Question & Answer

The Volcker Rule is intended to prevent banks from engaging in proprietary trading. Write a short essay offering your opinion on whether banks should be allowed to engage in proprietary trading. 

Describe the U.S. government’s efforts to infuse capital into all of the very large banks during the credit crisis. (LO6)

Explain the government’s dilemma regarding whether it should rescue American International Group (AIG) during the credit crisis. (LO5)

Lehman Brothers continued to report positive earnings throughout the spring of 2008, even though mortgage valuations were clearly declining. Nevertheless, some institutional investors were concerned that Lehman Brothers might have been overstating its earnings in 2007 and early 2008. Explain why more complete and accurate disclosure by banks and other financial institutions may help to resolve financial problems. Could managers’ compensation incentives discourage banks from fully disclosing their financial condition? Why or why not? (LO5)

How did Basel III change capital and liquidity requirements for banks? (LO3)

How did the Financial Reform Act of 2010 change the reserve requirements of the FDIC’s Deposit Insurance Fund? (LO7)

Explain how the Financial Reform Act is intended to prevent some problems that contributed to the credit crisis. (LO7)

Explain how TARP was expected to help resolve problems during the credit crisis. (LO6)

Explain why the credit crisis caused concerns about systemic risk. (LO5)

Explain how bank regulation can be more effective when there is consolidation of banks and securities firms. (LO2)

Why were bank regulators concerned about credit default swaps during the credit crisis? (LO2)

Should the Fed have the power to provide assistance to firms, such as Bear Stearns, that are not commercial banks? (LO5)

Explain why regulators might argue that the assistance they provided to Bear Stearns during the credit crisis was necessary. (LO5)

Explain how the accounting method applied to mortgage-backed securities made it more difficult for banks to satisfy capital requirements during the credit crisis of 2008–2009. (LO2)

Explain how the conversion of a securities firm to a bank holding company (BHC) structure might reduce its risk. (LO2)

Explain how the Sarbanes-Oxley Act improved the transparency of banks. Why might the act have a negative impact on some banks? (LO2)

Describe the Financial Services Modernization Act of 1999. Explain how it affected commercial bank operations and how it changed the competitive landscape among financial institutions. (LO2)

Why are bank regulators more concerned about a large bank failure than a small bank failure? (LO6)

How can the financial problems of one large bank affect the market’s risk evaluation of other large banks? (LO5)

How do economies of scale in banking relate to the issue of interstate banking? (LO2)

Explain the moral hazard problem as it relates to deposit insurance. (LO2)

Given the higher capital requirements now imposed on them, why might banks be even more interested in underwriting corporate debt issues? (LO2)

Describe highly leveraged transactions (HLTs) and explain why regulators closely monitor a bank’s exposure to HLTs. (LO2)

Explain how the value-at-risk (VaR) method can be used to determine whether a bank has adequate capital. (LO3) 

Explain how the uniform capital requirements established by the Basel Accord can discourage banks from taking excessive risk. (LO3)