ASSIGNMENT - TOO BIG TOO FAIL IN USA.docx

ASSIGNMENT - TOO BIG TOO FAIL IN USA.docx - LAW OF BANKING...

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LAW OF BANKING AND FINANCE Written Assignment: Too big too fail in USA Foreign Trade University Lecturer: Hà Công Anh B o Each member of the group has contributed equally to the completion of this assignment: Name Student’s ID Nguy n Th c Hi n 1513340028 Văn Minh Hoàng 1513340031 Nguy n Lê Tu n 1513340074
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Appendix I. Introduction .......................................................................................................... II. Cause and Effect of “Too big too fail” .................................................................. III. The US government solution for “Too big to fail” ............................................... IV. Conclusion .............................................................................................................. V. Comparision between Vietnamese and US banking system ............................... VI. Vietnam solution against “Too big too fail” ........................................................ 16 VII. Recommendation .................................................................................................. 16
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1 I. Introduction Banks have failed in all of the regions of the country throughout US history. The worst years for such failures were during the Great Depression: roughly 9,000 of about 25,000 banks failed, with nearly half of the failures occurring in 1933 alone. Depositors everywhere became concerned that their banks were on the verge of insolvency, and they rushed to withdraw their funds. This forced banks to sell off their assets at fire sale prices, thereby turning illiquidity problems into insolvency problems throughout the banking industry. The result was a major disruption in the payments system and a severe tightening of available credit, with a devastating impact on economic activity in all regions of the country. To prevent future bank runs by depositors, the Federal Deposit Insurance Corporation (FDIC) was established in June 1933. The FDIC guarantees deposits, up to a limit, to lessen depositors’ incentive to make panicked withdrawals and thereby to reduce the likelihood of bank runs. The FDIC is also assigned the task of resolving banks that fail. It is to do so in the least costly manner, which historically has involved liquidating a failed bank and paying off insured depositors or else arranging for a healthier bank to acquire a failed bank. Based upon these two methods of resolving troubled institutions, there was to be no differential treatment between big and small banks. In 1950, however, the FDIC became concerned that a bank might be confronted with a temporary funding problem, so it sought and received authorization to infuse funds into such a bank to keep it open. The stipulation was that it could provide “open bank assistance” only if such a bank was essential to providing adequate banking services to a community (FDIC, 1984), which was likely to be the case only for a big bank. In this type of situation, the FDIC could ignore the requirement to choose the least costly resolution method.
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2 The issue of size became important in 1984, when the government bailed out Continental Illinois National Bank & Trust (“Continental”), the seventh largest bank at the time. This bailout occurred because of concerns about systemic risk, due to the bank’s size, which could affect other banks in all parts of the country.
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  • Fall '14
  • Finance, ........., Federal Reserve System

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