Chapter16 - Chapter 16 Regulation of Financial Institutions...

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Chapter 16 Regulation of Financial Institutions
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Why are financial institutions regulated? They provide essential services to the public They have access to privileged information on customers – “asymmetric information” 2/3 of money supply are financial institution liabilities; important to control money supply by Federal Reserve
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Government provides deposit insurance, Federal Reserve acts as “lender of last resort” and federal agencies examine and monitor financial institution activities Encourage competitive financial institution markets (lowers costs to consumers) while hoping to prevent bank failures Bank failure occurs when bank is: Illiquid or Insolvent (inadequate capital)
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Glass – Steagall Act of 1933 Created Federal Deposit Insurance Corporation (FDIC) Currently insures up to $250,000 per depositor Act also limited bank activities to those that were less risky and bank-related
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Recent Legislation Increased allowable activities Breaking down barriers between banks, savings and loans, credit unions, mutual funds, investment bankers, etc. “level the playing field” Restructuring of deposit insurance – all deposit insurance is under FDIC; response to increase in financial institution failures in 1980’s Primary causes of bank failures – fraud, embezzlement and poor management
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This note was uploaded on 03/24/2011 for the course FINA 409 taught by Professor John during the Spring '11 term at Ohio State.

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Chapter16 - Chapter 16 Regulation of Financial Institutions...

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