Chapter 11 Economic Analysis of Financial Regulation

Depositors lack of information about the quality of bank assets can lead to ________.

• bank panics

• bank booms

• sequencing

• asset transformation

The fact that banks operate on a ʺsequential service constraintʺ means that

• all depositors share equally in the bankʹs funds during a crisis.

• depositors arriving last are just as likely to receive their funds as those arriving first.

• depositors arriving first have the best chance of withdrawing their funds.

• banks randomly select the depositors who will receive all of their funds.

Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a

• last-in, first-out constraint.

• sequential service constraint.

• double-coincidence of wants constraint.

• everyone-shares-equally constraint.

Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the

• too-big-to-fail effect.

• moral hazard problem.

• adverse selection problem.

• contagion effect.

The contagion effect refers to the fact that

• deposit insurance has eliminated the problem of bank failures.

• bank runs involve only sound banks.

• bank runs involve only insolvent banks.

• the failure of one bank can hasten the failure of other banks.

During the boom years of the 1920s, bank failures were quite

• uncommon, averaging less than 30 per year.

• uncommon, averaging less than 100 per year.

• common, averaging about 600 per year.

• common, averaging about 1000 per year.

To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance.

• FDIC

• SEC

• Federal Reserve

• ATM

The primary difference between the ʺpayoffʺ and the ʺpurchase and assumptionʺ methods of handling failed banks is

• that the FDIC guarantees all deposits when it uses the ʺpayoffʺ method.

• that the FDIC guarantees all deposits when it uses the ʺpurchase and assumptionʺ method.

• that the FDIC is more likely to use the ʺpayoffʺ method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures.

• that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions.

Deposit insurance has not worked well in countries with

• a weak institutional environment.

• strong supervision and regulation.

• a tradition of the rule of law.

• few opportunities for corruption.

When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of

• moral hazard.

• split incentives.

• ex ante shirking.

• pre-contractual opportunism.