G345 Final Exam questions with
complete solutions graded A+
Dual Banking System - correct answer ✔✔Banks are either chartered by the federal government
or the state government
Bank Run - correct answer ✔✔A situation in which many depositors simultaneously decide to
withdraw money from a bank and the bank's liquid funds are exhausted
Contagion Effect - correct answer ✔✔The spreading of bad news about one bank to include
other banks
Sequential - correct answer ✔✔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 - correct answer ✔✔Arises when people behave recklessly because they know
they will be saved if things go wrong (after contract)
FDIC Payoff Method - correct answer ✔✔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 - correct answer ✔✔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 - correct answer
✔✔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 - correct answer ✔✔more; less
Basel Accord - correct answer ✔✔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 - correct answer ✔✔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 - correct answer ✔✔Is pro-cyclical, meaning that banks may be required to hold more
capital during times when capital is short
Market to Market Accounting - correct answer ✔✔accounting practices that update the value of
an asset to its current market levels
Glass-Steagall Act - correct answer ✔✔Required the separation of commercial and investment
banking (repealed in 1999)
How many Federal Reserve Districts are there? - correct answer ✔✔12 districts
How is each district bank's board of directors set up? - correct answer ✔✔- 3 Bankers (Class A
Directors)
- 3 Leaders in industry (Class B directors)
- 3 Public Interest directors (Class C Directors
complete solutions graded A+
Dual Banking System - correct answer ✔✔Banks are either chartered by the federal government
or the state government
Bank Run - correct answer ✔✔A situation in which many depositors simultaneously decide to
withdraw money from a bank and the bank's liquid funds are exhausted
Contagion Effect - correct answer ✔✔The spreading of bad news about one bank to include
other banks
Sequential - correct answer ✔✔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 - correct answer ✔✔Arises when people behave recklessly because they know
they will be saved if things go wrong (after contract)
FDIC Payoff Method - correct answer ✔✔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 - correct answer ✔✔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 - correct answer
✔✔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 - correct answer ✔✔more; less
Basel Accord - correct answer ✔✔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 - correct answer ✔✔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 - correct answer ✔✔Is pro-cyclical, meaning that banks may be required to hold more
capital during times when capital is short
Market to Market Accounting - correct answer ✔✔accounting practices that update the value of
an asset to its current market levels
Glass-Steagall Act - correct answer ✔✔Required the separation of commercial and investment
banking (repealed in 1999)
How many Federal Reserve Districts are there? - correct answer ✔✔12 districts
How is each district bank's board of directors set up? - correct answer ✔✔- 3 Bankers (Class A
Directors)
- 3 Leaders in industry (Class B directors)
- 3 Public Interest directors (Class C Directors
