Identifications: identify and briefly explain the importance of any TWO (2) of the following:
1. repurchase agreements
2. regulatory forbearance
3. securitization
4. dual banking system
Short Responses: For any THREE (3) of the following statements, state whether you AGREE, DISAGREE, OR CANNOT DECIDE. Explain your position in a paragraph.
1. Accounting net worth is an ambiguous measure of bank performance.
2. If employees own the corporation for which they work, no moral hazard problem exists.
3. The greater the value of collateral for a loan, the less the lender has to worry about adverse selection.
4. The U.S. banking industry is highly competitive since there are a large number of banks.
5. Eliminating deposit insurance would actually be a good idea from the perspective of depositors.
6. The development of overnight loan markets have led banks to increase their holdings of excess reserves.
Essays: answer any TWO (2) of the following:
Q1. Briefly describe the three means of circumventing bank branching restrictions, prior to 1999. The Financial Services Modernization ACT of 1999 removed most of these restrictions, as well as most other impediments to bank consolidation and nationwide banking. Provide two potential costs and two potential benefits to bank consolidation and geographic expansion.
Q2. Government regulation of the financial sector is viewed as crucial to Mishkin. Give three examples of government regulation of the banking system and comment on how this regulation affects asymmetric information problems and how this regulation has led to financial innovation.
Q3. Successful banks balance liquidity management, asset and liability management, interest rate risk management, and capital adequacy requirements. Briefly explain each of these management areas and then comment on any potential conflict a banker might experience in trying to simultaneously achieve all of these goals.
Q4. Assume there is a simple closed economy with only three agents. You have the following information about the balance sheets of the three of them for three periods. Take into consideration that the stocks are measured at the end of the period and the flows are measured during the period, e.g. 115 are the total liabilities of Agent A at the end of period, 30 are total expenditures made by Agent B during period 1. Complete the missing information in the table below. Then in an essay comment on the definition and significance of net worth, the distinction between stock and flows and provide a brief synopsis of your findings [hint: remember to indicate who is saving and who is dissaving in periods 1 and 2].
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Period 0
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Period !
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Period 2
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AGENT A
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Income
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30
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40
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Expenditures
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30
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65
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95
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Assets
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100
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115
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Liabilities
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30
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80
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190
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Net Worth
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AGENT B
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Income
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50
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120
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40
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Expenditures
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50
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30
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Assets
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200
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250
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180
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Liabilities
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220
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150
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Net Worth
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AGENT C
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Income
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45
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50
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130
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Expenditures
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45
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35
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Assets
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100
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200
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150
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Liabilities
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150
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305
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Net Worth
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