Chapter 15

The Regulation of Markets and Institutions

D1Interpretive
1. A major reason for regulating the financial sector is to facilitate __________________ policy. A) monetary B) fiscal C) antitrust D) merger Answer: A

D1Factual
2. The __________________ is a regulator of interme iate mar!ets" A) #$C B) Commo ities %utures Tra ing Commission C) &'#$ D) %D(C Answer: D

D1Factual
). The __________________ is a regulator of interme iate mar!ets" A) #$C B) Commo ities %utures Tra ing Commission C) &ational Association of #ecurities Dealers D) Comptroller of the Currency Answer: D

D1Factual
*. The __________________ is a regulator of financial mar!ets" A) +.#. Treasury B) #$C C) %D(C D) &C+A Answer: B

175

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D1Factual
1. The __________________ is a regulator of financial mar!ets. A) Comptroller of the Currency B) Commo ities %utures Tra ing Commission C) %D(C D) %e eral ,eser0e Answer: B

D2Factual
2. 3hich of the following is not a reason for regulation of +.#. financial mar!ets" A) 4rotection of in i0i ual in0estors B) Disclosure of information a.out securities is the .est way to safeguar in0estors C) %ull isclosure .roa ens in0estor5s participation in the financial mar!ets D) The operation of financial mar!ets re6uires go0ernment regulation if they are to .e efficient in channeling fun s from sa0ers to .orrowers Answer: D

D1Factual
7. 8ust a corporation inform the #$C when it .orrows from a commercial .an! or through the pri0ate placements mar!et" A) %rom .oth B) 9nly from the commercial .an! C) 9nly from the pri0ate placements mar!et D) %rom neither Answer: D

D1Factual
:. 3hich of the following oes &9T appear on a prospectus" A) The price of the securities .eing issue B) The salaries of the .orrowing firm;s top e<ecuti0es C) Au ite financial statements of the .orrower D) An e<planation of any unusual rights grante to stoc!hol ers Answer: A

D1Factual
=. All issuers of pu.licly>tra e securities must file an annual report on its financial con ition with the #$C/ calle a __________________ report. A) 1?*?A B) C)11 C) 1?@ D) A>1?= Answer: C

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(nstitution s 177

D1Factual
1?. An e<ample of an Binsi er tra ingC law is that A) no officer of a corporation is allowe to hol stoc! in that corporation. B) an officer of a corporation must report to the #$C any .uying or selling of stoc! in that corporation. C) no ealer in omestic securities is allowe to han le foreign securities. D) no more than 21 percent of the outstan ing shares of a corporation may .e hel .y the e<ecuti0es of that corporation. Answer: B

D1Factual
11. B(nsi er tra ingC laws are meant to pre0ent A) the e<ecuti0es of a corporation from hol ing a majority of its outstan ing shares. B) .uying or selling shares .ase on information not a0aila.le to the pu.lic. C) foreign in0estors from gaining controlling interest in +.#. corporations. D) the issuing of .on s for the purpose of .uying stoc!. Answer: B

D2Factual
12. 8argin re6uirements on stoc!s are set .y A) the &ew 'or! #toc! $<change. B) the &ational Association of #ecurities Dealers. C) the %e eral ,eser0e #ystem. D) the #ecurities $<change Commission. Answer: C

D1Factual
1). 9ur B ualC .an!ing system refers to A) commercial .an!s an thrifts. B) fe eral an state chartering an super0ision of commercial .an!s. C) stoc!hol er>ownership an epositor>ownership of epository institutions. D) .an!s that are mem.ers an non>mem.ers of the %e . Answer: B

D1Factual
1*. The B ualC nature of our .an!ing system got its start in the A) 1:2?s. B) 1:2?s. C) 1=1?s. D) 1=)?s. Answer: B

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D2Factual
11. #tate chartere .an!s were suppose to .e ri0en out of .usiness .y the &ational Currency Act of 1:2) an the &ational Ban!ing Act of 1:2* .y A) imposing a ta< on their issuance of state .an! notes. B) prohi.iting them from ha0ing interstate .ranches. C) prohi.iting them from paying interest on eman eposits. D) regulating the amount of interest they coul pay on sa0ings accounts. Answer: A

