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1、1 Financial Markets and Institutions,6e(Mishkin/Eakins)Chapter 20 Banking Regulation 20.1 Multiple Choice 1)During the boom years of the 1920s,bank failures were quite A)uncommon,averaging less than 30 per year.B)uncommon,averaging less than 100 per year.C)common,averaging about 600 per year.D)commo
2、n,averaging about 2000 per year.Answer:C Question Status:Previous Edition 2)When one party to a transaction has incentives to engage in activities detrimental to the other party,there exists a problem of A)moral hazard.B)split incentives.C)ex ante shirking.D)pre-contractual opportunism.Answer:A Ques
3、tion Status:Previous Edition 3)Moral hazard is an important consequence of insurance arrangements because the existence of insurance A)provides increased incentives for risk taking.B)impedes efficient risk taking.C)causes the private cost of the insured activity to increase.D)both A and B of the abo
4、ve.E)both B and C of the above.Answer:A Question Status:Previous Edition 4)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.A)adverse selection;little B)adverse selection;much C)moral hazar
5、d;little D)moral hazard;much Answer:D Question Status:Previous Edition 5)The existence of deposit insurance can increase the likelihood that depositors will need deposit protection,as banks with deposit insurance A)are likely to take on greater risks than they otherwise would.B)are likely to be too
6、conservative,reducing the probability of turning a profit.C)are likely to regard deposits as an unattractive source of funds due to depositors demands for safety.D)are placed at a competitive disadvantage in acquiring funds.Answer:A Question Status:Previous Edition 2 6)Although the FDIC was created
7、to prevent bank failures,its existence encourages banks to A)take too much risk.B)hold too much capital.C)open too many branches.D)buy too much stock.Answer:A Question Status:Previous Edition 7)When bad drivers line up to purchase collision insurance,automobile insurers are subject to the A)moral ha
8、zard problem.B)adverse selection problem.C)assigned risk problem.D)ill queue problem.Answer:B Question Status:Previous Edition 8)Deposit insurance A)attracts risk-prone entrepreneurs to the banking industry.B)encourages bank managers to take on greater risks than they otherwise would.C)reduces the i
9、ncentives of depositors to monitor the riskiness of their banks asset portfolios.D)does all of the above.E)does only A and B of the above.Answer:D Question Status:Previous Edition 9)The possibility that the failure of one bank can hasten the failure of other banks is called the A)bank run effect.B)m
10、oral hazard effect.C)contagion effect.D)adverse selection effect.Answer:C Question Status:Previous Edition 10)If the FDIC decides that a bank is too big to fail,it will use the _ method,effectively ensuring that _ depositors will suffer losses.A)payoff;large B)payoff;no C)purchase and assumption;lar
11、ge D)purchase and assumption;no Answer:D Question Status:Previous Edition 11)If the FDIC uses the purchase and assumption method to handle a failed bank,A)all deposits will suffer losses.B)small deposits will be paid in full but deposits over the insurance limit will not.C)all deposits will be paid
12、in full.D)none of the above.Answer:C Question Status:Previous Edition 3 12)One problem of the too-big-to-fail policy is that it _ the incentives for _ by big banks.A)reduces;moral hazard by big banks.B)increases;moral hazard by big banks.C)reduces;adverse selection by big banks.D)increases;adverse s
13、election by big banks.Answer:B Question Status:Previous Edition 13)The result of the too-big-to-fail policy is that _ banks will take on _ risks,making bank failures more likely.A)small;fewer B)small;greater C)large;fewer D)large;greater Answer:D Question Status:Previous Edition 14)The too-big-to-fa
14、il policy A)exacerbates moral hazard problems.B)puts large banks at a competitive disadvantage in attracting large deposits.C)treats large depositors of small banks inequitably when compared to depositors of large banks.D)does only A and C of the above.Answer:D Question Status:Previous Edition 15)Th
15、e primary difference between the payoff and the purchase and assumption methods of handling failed banks is that the FDIC A)guarantees all deposits,not just those under the$100,000 limit,when it uses the payoff method.B)guarantees all deposits,not just those under the$100,000 limit,when it uses the
16、purchase and assumption method.C)is more likely to use the payoff method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures.D)both A and B of the above.E)both B and C of the above.Answer:B Question Status:Previous Edition 4 16)The primary
17、 difference between the payoff and the purchase and assumption methods of handling failed banks is that the FDIC A)guarantees all deposits,not just those under the$100,000 limit,when it uses the payoff method.B)guarantees all deposits,not just those under the$100,000 limit,when it uses the purchase
