(BBA)CH11 Financial Requlations

(BBA)CH11 Financial Requlations - Chapter Eleven Economic...

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    Chapter Eleven Economic Analysis of Financial Regulation
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    Regulation (p.255) There are nine basic categories of financial regulation: 1. Government Safety Net. 2. Restrictions on Assets holdings. 3. Capital Requirements. 4. Prompt Corrective Action. 5. Chartering and Examination. 6. Assessment of Risk Management. 7. Disclosure Requirement. 8. Consumer Protection. 9. Restrictions on Competition.
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    1. Government Safety Net (p.255) 1. Depositors do not tell which bank is good or bad due to lack of information and then reluctant to deposit money into banks. 2. If a bank is unable to pay its depositors and other creditors and it must go out of its business. 3.The failure of one bank can hasten the failure of others ( Contagion effect ). It may cause a bank panic. As a result, depositors have to wait to get their deposits funds until banks were liquidated.
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    1. Government Safety Net (p.279) Bank Act of 1933 : to set up FDIC. FDIC started operation in 1934 and provided deposits insurance. 1. Depositors are paid off in full on the first US$100,000 they deposited in a bank. (temporarily raised to US$250,000 during subprime crisis in October 2008) 2. Two primary methods to handle failed banks: a. Payoff Method. b. Purchase and Assumption Method.
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    Two Methods to Address Failed Banks (p.256) 1. Payoff Method to allow banks to fail and pay off deposits up to US$ 100,000 insurance limit. (with funds from insurance premium paid by banks) 2. Purchase and Assumption Method to find a merger partner who assumes all of failed bank's deposits. FDIC may help the merger partner by providing it subsidized loans or by buying some of failed bank's weaker loans.
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    Deposits Insurance Premium of FIDC Capital Adequacy Supervision Grades A B C Excellent 0.23% 0.26% 0.29% Good 0.26% 0.29% 0.30% Bad 0.29% 0.30% 0.31%
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    Deposits Insurance Premium of CIDC (Taiwan) Capital Adequacy Supervision Grades A B C Excellent 0.05% 0.05% 0.55% Good 0.05% 0.55% 0.06% Bad 0.55% 0.06% 0.06%
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    Funds of FDIC in 1990-2009Q1 Source : Taiwan Financial Time (2009/8/2) -10 0 10 20 30 40 50 60 199 0199 1199 2199 3199 4199 5199 6199 7199 8199 9200 0200 1200 2200 3200 4200 5200 6200 7200 8 200 9Q1 U SD B illion
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    Other Forms of Government Safety Net (p.257-58) Deposit insurance is not only form of government safety net. Governments provide support is through lending from central bank to troubled banks. Federal reserve System acts as the " lender of resort " role of central bank. Governments can take over troubled banks and guarantee that all creditors will be repaid their loans in full.
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  Adverse Selection and Moral Hazard The most serious drawback of government safety net stems from moral hazard. Deposit insurance provides increased incentives for banks to take risks that may result in an insurance payoff. Depositors and creditors protected by government
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This note was uploaded on 04/16/2011 for the course ECON 121 taught by Professor Lily during the Spring '11 term at Clinton Community College.

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(BBA)CH11 Financial Requlations - Chapter Eleven Economic...

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