Week 8 Workshop
Mohamed Badawy
Michaelmas, 2021
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Instruction
The intent is to familiarize with the type of questions that can be part of your final assessment.
Every question has only ONE correct answer. In order to get the best out of this practical
session, each student should not just pick the right answer but rather justify why that choice is
right and why the other options ought to be excluded.
General rule: if anything seems not clear or you believe some information is missing, please
state the needed assumption and continue to solve the exercise accordingly.
1. Among others which one of the following was a reason to improve Basel I accords, which later
led to the three pillars in Basel II?
(a) Basel I was already scheduled to be replaces by Basel II in 1996
(b) The computation of risk-adjusted assets in Basel I led banks to undertake regulatory
arbitrage
(c) The minimum capital requirement in Basel I was found to be too low in order to be used
as cushion to withstand negative shocks
(d) All of the above contributed to the transition from Basel I to Basel II
2. Which of the following items belongs to the Tier 1 capital as defined by the Basel accords?
(a) Common stocks retained earnings, and preferred stocks
(b) Common stocks, retained earnings, and non-redeemable non-cumulative preferred stock
(c) Only common stocks
(d) None of the above
3. What is the difference between bail-out and bail-in?
(a) Bail-out is a procedure to rescue defaulting banks while bail-in is a supervisory test to
check the health fo banks
(b) A bail-in is the rescue of a financial institution that is on the brink of failure whereby
exclusively depositors take a loss on their holdings
(c) Bail-in differentiates from bail-out because the rescuing costs are not borne by taxpayers
but by shareholders and debtholders of the distressed institution
(d) They do not differ in any aspect
4. Bernanke and Gertler (1995) study the transmission of monetary policies to the real economy.
Which of the following channel they hypothesize and provide empirical evidence?
(a) Balance-sheet channel where monetary policies generate direct and indirect effect of
firms’ external finance premia
(b) Lending channel due to the lack of substitutability between banks’ reservable and nonreservable labilities
(c) The cost of capital channel where monetary policies increase the cost of capital and this
spillovers onto the real economy
(d) All of the above are channels identified in Bernanke and Gertler (1995)
(e) None of the above is identified in the paper
5. Kashyap and Stein (2000) study the transmission of monetary policies to the real economy.
Which of the following channel they hypothesize and provide empirical evidence?
(a) Balance-sheet channel where monetary policies generate direct and indirect effect of
firms’ external finance premia
(b) Lending channel due to the lack of substitutability between banks’ reservable and nonreservable labilities
(c) The cost of capital channel where monetary policies increase the cost of capital and this
spillovers onto the real economy
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(d) All of the above are channels identified in Bernanke and Gertler (1995)
(e) None of the above is identified in the paper
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Open question
1. Discuss the evolution of international banking regulation. Please, in your answer, stress the
reasons why self-regulation by financial intermediaries is not achievable and the regulator’s
response to market participants’ (mis-)behavior.
2. Discuss the role of central banks and their policies. In particular, what is/are the mandate(s)
of central banks? What are the monetary policy tools used by the central banks? Discuss
the difference among tools and when it is optimal to use conventional versus unconventional
policies. Discuss the economic mechanism through which monetary policies reach the real
economy.
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