18、and assumption method.C)is less likely to use the payoff method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures.D)both A and B of the above.E)both B and C of the above.Answer:E Question Status:Previous Edition 17)Regulators attempt to
19、reduce the riskiness of banks asset portfolios by A)limiting the amount of loans in particular categories or to individual borrowers.B)prohibiting banks from holding risky assets such as common stocks.C)establishing a minimum interest rate floor that banks can earn on certain assets.D)doing all of t
20、he above.E)doing only A and B of the above.Answer:E Question Status:Previous Edition 18)One way for bank regulators to assure depositors that a bank is not taking on too much risk is to require the bank to A)diversify its loan portfolio.B)reduce its equity capital.C)reduce the size of its loan portf
21、olio.D)do both A and B of the above.E)do both B and C of the above.Answer:A Question Status:Previous Edition 19)Banks do not want to hold too much capital because A)they do not bear fully the costs of bank failures.B)higher returns on equity are earned when bank capital is smaller,all else equal.C)h
22、igher capital levels attract the scrutiny of regulators.D)all of the above.E)only A and B of the above.Answer:E Question Status:Previous Edition 20)The increased integration of financial markets across countries and the need to make the playing field equal for banks from different countries led to t
23、he Basel agreement to A)standardize bank capital requirements internationally.B)reduce,across the board,bank capital requirements in all countries.C)sever the link between risk and capital requirements.D)do all of the above.Answer:A Question Status:Previous Edition 5 21)Under the Basel Plan,A)assets
24、 and off-balance sheet activities are assigned to various categories to reflect the degree of credit risk.B)a banks total capital must equal or exceed 8 percent of total risk-adjusted assets.C)both of the above.D)none of the above.Answer:C Question Status:Previous Edition 22)Of the following assets,
25、the one which has the highest capital requirement under the Basel Accord is A)municipal bonds.B)residential mortgages.C)commercial paper.D)securities issued by industrialized countries governments.Answer:C Question Status:Previous Edition 23)Which of the following is not true regarding the Basel 2 p
26、roposal to reform the original 1988 Basel Accord?A)It attempts to link capital requirements more closely to actual risk by expanding the number of risk categories.B)It focuses on assessing the quality of risk management in banking institutions.C)It attempts to improve market discipline by requiring
27、increased disclosure of pertinent information about banks.D)It has been well received by banks and national regulatory agencies.Answer:D Question Status:Previous Edition 24)Ways in which bank regulations reduce the adverse selection and moral hazard problems in banking include A)a chartering process
28、 designed to prevent crooks from getting control of a bank.B)restrictions that prevent banks from acquiring certain risky assets,such as common stocks.C)high bank capital requirements to increase the cost of bank failure to the owners.D)all of the above.E)only A and B of the above.Answer:D Question
29、Status:Previous Edition 25)The chartering process is especially designed to deal with the _ problem,and regular bank examinations help to reduce the _ problem.A)adverse selection;adverse selection B)adverse selection;moral hazard C)moral hazard;adverse selection D)moral hazard;moral hazard Answer:B
30、Question Status:Previous Edition 6 26)The chartering process is especially designed to deal with the _ problem,and restrictions on asset holdings help to reduce the _ problem.A)adverse selection;adverse selection B)adverse selection;moral hazard C)moral hazard;adverse selection D)moral hazard;moral
31、hazard Answer:B Question Status:Previous Edition 27)Regular bank examinations and restrictions on asset holdings indirectly help to reduce the _ problem because,given fewer opportunities to take on risk,risk-prone entrepreneurs will be discouraged from entering the banking industry.A)moral hazard B)
32、adverse selection C)ex post shirking D)post-contractual opportunism Answer:B Question Status:Previous Edition 28)Regular bank examinations and restrictions on asset holdings indirectly help to _ the adverse selection problem because,given fewer opportunities to take on risk,risk-prone entrepreneurs
33、will be _ from entering the banking industry.A)increase;encouraged B)increase;discouraged C)reduce;encouraged D)reduce;discouraged Answer:D Question Status:Previous Edition 29)The legislation that separated commercial banking from the securities industry is known as the A)National Bank Act.B)Federal
