Q#1: A bank faces a tradeoff that can impact its likelihood of failure in that:
(A) Banks that are operating in more competitive markets tend to be less efficient than banks that are monopolies in their local market
(B) More profitable banks tend to be less liquid and more likely to fail
(C) The greater the regulation from government the more likely the bank will fail
(D) The larger the bank in asset size the more likely it will fail
Answer: (B) More profitable banks tend to be less liquid and more likely to fail
Q#2: What matters most during a bank run is:
(A) The liquidity of the bank
(B) The solvency of the bank
(C) The number of depositors
(D) All of the above
Answer: (A) The liquidity of the bank
Q#3: The federal government is concerned about the health of the banking system mainly because:
(A) Banks are where government bonds are traded
(B) A significant number of people are employed in banking
(C) Banks are important for efficient functioning of the economy
(D) Many people earn income from bank deposits
Answer: (C) Banks are important for efficient functioning of the economy
Q#4: Contagion effects occur, in absence of deposit insurance, because:
(A) One bank becomes insolvent, most banks become insolvent
(B) All banks earn same profits or losses
(C) There is asymmetric information about bank solvency
(D) Failures occur during rapid growth
Answer: (C) There is asymmetric information about bank solvency
Q#5: It is difficult for depositors to know true health of banks because:
(A) Regulations prohibit disclosure
(B) Loan information is private and model-based
(C) Financial statements are too complex
(D) Records are hidden from competitors
Answer: (B) Loan information is private and based on sophisticated models
Q#6: Government deposit insurance protects:
(A) Large corporate accounts above $100,000
(B) Federal Reserve accounts
(C) Depositors up to $100,000 per bank failure
(D) Only federally chartered banks
Answer: (C) Depositors up to $100,000 per bank failure
Q#7: One unique problem banks face is that:
(A) They hold illiquid assets to meet liquid liabilities
(B) They hold liquid assets to meet illiquid liabilities
(C) Both assets and liabilities are liquid
(D) Both are illiquid
Answer: (A) They hold illiquid assets to meet liquid liabilities
Q#8: Lender of last resort must be effective by being:
(A) Credible so banks know they can get loans quickly
(B) Used on limited basis
(C) Given only to deserving banks
(D) Very difficult to access
Answer: (A) Credible, with quick access for banks
Q#9: With deposit insurance:
(A) Depositors must monitor bank risk
(B) Deposits are insured up to amount deposited
(C) Moral hazard is created
(D) All of the above
Answer: (D) All of the above
Q#10: Under purchase and assumption method, FDIC:
(A) Sells bank to Federal Reserve
(B) Finds another bank to take over insolvent bank
(C) Manages bank directly
(D) Sells only profitable loans
Answer: (B) Finds another bank to take over insolvent bank
Q#11: Incorrect statement is:
(A) Higher deposit insurance increases moral hazard
(B) Lower deposit insurance reduces moral hazard
(C) Deposit insurance does not impact moral hazard
(D) Increasing limit affects few depositors
Answer: (C) Deposit insurance does not impact moral hazard
Q#12: Too-big-to-fail policy applies to:
(A) Bank runs in populated states
(B) Banks in more than two states
(C) Large payroll accounts
(D) Large banks whose failure causes panic
Answer: (D) Large banks whose failure causes system-wide panic
Q#13: Too-big-to-fail moral hazard problem is:
(A) Larger in small banks
(B) Larger in large banks
(C) Equal in both
(D) Smaller than without policy
Answer: (B) Larger in large banks
Q#14: FDIC insured accounts ($70,000 + $65,000 in separate banks):
(A) $100,000
(B) $135,000
(C) $70,000
(D) $67,500
Answer: (B) $135,000
Q#15: Bank asset restrictions exist to:
(A) Limit growth
(B) Reduce moral hazard from safety nets
(C) Reduce profitability
(D) Reduce executive perks
Answer: (B) Combat moral hazard from safety nets
Q#16: Bank officer reluctance to write off loan because:
(A) Reduces assets and capital
(B) Increases liabilities
(C) Increases both liabilities and assets
(D) No reluctance exists
Answer: (A) It decreases assets and capital
Q#17: CAMELS ratings are:
(A) Public monthly
(B) Published quarterly
(C) Not made public
(D) In annual reports
Answer: (C) Not made public