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| 1 | |
Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because: |
| | A) | Customers will not want to obtain loans from this bank |
| | B) | The rumors will cause people to not want to deposit in this bank |
| | C) | Regulators will scrutinize the bank heavily looking for something wrong |
| | D) | Depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have sufficient liquid assets on hand |
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| 2 | |
What matters most during a bank run is: |
| | A) | The number of loans outstanding |
| | B) | The solvency of the bank |
| | C) | The liquidity of the bank |
| | D) | The size of the bank's assets |
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| 3 | |
Contagion is: |
| | A) | The failure of one bank spreading to other banks through depositors withdrawing of funds |
| | B) | The phenomenon that if one bank loan defaults it will cause other bank loans to default |
| | C) | The rapid contraction of investment spending that occurs when interest rates are increased by the Federal Reserve |
| | D) | The rapid inflation that results from the printing of money |
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| 4 | |
An economic rationale for government protection of small investors is that: |
| | A) | Large investors can better afford losses |
| | B) | Many small investors cannot adequately judge the soundness of their bank |
| | C) | There is inadequate competition to ensure a bank is operating efficiently |
| | D) | Banks are often run by unethical managers who will often exploit small investors |
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| 5 | |
The financial system is inherently more unstable than most other industries due to the fact that: |
| | A) | While in most other industries customers disappear at a faster rate, in banking they disappear slowly so the damage is done before the real problem is identified |
| | B) | Banks deal in paper profits, not in real profits |
| | C) | A single firm failing in banking can bring down the entire system; this isn't true in most other industries |
| | D) | There is less competition than in other industries |
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| 6 | |
The government's role of lender of last resort: |
| | A) | Cannot be extended to non-bank entities. |
| | B) | Is directed to depositors; this is role the government plays when they insure depositors' balances in banks that fail. |
| | C) | Allows developing nations that are trying to build their financial systems to borrow from the Fed. |
| | D) | Was extended to nonbank intermediaries through the Fed's emergency lending authority in the financial crisis of 2007-2009. |
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| 7 | |
A moral hazard situation arises in the lender of last resort function because: |
| | A) | A central bank finds it difficult to distinguish illiquid from insolvent banks |
| | B) | A central bank usually will only make a loan to a bank after it becomes insolvent |
| | C) | A central bank usually undervalues the assets of a bank in a crisis |
| | D) | The central bank is the first place a bank facing a crisis will turn |
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| 8 | |
The existence of a lender of last resort creates moral hazard for bank managers because: |
| | A) | They have an incentive to take too much risk in their operations |
| | B) | Officials are likely to undervalue the bank's portfolio of assets |
| | C) | They are less likely to apply for a direct loan from the central bank |
| | D) | Banks seek loans from the central bank only after exploring other options |
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| 9 | |
One reason customers do not care about the quality of their bank's assets is: |
| | A) | Most people cannot distinguish an asset from a liability |
| | B) | The quality of a bank's assets changes almost daily |
| | C) | They assume the bank only has high quality assets |
| | D) | With deposit insurance, there isn't any real reason to care; their deposits are protected even if the bank fails |
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| 10 | |
The payoff method used by the FDIC to address the insolvency of a bank is when the FDIC: |
| | A) | Pays the owners of the bank for the losses they would otherwise face |
| | B) | Pays off all depositors the balances in their accounts so no depositor suffers a loss, though the owners of the bank may suffer losses |
| | C) | Pays off the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses |
| | D) | Takes all of the assets of the bank, sells them pays off the liabilities of the bank in full and then replenishes their fund with any remaining balance |
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| 11 | |
Under the purchase-and-assumption method of dealing with a failed bank, the FDIC: |
| | A) | Finds another bank to take over the insolvent bank |
| | B) | Takes over the day to day management of the bank |
| | C) | Sells the failed bank to the Federal Reserve |
| | D) | Sells off the profitable loans of the failed bank in an open auction |
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| 12 | |
The government's too-big-to-fail policy: |
| | A) | Applies to certain highly populated states where a bank run impacts a large percent of the total population. |
| | B) | Exists because small banks' failure would certainly start a widespread panic in the financial system. |
| | C) | Means that the intermediary is too big or too complex to shut down or sell in an orderly fashion without large and painful spillovers. |
| | D) | Applies only to banks that have branches in more than two states. |
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| 13 | |
You hold an FDIC insured savings account at your neighborhood bank jointly with your father. Each of you has contributed equally into the account. The current balance in the account is $300,000. If the bank fails each of you will receive: |
| | A) | $600,000 |
| | B) | $3000,000 |
| | C) | $150,000 |
| | D) | $250,000 |
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| 14 | |
You have savings accounts at two separately FDIC insured banks. At one of the banks your account has a balance of $150,000. At the other bank the account balance is $60,000. If both banks fail, you will receive: |
| | A) | $100,000 |
| | B) | $60,000 |
| | C) | $210,000 |
| | D) | $50,000 |
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| 15 | |
Bank mergers require government approval because banking officials want to make sure that: |
| | A) | The merger will create a larger bank |
| | B) | The merger will not create a monopoly in any geographic region |
| | C) | If a merger has a small community bank taken over by a larger regional bank, that the customers of the small town will still be well-served |
| | D) | The merger will not result in regulatory competition |
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