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HW_10_Solutions_Chapter_18_20[1]

HW_10_Solutions_Chapter_18_20[1] - Chapter 20 Banking...

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Chapter 20 Banking Regulation square6 Answers to End-of-Chapter Questions 10. With the advent of new financial instruments, a bank that is quite healthy at a particular point in time can be driven into insolvency extremely rapidly from risky trading in these instruments. