G345 FINAL EXAM QUESTIONS AND ANSWERS
Dual Banking System - Answers - Banks are either chartered by the federal government
or the state government
Bank Run - Answers - A situation in which many depositors simultaneously decide to
withdraw money from a bank and the bank's liquid funds are exhausted
Contagion Effect - Answers - The spreading of bad news about one bank to include
other banks
Sequential - Answers - Banks operate this way, causes people to have a strong
incentive to show up first to withdraw their funds during a bank crisis
Moral Hazard - Answers - Arises when people behave recklessly because they know
they will be saved if things go wrong (after contract)
FDIC Payoff Method - Answers - A resolution method for a failed bank or thrift in which
the FDIC directly pays the insured amount of each insured depositor.
FDIC Purchase and Assumption Method - Answers - a transaction in which a healthy
bank or thrift purchases assets and assumes liabilities (including all insured deposits)
from an unhealthy bank or thrift. It is the most common and preferred method used by
the Federal Deposit Insurance Corporation (FDIC) to deal with failing banks
Regulators attempt to reduce the riskiness of banks' asset portfolios by - Answers -
limiting the amount of loans in particular categories or to individual borrowers
A well-capitalized finical institution has _____ to loose if it fails and thus is ______ likely
to pursue risky activities - Answers - more; less
Basel Accord - Answers - Bank supervision and risk management polices(Basel I, II,
and III)
originally used a risk weighted capital adequacy ratio to ensure banks had enough
capital on hand (Creates regulatory arbitrage)
Regulatory Arbitrage - Answers - A process in which banks keep on their books assets
that are relatively risky, such as a loan to a company with a very low credit rating, while
taking off their books low-risk assets, such as a loan to a company with a very high
credit rating. In regulatory arbitrage, the risky and low-risk assets have the same risk-
based capital requirements.
Basel 2 - Answers - Is pro-cyclical, meaning that banks may be required to hold more
capital during times when capital is short
Dual Banking System - Answers - Banks are either chartered by the federal government
or the state government
Bank Run - Answers - A situation in which many depositors simultaneously decide to
withdraw money from a bank and the bank's liquid funds are exhausted
Contagion Effect - Answers - The spreading of bad news about one bank to include
other banks
Sequential - Answers - Banks operate this way, causes people to have a strong
incentive to show up first to withdraw their funds during a bank crisis
Moral Hazard - Answers - Arises when people behave recklessly because they know
they will be saved if things go wrong (after contract)
FDIC Payoff Method - Answers - A resolution method for a failed bank or thrift in which
the FDIC directly pays the insured amount of each insured depositor.
FDIC Purchase and Assumption Method - Answers - a transaction in which a healthy
bank or thrift purchases assets and assumes liabilities (including all insured deposits)
from an unhealthy bank or thrift. It is the most common and preferred method used by
the Federal Deposit Insurance Corporation (FDIC) to deal with failing banks
Regulators attempt to reduce the riskiness of banks' asset portfolios by - Answers -
limiting the amount of loans in particular categories or to individual borrowers
A well-capitalized finical institution has _____ to loose if it fails and thus is ______ likely
to pursue risky activities - Answers - more; less
Basel Accord - Answers - Bank supervision and risk management polices(Basel I, II,
and III)
originally used a risk weighted capital adequacy ratio to ensure banks had enough
capital on hand (Creates regulatory arbitrage)
Regulatory Arbitrage - Answers - A process in which banks keep on their books assets
that are relatively risky, such as a loan to a company with a very low credit rating, while
taking off their books low-risk assets, such as a loan to a company with a very high
credit rating. In regulatory arbitrage, the risky and low-risk assets have the same risk-
based capital requirements.
Basel 2 - Answers - Is pro-cyclical, meaning that banks may be required to hold more
capital during times when capital is short