D1Factual
12. 3hen the %e eral ,eser0e was forme / state>chartere .an!s were __________________ %e mem.er .an!s. A) automatically ma e B) re6uire to .ecome C) gi0en the option to .ecome D) not allowe to .ecome Answer: C

D1Factual
17. 3hen the %e eral ,eser0e was forme / fe erally>chartere .an!s were __________________ %e mem.er .an!s. A) allowe to .ecome B) re6uire to .ecome C) gi0en the option to .ecome D) not allowe to .ecome Answer: B

D1Factual
1:. To ay/ __________________ state .an!s are mem.ers of the %e eral ,eser0e #ystem. A) all B) most C) a minority of D) none of the Answer: C

D1Factual
1=. All __________________ are re6uire to .e insure .y the %e eral Deposit (nsurance Corporation. A) commercial .an!s B) sa0ings .an!s C) national .an!s D) state .an!s that are not mem.ers of the %e eral ,eser0e Answer: C

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(nstitution s 179

D1Factual
2?. Among the state nonmem.er .an!s/ __________________ ha0e fe eral eposit insurance through the %D(C. A) all B) 0irtually all C) a minority D) none of them Answer: B

D1Factual
21. Among state mem.er an national .an!s/ __________________ ha0e fe eral eposit insurance through the %D(C. A) all B) 0irtually all C) a minority D) none of them Answer: A

D2Factual
22. %or fe erally chartere .an!s/ the BprimaryC fe eral regulator is the A) %e eral ,eser0e. B) %D(C. C) Douse Ban!ing Committee. D) Comptroller of the Currency. Answer: D

D2Factual
2). %or state mem.er .an!s/ the BprimaryC fe eral regulator is the A) %e eral ,eser0e. B) %D(C. C) Douse Ban!ing Committee. D) Comptroller of the Currency. Answer: A

D2Factual
2*. %or state nonmem.er .an!s/ the BprimaryC fe eral regulator is the A) %e eral ,eser0e. B) %D(C. C) Douse Ban!ing Committee. D) Comptroller of the Currency. Answer: B

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D2Factual
21. The regulator that etermines the permissi.le acti0ities any .an! may engage in is the A) %e eral ,eser0e. B) %D(C. C) Douse Ban!ing Committee. D) Comptroller of the Currency. Answer: A

D1Factual
22. The e<istence of multiple fe eral .an! regulatory authorities has .een permitte to continue .ecause A) the regulators coor inate their acti0ities well enough to a0oi ifferences. B) ifferent types of .an!s re6uire ifferent !in s of regulation. C) many regulatory authorities are necessary to insure the safety of epositor5s fun s. D) the legislati0e will to replace the current regulatory system has .een lac!ing. Answer: D

D1Interpretive
27. (n .an! regulation in the +nite #tates there is a strong emphasis on A) ma<imiEing epositor returns. B) limiting epositor returns. C) ma<imiEing epositor ris!. D) limiting epositor ris!. Answer: D

D2Interpretive
2:. Ban!ing regulation in the +nite #tates is strongly influence .y the large amount of __________________ eposits an __________________ assets .an!s hol . A) timeF illi6ui B) timeF li6ui C) chec!a.leF illi6ui D) chec!a.leF li6ui Answer: C

D2Interpretive
2=. A .an! run __________________ possi.ly mushroom into a .an! panic .ecause the 6uality of a .an!5s portfolio of loans __________________ ma e pu.lic information .y .an! e<amining agencies. A) canF is B) canF is not C) cannotF is D) cannotF is not Answer: B

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(nstitution s 181

D1Factual
)?. %e eral eposit insurance in the +nite #tates .egan in A) 1:2*. B) 1=)). C) 1=2:. D) 1=:*. Answer: B

D1Factual
)1. #a0ings>an >loans were originally fe erally insure through the A) %D(C. B) %#G(C. C) &C+#(%. D) Comptroller of the Currency. Answer: B

D1Factual
)2. #a0ings>an >loans are now fe erally insure through the A) %D(C. B) %#G(C. C) &C+#(%. D) Comptroller of the Currency. Answer: A

