Chapter 11 Outline

Chapter 11 Outline - Click to edit Master subtitle style...

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Unformatted text preview: Click to edit Master subtitle style 5/7/09 Department of Department of Chapter 11: Economic Analysis of Banking Regulation Econ 330: Money and Banking Fall 2007 Prof. Joseph Santos This outline draws from Frederic Mishkin’s Money, Banking and Financial Markets (2007) and, as such, contains copy written material. Please do not quote without proper citation. 5/7/09 Department of Department of [1] Government Safety Net: Deposit Insurance and the FDIC • Banks are particularly well suited to solve asymmetric information (AI) problems because they make private loans that limit free-rider problems. • However, this solution creates another AI problem, because depositors lack information about the quality of these private loans. • This AI problem may present two consequences. – Disintermediation – Contagion effects • A government safety net can minimize these problems; however, not without its own consequences. – Moral Hazard and the government safety net. – Adverse selection and the government safety net. – “Too big to fail.” • Financial consolidation and the government safety net [1] Government Safety Net [2] Restrictions on Assets and Capital Requirements [3] Bank Supervision [4] Assessment of Risk Management [5] Disclosure Requirements [6] Consumer Protection [7] Restrictions on Competition [8.1] Major Banking Legislation [8.2] Major Banking Legislation, continued [8.3] Major Banking Legislation, continued This outline draws from Frederic Mishkin’s Money, Banking and Financial Markets (2007) and, as such, contains copy written material. Please do not quote without proper citation. 5/7/09 Department of Department of [2] Restrictions on Asset Holdings and Bank Capital Requirements • Bank capital requirements take two forms. • The so-called leverage ratio is the amount of capital divided by the bank’s total assets. – To be classified as well capitalized, a bank’s leverage ratio must exceed 5%. – Through most of the 1980s, minimum bank capital in the U.S. was set solely by specifying a minimum leverage ratio. • The U.S. and the rest of the world have become increasingly worried about banks’ holdings of risky assets and about the increase in bank’s off-balance-sheet activities. • An agreement among banking officials from industrialized nations set up the Basel Committee on Banking Supervision, which has implemented the so-called Basel Accord on a second type of capital requirement – risk based capital requirements. • The Basel Accord, which requires banks to hold as capital at least 8% of their risk-weighted assets, has been adopted by more than 100 countries, including the U.S....
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Chapter 11 Outline - Click to edit Master subtitle style...

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