mishkin tb11

8/17/2019 Mishkin Tb11

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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


2/31

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


3/31

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'


()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'


()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'


()mmm


4/31

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'


()%%% 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'


()hhhh


5/31

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'


()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'



6/31

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'


()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'


()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'


()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'



7/31

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&


()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'


()lllllll


8/31

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'


()"""""""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&


9/31

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'


() 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'


()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'


()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'



10/31

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'


()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'


()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


11/31

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&


()"""""""""" 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'


() 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'


()%%%%%%%%%% 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&



12/31

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'


()ooooooooooo


13/31

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&


()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'


()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


14/31

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!


()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'


()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'



15/31

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'


()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'


()tttttttttttttt


16/31

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'


()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'



17/31

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'


()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


18/31

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'


()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'


()""""""""""""""""" 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'


()################## 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'



19/31

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'


()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'


()%%%%%%%%%%%%%%%%%%


20/31

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!


()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'


()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'


()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'



21/31

Chapter 11 Economic Analysis of Banking Regulation 1@1()aaaaaaaaaaaaaaaaaaaa In 1+ $ Far


22/31

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'


()!!!!!!!!!!!!!!!!!!!!! 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'


()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'



23/31

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'


()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'


()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'



24/31

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'


()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'


()"""""""""""""""""""""" 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'



25/31

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'


()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'


()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'


()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'



26/31

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'


()!!!!!!!!!!!!!!!!!!!!!!!! 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'


()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'



27/31

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'


()"""""""""""""""""""""""" 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'


()######################### 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'


()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'



28/31

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'


()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&


()%%%%%%%%%%%%%%%%%%%%%%%%% 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'


()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'



29/31

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&


()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'


()rrrrrrrrrrrrrrrrrrrrrrrrrr


30/31

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


31/31

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'


)2 Essay Questions

()a he go"ernment safety net is consi!ere! a mi%e! #lessing& Discuss the pros an! cons of thesafety net&

()#

mishkin tb11

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