34、 Reserve Act.C)Glass-Steagall Act.D)McFadden Act.Answer:C Question Status:Previous Edition 30)The Depository Institutions Deregulation and Monetary Control Act of 1980 A)approved NOW accounts nationwide.B)restricted the use of ATS accounts.C)imposed interest rate ceilings on bank loans.D)did all of
35、the above.Answer:A Question Status:Previous Edition 7 31)The Depository Institutions Deregulation and Monetary Control Act of 1980 A)approved NOW accounts nationwide.B)imposed uniform reserve requirements.C)mandated the phase out of interest rate ceilings on deposits.D)did all of the above.E)did onl
36、y A and B of the above.Answer:D Question Status:Previous Edition 32)As a way of stemming the decline in the number of savings and loans and mutual savings banks,the Garn-St.Germain Act of 1982 allowed A)money market certificates.B)money market mutual funds.C)money market deposit accounts.D)negotiabl
37、e order of withdrawal accounts.Answer:C Question Status:Previous Edition 33)An impact of the Garn-St.Germain Act of 1982 has been to A)put savings and loans at a competitive disadvantage.B)make the banking system more competitive.C)give money market mutual funds a competitive advantage.D)do both A a
38、nd B of the above.E)do both A and C of the above.Answer:B Question Status:Previous Edition 34)Moral hazard and adverse selection problems increased in prominence in the 1980s A)as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk.B)following a bu
39、rst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets,thereby widening the scope for risk taking.C)following an increase in federal deposit insurance from$40,000 to$100,000.D)all of the above.E)only A and B of the above.Answer:D Question Status:
40、Previous Edition 35)Moral hazard and adverse selection problems increased in prominence in the 1980s A)as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk.B)following a burst of financial innovation in the 1970s and early 1980s that produced new
41、 financial instruments and markets,thereby widening the scope for risk taking.C)following a decrease in federal deposit insurance from$100,000 to$40,000.D)all of the above.E)only A and B of the above.Answer:E Question Status:Previous Edition 8 36)The Federal Deposit Insurance Corporation Improvement
42、 Act of 1991 A)increased the FDICs ability to borrow from the Treasury to deal with failed banks.B)reduced the scope of deposit insurance in several ways.C)eliminated governmentally-administered deposit insurance.D)did only A and B of the above.Answer:D Question Status:Previous Edition 37)The Federa
43、l Deposit Insurance Corporation Improvement Act of 1991 A)reduced the scope of deposit insurance in several ways.B)eliminated restrictions on nationwide banking.C)allowed well-capitalized banks to do some securities underwriting.D)did only A and B of the above.E)did only A and C of the above.Answer:
44、E Question Status:Previous Edition 38)The Federal Deposit Insurance Corporation Improvement Act of 1991 A)reduced the scope of deposit insurance in several ways.B)limited the FDICs ability to use the too-big-to-fail policy.C)requires the FDIC to intervene earlier when a bank gets into trouble.D)did
45、all of the above.Answer:D Question Status:Previous Edition 39)The Federal Deposit Insurance Corporation Improvement Act of 1991 A)instructed the FDIC to come up with risk-based deposit insurance premiums.B)expanded the FDICs ability to use the too-big-to-fail policy.C)instructed the FDIC to wait lon
46、ger before intervening when a bank gets into trouble.D)did all of the above.Answer:A Question Status:Previous Edition 40)Which of the following is least likely to accompany financial consolidation and the development of large complex banking organizations?A)More financial institutions will be consid
47、ered too big to fail.B)The government safety net will be extended to include nonbanking activities.C)Moral hazard problems will become less important.D)Banks will have greater incentives and opportunities to take on more risk.Answer:C Question Status:Previous Edition 41)What accounts for the problem
48、s facing Chinas four largest banks?A)Large loans to inefficient state-owned enterprises B)Closing of unprofitable branches and laying off unproductive employees C)Selling shares in the bank overseas to raise capital D)All of the above Answer:A Question Status:Previous Edition 9 42)World Bank researc
49、h on the effects of deposit insurance concludes that A)adoption of deposit insurance will promote stability and efficiency in the banking systems of emerging-market economies.B)adoption of explicit government deposit insurance is associated with a higher incidence of banking crises.C)adoption of dep
50、osit insurance has the greatest benefits in countries that have weaker institutional environments.D)none of the above are true.Answer:B Question Status:Previous Edition 20.2 True/False 1)To understand banking regulation in the United States,it is helpful to understand the concepts of asymmetric info