D1Factual
)). Cre it unions are fe erally insure through the A) %D(C. B) %#G(C. C) &C+#(%. D) Comptroller of the Currency. Answer: C

D1Factual
)*. The current le0el of eposit insurance is A) H1??/??? per epositor. B) H1??/??? per eposit. C) H2??/??? per epositor. D) H2??/??? per eposit. Answer: B

D1Factual
)1. (t is estimate that appro<imately __________________ percent of +.#. epositors ha0e their eposits fully fe erally insure . A) 21 B) *? C) 7? D) == Answer: D

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D1Factual
)2. The %D(C han les most .an! failures .y the __________________ metho . A) payoff B) nationaliEation C) purchase an assumption D) share transfer Answer: C

D2Interpretive
)7. The %D(C han les most .an! failures .y the purchase an assumption metho .ecause A) the e<istence of uninsure eposits Io0er H1??/???) ma!es runs an panics possi.le. B) it allows the %D(C to a0oi paying off large eposits when a .an! fails. C) most .an!s ha0e .ecome too .ig for the %D(C to allow them to fail. D) it allows the %D(C to write chec!s legally to pay all eposits/ e0en those o0er H1??/???. Answer: A

D1Factual
):. (n the wa!e of the failure of __________________ in 1=:*/ the %D(C announce the Btoo .ig to failC policy. A) 8ariners5 Trust of Detroit B) 8anufacturers Dano0er Ban! C) #il0era o #a0ings>an >Goan D) Continental (llinois Ban! Answer: D

D2Factual
)=. 3hat was particularly significant a.out the failure of the Ban! of &ew $nglan in 1==1" A) (t was the %D(C5s first use of the purchase an assumption metho . B) (t fell un er the %D(C5s Btoo .ig to failC policy. C) The %D(C ha to elay .an! li6ui ation ue to lac! of fun s. D) The %D(C .egan its policy of insuring chec!a.le eposits fully. Answer: B

D1Interpretive
*?. Deposit insurance has .een __________________ in achie0ing its goals of pre0enting runs an __________________ A) successful/ protecting small in0estors B) successful/ protecting large in0estors C) unsuccessful/ protecting small in0estors D) unsuccessful/ protecting large in0estors Answer: A

Chapter 11The ,egulation of 8ar!et s an

(nstitution s 183

D2Interpretive
*1. There is __________________ pro.lem with eposit insurance as the insurer shares isproportionately in the __________________ ris! of .an!ing. A) an a 0erse selectionF upsi e B) an a 0erse selectionF ownsi e C) a moral haEar F upsi e D) a moral haEar F ownsi e Answer: D

D2Interpretive
*2. The pro.lem of moral haEar that resulte from fe eral eposit insurance can .e attri.ute to all of the following e<cept A) epositors ha0e little incenti0e to monitor their .an!. B) eposit premiums until recently i not epen on ris!. C) ris! a0ersion .y managers of .an!s plus .an! e<amination. D) the incenti0e of .an! stoc!hol ers to increase ris! .ecause they share isproportionately in success .ut the %D(C shares isproportionately in failure. Answer: C

D2Interpretive
*). The .eha0ior of many sa0ings>an >loans in the 1=:?s appears to .e e0i ence __________________ the e<istence of __________________ pro.lem in eposit insurance. A) supportingF a moral haEar B) supportingF an a 0erse selection C) againstF a moral haEar D) againstF an a 0erse selection Answer: A

D2Interpretive
**. The large num.er of .an! failures in the 1=:?s compare to the num.er of failures in earlier eca es appears to .e e0i ence __________________ the e<istence of __________________ pro.lem in eposit insurance. A) supportingF a moral haEar B) supportingF an a 0erse selection C) againstF a moral haEar D) againstF an a 0erse selection Answer: A

D2Applied
*1. #uppose a .an! has total assets of H)/???/???/??? an total eposits an other lia.ilities of H2/:??/???/???. The .an!;s le0erage ratio is A) 2.7J. B) 7.1J. C) 1.2J. D) =).)J. Answer: A

