FINAN 4300 Problem Set 8

1. Which regulator is responsible for examining nationally chartered banks?

The OCC, created during the Civil War era, is tasked with chartering, regulating, and supervising nationally chartered banks; it conducts regular examinations to ensure these banks are operating safely and in compliance with federal banking laws

Which regulator supervises most banks?

The FDIC supervises the largest number of banks in the United States, primarily state-chartered institutions that are not members of the Federal Reserve System; however, the Federal Reserve supervises bank holding companies and state-chartered member banks,

Which law created the PCAOB?

The Sarbanes–Oxley Act of 2002 established the PCAOB in response to corporate scandals like Enron and WorldCom; the PCAOB oversees the audits of public companies, sets auditing standards, and enforces compliance to protect investors and improve the reliability of financial reporting.

What is the purpose and function of the Federal Deposit Insurance Company (FDIC)?

The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per depositor, per bank, per ownership category, thereby protecting consumers in the event of bank failure; it also examines banks for safety, soundness, and compliance, and plays a key role in resolving failed banks to maintain stability in the financial system.

What is the oldest regulatory agency, and what law created it?

The OCC is the oldest federal banking regulator, established under the National Currency Act of 1863 and formalized under the National Bank Act of 1864; it was created to provide a stable national currency and regulate nationally chartered banks, a role it continues to play

Deposit insurance eliminates the risk of bank runs without creating any new risks.

False

While deposit insurance prevents panic withdrawals, it creates moral hazard by encouraging risk-taking since depositors feel protected.

The presence of overlapping regulators in the U.S. banking system always increases

efficiency and prevents bank failures

False

Overlap can increase coverage but also causes turf battles, confusion, and delayed enforcement, as seen in the S&L crisis.

The FDIC’s main role is to provide liquidity to solvent but illiquid banks through emergency lending.

False

That is the Federal Reserve’s role; the FDIC’s main responsibility is deposit insurance and resolving failed banks.

Thrifts were originally designed to fund homeownership through savings deposits and long-term mortgage lending.

True

Their narrow mission was mortgages for ordinary households, not speculative investments

Garn St. Germain Act (1982) expanded thrifts powers to invest in riskier assets while

retaining federal insurance.

True

increased moral hazard and contributed to S&L crisis.

Lincoln S&L primarily misled depositors by selling insured CDs.

False

They sold uninsured ACC corporate bonds as if they were safe like deposits.

Regulatory capture means regulators are influenced by the industry (lobbying/careers).

True

Can tilt actions toward industry’s interest over public interest.

Reagan said “We hit the jackpot” on signing Garn St. Germain, reflecting 1980s

deregulation.

True

This quote highlighted the political enthusiasm for deregulation.

The Keating Five shows how political pressure can undermine enforcement.

True

Five senators intervened with regulators on Keating’s behalf, delaying action against Lincoln S&L.

Post 2008 reforms eliminated political pressure/industry capture risks.

False

While tools improved, lobbying, capture, and new risks (fintech, crypto) still challenge regulators.

Thrifts were designed to provide broad commercial/business loans like commercial banks.

False

Thrifts (Savings & Loans) were narrowly focused on home mortgages funded by local savings deposits, unlike commercial banks which offered diversified lending and payments services.

Systemic risk refers only to the chance that an individual bank might fail due to its own poor management

False

Systemic risk is the danger that one failure spreads through contagion, threatening the stability of the entire financial system.

Which of the following best explains why banks are more heavily regulated than most

industries?

They face unique fragility from maturity mismatch and systemic contagion.

Which agency supervises state-chartered non-member banks?

Federal Deposit Insurance Corporation (FDIC)

Which agency is primarily responsible for consumer financial protection in the U.S.?

CFPB

If a Utah-chartered industrial bank engages in high-risk fintech lending, which regulators would have primary supervisory authority?

Utah Department of Financial Institutions (DFI) and FDIC

In the Lincoln Savings & Loan case, which product was sold to depositors under misleading claims of safety?

ACC corporate bonds

Which quote best represents Ronald Reagan’s deregulatory philosophy in the 1980s?

“The nine most terrifying words in the English language are: I’m from the government, and I’m here to help.”

Regulatory capture is most likely to occur when:

Regulators rely on the industry for expertise, jobs, or political donations

Which of the following regulators would primarily intervene in a case of discriminatory mortgage lending in Utah?

DOJ and CFPB

Which of the following is an example of regulatory failure linked to political influence?

Keating Five intervention in the 1980s

Which of the following best describes a thrift (Savings & Loan)?

A financial institution created to promote homeownership through mortgages.

Which of the following best highlights a key difference between thrifts and commercial banks (historically)?

Thrifts primarily made long-term, fixed-rate home mortgages; commercial banks offered a wider range of business and consumer loans.

Which of the following best describes systemic risk in banking?

The risk that distress at one bank triggers widespread panic and failures across the financial system.