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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

What were the motivations for the original Glass-Steagall Act in 1933?
Why does the United States operate under a dual banking system?
Why was the United States one of the last major industrialized countries to have a central bank?
What topic does it cover?Summarize its purpose.
The Office of the Comptroller of the Currency is responsible for many of the regulations affecting bank operations. Go to www.occ.treas.gov/. Click on Legal and Regulatory and then on Law and
www.fdic.gov/regulations/laws/important/index.html.This site reports on the most significant pieces of legislation affecting banks since the 1800s. Summarize the most recently enacted bank regulation
To avoid insolvency, regulators decide to provide the bank with $25 million in bank capital. However, the bad news about the mortgages is featured in the local newspaper, causing a bank run. As a
Early the next day the bank invests $50 million of its excess reserves in commercial loans. Later that day, terrible news hits the mortgage markets, and mortgage rates jump to 13%, implying a present
Oldhat Financial starts its first day of operations with$9 million in capital. A total of $130 million in checkable deposits are received. The bank makes a $25 million commercial loan and another $50
Consider a bank with the following balance sheet:The bank makes a loan commitment for $10 million to a commercial customer. Calculate the bank’s capital ratio before and after the agreement.
Consider a failing bank. A deposit of $350,000 is worth how much if the FDIC uses the payoff method?The purchase and assumption method? Which is more costly to taxpayers?
Why is it important for the U.S. government to have resolution authority?
Why were consumer protection provisions included in the Dodd-Frank bill, a bill designed to strengthen the financial system?
How can the S&L crisis be blamed on the principal–agent problem?
How does the process of financial innovation impact the effectiveness of macroprudential regulation?
Why is it a good idea for macroprudential policies to require countercyclical capital requirements?
Why might more competition in financial markets be bad? Would restrictions on competition be better? Why or why not?
Suppose Universal Bank holds $100 million in assets, which are composed of the following:Required Reserves: $ 10 million Excess Reserves: $ 5 million Mortgage Loans: $ 20 million Corporate Bonds: $
How do disclosure requirements help limit excessive risk taking by banks?
Why has the trend in bank supervision moved away from a focus on capital requirements to a focus on risk management?
How does bank chartering reduce adverse selection problems? Will it always work?
What are some of the limitations to the Basel and Basel 2 Accords? How does the Basel 3 Accord attempt to address these limitations?
What special problem do off-balance-sheet activities present to bank regulators, and what have they done about it?
At the height of the global financial crisis in October 2008, the U.S. Treasury forced nine of the largest U.S.banks to accept capital injections, in exchange for nonvoting ownership stock, even
Why does imposing bank capital requirements on banks help limit risk taking?
What types of bank regulations are designed to reduce moral hazard problems? Will they completely eliminate the moral hazard problem?
What are the costs and benefits of a too-big-to-fail policy?
How could higher deposit insurance premiums for banks with riskier assets benefit the economy?
Do you think that eliminating or limiting the amount of deposit insurance would be a good idea? Explain your answer.
If casualty insurance companies provided fire insurance without any restrictions, what kind of adverse selection and moral hazard problems might result?
Why are deposit insurance and other types of government safety nets important to the health of the economy?
It is relatively easy to find up-to-date information on banks because of their extensive reporting requirements.Go to www2.fdic.gov/qbp/. This site is sponsored by the Federal Deposit Insurance
Table 1 reports the balance sheet of all commercial banks based on aggregate data found in the Federal Reserve Bulletin. Compare this table to the most recent balance sheet reported by Bank of
Suppose that you are the manager of a bank that has $15 million of fixed-rate assets, $30 million of rate-sensitive assets, $25 million of fixed-rate liabilities, and $20 million of rate-sensitive
Suppose that you are the manager of a bank whose$100 billion of assets have an average duration of four years and whose $90 billion of liabilities have an average duration of six years. Conduct a
X-Bank reported an ROE of 15% and an ROA of 1%.How well capitalized is this bank?
NewBank decides to invest $45 million in 30-day T-bills. The T-bills are currently trading at $4,986.70(including commissions) for a $5,000 face value instrument.How many do they purchase? What does
NewBank started its first day of operations with$6 million in capital. A total of $100 million in checkable deposits is received. The bank makes a$25 million commercial loan and another $25 million
What happens to reserves at the First National Bank if one person withdraws $1,000 of cash and another person deposits $500 of cash? Use T-accounts to explain your answer.
Using the T-accounts of the First National Bank and the Second National Bank, describe what happens when Jane Brown writes a $50 check on her account at the First National Bank to pay her friend Joe
Why has noninterest income been growing as a source of bank operating income?
“Bank managers should always seek the highest return possible on their assets.” Is this statement true, false, or uncertain? Explain your answer.
If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans?
