in all of the banking crisis episodes in different countries is
As in the United States, an important factor in the banking crises in Norway, Sweden, and Finland was the
As in the United States, an important factor in the banking crises in Latin America was the
The Argentine banking crisis of 2001 resulted from Argentina's banks being required to
When comparing the banking crisis in the United States to the crises in Latin America, cost to the taxpayers of the government bailouts was
The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S. in the 1980s.
China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas.
Banking crises have occurred throughout the world. What similarities do we find when we look at the different countries?
Answer: Financial deregulation with inadequate supervision can lead to increased moral hazard as banks take on more risk. Although deposit insurance was not necessarily a major factor in every country's bank crisis, there was always some kind of government safety net. The presence of the government safety net also leads to increased risk-taking from the banks.