Identifications:
I. Define and explain the significance of each of the terms given below.
- Asymmetric Information
- Moral Hazard
- Adverse Selection
- Secured Debt
- Unsecured Debt
- Financial Intermediaries
- Mutual Fund
- The Lemons Problem
- Free Rider Problem
- Net Worth
- Venture Capital
- Incentive Compatible
- Collateral
- Cash Flow
- Bank Panic
- Debt Deflation
- Time Deposits
- Required Reserve Ratio
- Reserves
- Excess Reserves
- Loan Loss Reserves
- Secondary Reserves
- Capital Adequacy Management
- Money Center Banks
- Return on Assets
- Return on Equity
- Equity Multiplier
- Screening
- Compensating Balances
- Gap Analysis
- Duration Analysis
- Loan Sale
- Financial Engineering
- Disintermediation
- Eurodollars
- NOW
- Sweep Account
- Glass-Steagall
- Dual Banking System
- Bank Holding Companies
- Loophole Mining
- Nonbank Banks
- Super-regional Banks
- Universal Banking
- The Common Bond Controversy
- Junk Bonds
- GNMA
- Thrifts
- Z-bonds
- IBFs
- Payoff method of FDIC
- Off-balance Sheet Activities
- Call Reports
- McFadden Act
- FDICIA
- CEBA
- FIRREA
- DIDMCA
II True/False/Uncertain
Read each statement below and decide whether you think it is true, false, or you are uncertain. Explain your position in a paragraph
1. Moral hazard and adverse selection are the same phenomena.
2. Financial markets in the U.S. are not very regulated.
3. Indirect finance is more important than direct finance as a source of funding for industries.
4. Venture capital firms create moral hazard.
5. Recession aggravates the moral hazard problem.
6. Bank loans are bank liabilities.
7. The discount rate and the federal funds rate are the same.
8. Lower bank capital always leads to higher returns to the owners of banks.
9. If a bank has more interest rate sensitive assets than liabilities, a decline in interest rates will increase bank profits.
10. Increasing reserves for banks leads to higher profits.
11. FDIC made sure that there was no financial crisis in the USA.
12. Preponderance of banks in the U.S. is due to the intense competition in the banking sector.
13. U.S., U.K., Canada and Australia have universal banking.
14. Since 1980s, the share of non-interest income in total bank income has been decreasing in the U.S.
15. Rising profits for commercial banks since mid 1980s have given rise to the moral hazard problem in the U.S.
16. Basel Accord has stipulated that capital adequacy ratio should be 12%.
17. Increase in competition amongst banks always aggravates the moral hazard problem.
18. Central Bank has been in existence in the U.S. since the passing of the National Bank Act of 1863.
19. Regulatory forbearance prevented crisis in the Savings and Loan (S&L) industry.
20. Glass-Steagall Act of 1933 has been abolished.
III Essays:
Question 1. Analyze the following statement.
“Asymmetric information, adverse selection and moral hazard can go a long way in explaining sources of funds for non-financial businesses in the U.S .”
Question 2. Compared to other developed countries, the U.S.has too many banks. Why do you think the United States has evolved with so many banks while the European countries and Japan have a relatively smaller number of large banks?
Question 3. What kind of asset management, liability management, capital adequacy management, and risk-management techniques should banks adopt to maximize returns while incurring a reasonable amount of risk?
Question 4. Discuss the reasons behind the decline in traditional banking and consolidation of the banking sector in the United States since the 1980s.
Question 5. Invoking arguments using the ideas implicit in the principal-agent problem, explain the reasons behind the U.S banking crisis in the 1980s. What remedial measures have been undertaken since then to ensure that such crises are not repeated?