Chapter 11 Practice Quiz1. To prevent bank runs and the consequent bank failures, the United States established the __________ in 1934 to provide deposit insurance.a. FDIC b. SECc. Federal Reserve d. ATM2. A system of deposit insurancea. attracts risk-taking individuals into the banking industry.b. encourages bank managers to decrease risk.c. increases the incentives of depositors to monitor the riskiness of their bank’s asset portfolio.d. increases the likelihood of bank runs.3. Banks with deposit insurancea. are likely to take on greater risks than they otherwise would.b. are likely to be too conservative, reducing the probability of turning a profit.c. are likely to regard deposits as an unattractive source of funds due to depositors’ demands forsafety.d. are placed at a competitive disadvantage in acquiring funds.4. If the FDIC decides that a bank is “too-big-to-fail,” it will use the _______method of dealing with the failed institution to avoid disrupting the financial system.a. payofb. purchase and assumptionc. inequityd. Basel5. Regulators attempt to reduce the riskiness of banks’ asset portfolios bya. limiting the amount of loans in particular categories or to individual borrowers.b. encouraging banks to hold risky assets such as common stocks.c. establishing a maximum interest rate that banks can earn on certain assets.d. requiring collateral for all loans.6. The chartering process is designed to deal with the _____________ problem, and regular bank examinations help to reduce the ___________ problem.a. adverse selection; adverse selectionb. moral hazard; moral hazardc. moral hazard; adverse selectiond. adverse selection; moral hazard7. Consumer protection legislation includes legislation toa. reduce the amount of interest that banks can charge on loans.b. require banks to make periodic reports to the Better Business Bureau.c. reduce discrimination in credit markets.d. require banks to make loans to everyone who applies.8. Moral hazard problems increased in the 1980sa. as deregulation required savings and loans and mutual savings banks to be more cautious.b. following a decrease in deposit insurance from $100,000 to $40,000.c. financial innovations brought increased competition for the banking industry.d. all of the above.9. One of the problems experienced by the savings and loan industry during the 1980s wasa. managers lack of expertise to manage risk in new lines of business.b. heavy regulations in the new areas open to S&Ls.c. slow growth in lending.d. close monitoring by the FSLIC.10. The policy of _____________ worsened ________________ problems as some savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.a. regulatory forbearance; moral hazardb. regulatory forbearance; adverse selectionc. regulatory ignorance; moral hazardd. regulatory inattention; moral hazardAnswers to Chapter 11 practice quiz1. A2. A3. A4. B5. A6. D7. C8. C9. A10.
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