Study Guide for Money and Banking, Chapter 12

Definitions
Contagion effect
Payoff method
Purchase and assumption method
Regulatory forbearance
Brokered deposits
Market-value accounting
Zombie S&L
Vampire S&L
Coinsurance
Too-Big-to-Fail
Capture theory
Off-balance-sheet activities

Essay questions
1. Explain how deposit insurance in general, and flat-fee based premiums in particular, increased the moral hazard problem of S&Ls. What could be done to correct this situation?
2. How did historical cost basis accounting contribute to the S&L crisis? How would market-value based accounting benefit the economy?
3. How did regulatory forbearance increase the moral hazard problem of S&Ls?
4. Explain how "zombie" S&Ls became "vampires."
5. How did the principal-agent problem between voters/taxpayers and politicians contribute to the S&L crisis?
6. Explain why were 50% of S&Ls insolvent by 1982? Make specific reference to 1) the bank's balance sheet and 2) the bank's income statement in your answer.
7. What would be the problems with not having FDIC?
8. How did the "too big to fail" increase moral hazard and why was it unfair?
9. What are the advantages and disadvantages of coinsurance?
10. (T-F-U, explain) Deregulation of S&L's in the early 1980s caused the number of bank failures to increase during the 1980s.
11. Explain these statements: "The S&L industry was a prescription for failure." "S&L's were financial time bombs."