“Because diversification is a desirable strategy for avoiding risk, it never makes sense for a bank to specialize in making specific types of loans.” Is this statement true, false, or uncertain?
If the president of a bank told you that the bank was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy
A bank almost always insists that the firms it lends to keep compensating balances at the bank. Why?
Why is being nosy a desirable trait for a banker?
What are the benefits and costs for a bank when it decides to increase the amount of its bank capital?
If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?
Why do equity holders care more about ROE than about ROA?
If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation?
If a bank finds that its ROE is too low because it has too much bank capital, what can it do to raise its ROE?
If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don’t have any excess reserves to
Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?
If a deposit outflow of $50 million occurs, which balance sheet would a bank rather have initially, the balance sheet in Question 3 or the following balance sheet? Why? Assets Reserves $100 million
The bank you own has the following balance sheet:.If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, what actions should you take? Assets
Rank the following bank assets from most to least liquid:a. Commercial loansb. Securitiesc. Reservesd. Physical capital
Why might a bank be willing to borrow funds from other banks at a higher rate than it can borrow from the Fed?
One of the countries hardest hit by the global financial crisis of 2008 was Iceland. Go to http://assets.opencrs.com/ rpts/RS22988_20081120.pdf and summarize the causes and events that led to the
Go to the International Monetary Fund’s Financial Crisis page at www.imf.org/external/np/exr/key/finstab.htm.Report on the most recent three countries that the IMF has given emergency loans in
This chapter discusses how an understanding of adverse selection and moral hazard can help us better understand financial crises. The greatest financial crisis faced by the United States was the
How can a deterioration in bank balance sheets lead to a currency crisis?
How can a currency crisis lead to higher interest rates?
Why does the “twin crises” phenomenon of currency and banking crises occur in emerging market countries?
How can opening up to capital flows from abroad lead to a financial crisis?
Why do debt deflations occur in advanced countries, but not in emerging market countries?
When can a decline in the value of a country’s currency exacerbate adverse selection and moral hazard problems?Why?
What similarities exist between experiences in the United States and in Ireland during the 2007–2009 financial crisis?
Why would haircuts on collateral increase sharply during a financial crisis? How would this lead to fire sales on assets?
What is the shadow banking system, and why is it an important part of the 2007–2009 financial crisis?
How did a decline in housing prices help trigger the subprime financial crisis starting in 2007?
“Financial engineering always leads to a more efficient financial system.” Is this statement true, false, or uncertain?
Why is the originate-to-distribute business model subject to the principal–agent problem?
What technological innovations led to the development of the subprime mortgage market?
What do you think prevented the financial crisis of 2007–2009 from becoming a depression?
Describe two similarities and two differences between the United States’ experiences during the Great Depression and the financial crisis of 2007–2009.
What role does weak financial regulation and supervision play in causing financial crises?
How can financial liberalizations lead to financial crises?
How can government fiscal imbalances lead to a financial crisis?
Why do credit spreads rise significantly during a financial crisis?
How does a general increase in uncertainty as a result of a failure of a major financial institution lead to an increase in adverse selection and moral hazard problems?
How does a deterioration in balance sheets of financial institutions and the simultaneous failures of these institutions cause a decline in economic activity?
How can a decline in real estate prices cause deleveraging and a decline in lending?
How does an unanticipated decline in the price level cause a drop in lending?
How can a bursting of an asset-price bubble in the stock market help trigger a financial crisis?
How does the concept of asymmetric information help to define a financial crisis?
You own a house worth $400,000 that is located on a river. If the river floods moderately, the house will be completely destroyed. This happens about once every 50 years. If you build a seawall, the
You wish to hire Ron to manage your Dallas operations.The profits from the operations depend partially on how hard Ron works, as follows.If Ron is lazy, he will surf the Internet all day, and he
Now you believe the dealer knows more about the cars than you. How much are you willing to pay? Why? How can this be resolved in a competitive market?
Refer to Problem
You are in the market for a used car. At a used car lot, you know that the blue book value for the cars you are looking at is between $20,000 and $24,000. If you believe the dealer knows as much
Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a mortgage, he found that banks usually required collateral for up
Many policymakers in developing countries have proposed implementing systems of deposit insurance like the one that exists in the United States. Explain why this might create more problems than
Explain how the separation of ownership and control in American corporations might lead to poor management.
“The more collateral there is backing a loan, the less the lender has to worry about adverse selection.” Is this statement true, false, or uncertain? Explain your answer.
How can the existence of asymmetric information provide a rationale for government regulation of financial markets?
Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their activities? Why?
How do standardized accounting principles help financial markets work more efficiently?
Would moral hazard and adverse selection still arise in financial markets if information were not asymmetric?Explain.
How does the free-rider problem aggravate adverse selection and moral hazard problems in financial markets?

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