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D2Applied
*2. #uppose a .an! has total assets of H*/???/???/??? an total eposits an other lia.ilities of H)/1??/???/???. The .an!;s le0erage ratio is A) 11.2J. B) 12.1J. C) 1*.)J. D) :7.1J. Answer: C

D2Applied
*7. A .an! has total assets of H2/???/??? an capital of H11?/???. The .an!5s le0erage ratio is: A) 2?J B) 11J C) 7.1J D) &one of the a.o0e Answer: C

D1Factual
*:. The larger the le0erage ratio of a .an!/ A) the greater the proportion of its eposits that are fully insure . B) the smaller the proportion of its eposits that are fully insure . C) the thic!er its cushion against failure. D) the thinner its cushion against failure. Answer: C

D1Factual
*=. The minimum>le0erage>ratio approach to capital a e6uacy re6uirements A) has .een ominant since the 1=)?s. B) was phase out in the 1==?s. C) was a opte in the 1==?s. D) has ne0er .een implemente . Answer: B

D1Interpretive
1?. As a .an!;s assets .ecome less ris!y/ its A) ris!>.ase capital ratio rises. B) ris!>.ase capital ratio falls. C) le0erage ratio rises. D) le0erage ratio falls. Answer: B

Chapter 11The ,egulation of 8ar!et s an

(nstitution s 185

D3Applied
11. #uppose a .an! has total assets of H)/???/???/???/ of which H1/???/???/??? are cash assets an go0ernment securities with a Bris! weightC of ?J an H2/???/???/??? are loans with a ris! weight of 1?J. The .an! has total eposits an other lia.ilities of H2/:??/???/???. The .an!;s ris!>.ase capital ratio is A) 2.7J. B) 2?.?J. C) )).)J. D) 1?J. Answer: A

D3Applied
12. #uppose a .an! has total assets of H*/???/???/???/ of which H1/???/???/??? are cash assets an go0ernment securities with a Bris! weightC of ?J an H)/???/???/??? are loans with a ris! weight of 1?J. The .an! has total eposits an other lia.ilities of H)/1??/???/???. The .an!;s ris!>.ase capital ratio is A) 1*.)J. B) 21.?J. C) )).)J. D) )7.1J. Answer: C

D3Applied
1). A .an! has total assets of H)/???/???. 9f these assets/ H2??/??? are cash an H)??/??? are Treasury securities. %urthermore/ the .an! hol s municipal re0enue .on s of H2??/???/ resi ential mortgages of H1/???/???/ an consumer an commercial loans of H=??/???. This .an!5s ris!>a juste assets are: A) H)/???/??? B) H1/=??/??? C) H1/21?/??? D) H1/?7?/??? Answer: D

D3Applied
1*. A .an! has total assets of H)/???/???. 9f these assets/ H2??/??? are cash an H)??/??? are Treasury securities. %urthermore/ the .an! hol s municipal re0enue .on s of H2??/???/ resi ential mortgages of H1/???/???/ an consumer an commercial loans of H=??/???. The .an! has capital of H1??/???. This .an!5s ris!>a juste capital ratio is: A) =.)J B) *.?J C) ).)J D) :.?J Answer: A

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D1Factual
11. The propose Basel (( capital a e6uacy rules A) a ress the incenti0e .an!s ha0e to switch from ris!ier to safer assets. B) a0oi the use of statistical rules .y relying mostly on Bcommon sense.C C) use highly theoretical measures of ris!. D) will li!ely .e a opte initially to a han ful of large .an!s with significant international e<posure. Answer: D

D1Interpretive
12. A Bfor.earanceC policy in ealing with wea! .an!s is oppose .y the __________________ policy. A) prompt correcti0e action B) too>.ig>to>fail C) ris!>.ase capital ratio D) le0erage ratio Answer: A

D1Interpretive
17. The __________________ policy ealt with the pro.lem of the conse6uences of i entification of wea! .an!s .y changing the closure rule. A) for.earance B) setting of BfirewallsC C) prompt correcti0e action D) ris!>.ase capital ratio Answer: C

D1Factual
1:. +n er the 4CA gui elines/ the %D(C must start closure procee ings on a .an! once its le0erage ratio falls .elow __________________ percent. A) ? B) 2 C) 1 D) 1? Answer: B

