QUESTION 4The following is true of deposit insurance, except Depositor no longer has incentives to monitor the activities of the bank Moral hazard dissuades the bank manager from taking risky projects In theory, regulators have replaced depositors in the monitoring of banks Moral hazard encourages the bank manager to take on risky projects

Deposit insurance is used to refer to the guarantee provided to protect the savings of the…

Answered: The following is true of deposit…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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QUESTION 4

The following is true of deposit insurance, except

		Depositor no longer has incentives to monitor the activities of the bank
		Moral hazard dissuades the bank manager from taking risky projects
		In theory, regulators have replaced depositors in the monitoring of banks
		Moral hazard encourages the bank manager to take on risky projects

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Moral hazard caused by Deposit Insurance Schemes refers to: Question 2Answer a. The placing of funds from immoral activities into the banking system. b. The loss exposure faced by an insurer when the provision of insurance encourages the insured to take less risks. c. The loss exposure faced by an insurer when the provision of insurance encourages the insured to take more risks. d. The excess profits earned by banks from insured deposits.
What bank regulations are designed to reduce moral hazard problems created by deposit insurance? Willthey eliminate the moral hazard problem?
Q 9. What is the benefit of a regulatory guarantee or deposit insurance program for depositors of commercial banks? a. It provides preference to those who are first in line to withdraw funds over those last in line. b. It provides incentives to depositors to engage in runs. c. It increases concerns about solvency of a bank. d. It increases concerns about the asset quality of a bank. e. It decreases the likelihood of bank runs.
Bank regulation cannot eliminate risk and does not prevent bank failure. It cannot guarantee that bank management will make good decisions especially in high-risk lending and investment. However, bank regulation can enhance safety and stability of the banking industry. Therefore bank regulation is justified. Do you agree or disagree? Please explain your answer.
Which of the following decreases the likelihood of bank failures by keeping banks from making risky loans? FDIC insurance The discount window Reserve requirements Capital requirements
Do you think it is possible for depositors to discipline bank managers who are tempted to take unsound risks with their funds? What steps are necessary for depositors to do this successfully
Select all that are true regarding liquidity risk for a bank. Consumer trust in the bank ensures a flow of funds from customers, reducing this risk. O A reduced access to credit markets reduces the bank's liquidity risk. Higher liquidity risk is a result of lower borrowing costs to the bank. O The flow of funds form the bank's clearing of payments reduces this risk. | This risk creates an opportunity cost which could result in a hole in the risk management strategy of the bank. O An increase in the bank's credit rating will help to reduce their liquidity risk.
Securitization changes the systemic (system-wide) risksin the regulated and unregulated “shadow” banking system. What is securitization? Does it pose a problem foreffective banking systems?
Distinguish between illiquidity and insolvency as it affects a bank and discuss the reasons why banks are vulnerable to these problems.
Role of Central Banks and Moral Hazards How does central bank intervention outweigh the risks of moral hazard?
To minimize systemic risk in the banking system, which prudential measure has been put in place in the General Banking Law and the Manual of Regulations for Banks to safeguard them from too large a risk exposure to a particular borrower or corporate group?* Reserves Single Borrower's Limit DOSRI (directors, officers, stockholders and their related interests) Limit Equity Investment Limit Loan Loss provisioning
How do adverse selection and moral hazard affect the bank lending function? And How can minimise such problems?

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