8. Banking panics and regulations Which of the following describe a common cause

Question

8. Banking panics and regulations

Which of the following describe a common cause of bank panics? Check all that apply.

a.Bank executives are not trained in risk management.

b.Rumors that a bank is in financial trouble spread easily.

c.Potential buyers of the assets of a bank, incorrectly rumored to be distressed, may suspect the assets to be of poor quality.

Which of the following are reasons why bank panics were largely eliminated after 1933? Check all that apply.

A.The Federal Reserve ("the Fed") stands ready to inject reserves into the system more quickly in a crisis.

b.Banks are required to hold a significant percentage of their assets as bank capital.

c.The shadow banking system has grown larger than the regular banking system.

Explanation / Answer

The correct option is b) because rumors about banks financial trouble will lower the confidence of depositors in the bank and they will try to withdraw their money from the bank thus creating pressure on the banks. The correct option is a) because this was a kind of insurance made by banks to prevent panics.

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