D2Interpretive
1=. ,is!>.ase eposit insurance premiums ha0e recently .een __________________ an this is e<pecte to __________________ the moral haEar pro.lem of eposit insurance. A) a.olishe F alle0iate B) a.olishe F worsen C) esta.lishe F alle0iate D) esta.lishe F worsen Answer: C

Chapter 11The ,egulation of 8ar!et s an

(nstitution s 187

D2Interpretive
2?. The te<t.oo! states that in attac!ing moral haEar / ha0ing .oth ris!>.ase capital re6uirements an ris!>.ase eposit insurance premiums A) is necessary/ to eal with the pro.lem from .oth si es of the .an!;s .alance sheet. B) is re un ant an that one of the policies shoul .e en e . C) is necessary in or er to eal with the moral haEar of .oth .an!ers an epositors. D) may .e re un ant in theory .ut a 0isa.le in practice gi0en the ifficulty of measuring ris!. Answer: D

D1Interpretive
21. This .asic pattern emerges in the +nite #tates financial institutions are more hea0ily regulate A) the smaller is their typical contri.utor. B) the larger is their typical contri.utor. C) the ris!ier are their assets. D) the larger they are in total asset siEe. Answer: A

D2Interpretive
22. The smaller the typical epositor at a financial institution/ the __________________ li!ely that some of the institution;s eposits are fe erally insure an thus the __________________ hea0ily that institution ten s to .e regulate . A) lessF less B) lessF more C) moreF less D) moreF more Answer: D

D1Factual
2). (n or er to manage ris! of failure an protect guarantors/ the $mployee ,etirement income #ecurity Act I$,(#A) esta.lishe all of the following re6uirements on pension fun s e<cept for minimum A) isclosure of information. B) reporting re6uirements. C) in0estment stan ar s. D) ris!>.ase capital re6uirements. Answer: D

D1Factual
2*. The moti0ation .ehin mutual fun regulation is protection of in i0i ual in0estors through A) ris!>.ase capital re6uirements. B) full financial isclosure. C) insurance of in0estors accounts. D) performance of perio ic au its .y the #$C. Answer: B

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D1Factual
21. The Alass>#teagall Act .ecame law in the A) 1:=?s. B) 1=1?s. C) 1=)?s. D) 1=1?s. Answer: C

D1Factual
22. The Alass>#teagall Act for.i s .an!s from owning A) municipal .on s. B) corporate stoc!. C) home mortgages. D) .on s issue .y foreign go0ernments. Answer: B

D1Factual
27. Behin the Alass>#teagall Act was the feeling that __________________ is too ris!y for commercial .an!s. A) un erwriting corporate securities B) competing to pay high eposit rates C) ma!ing .usiness mortgage loans D) interstate .ranching Answer: A

D1Factual
2:. (n the 1=2?s/ .an!s starte __________________ in or er to maneu0er aroun the Alass> #teagall act. A) opening foreign .ranches B) cre it rationing C) forming one>.an! hol ing companies D) ropping %e eral ,eser0e mem.ership Answer: C

D1Factual
2=. The Aramm>Geach>Bliley Act A) has allowe affiliates of financial hol ing companies to engage in commercial an in0estment .an!ing. B) pro0i es for the regulation of hol ing company affiliates .y functional super0isors such as the #$C. C) esignates the %e eral ,eser0e as the Bum.rellaC regulator. D) All of the a.o0e Answer: D

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(nstitution s 189

D2Interpretive
7?. Com.ining commercial .an!ing an in0estment .an!ing in the same organiEation pro uces a ris! for that organiEation A) that must .e a.o0e that of in0estment .an!ing. B) that is the same as in0estment .an!ing/ the ris!ier of the two acti0ities. C) somewhere in .etween the ris! of the two acti0ities. D) that may .e .elow that of commercial .an!ing. Answer: D

D2Interpretive
71. B+ni0ersal .an!ingC can lower the ris! of participating financial institutions if A) there is high correlation in the returns of the permitte acti0ities. B) there is low correlation in the returns of the permitte acti0ities. C) there are firewalls .etween all the permitte acti0ities. D) none of the customers of the institution are fe erally insure . Answer: B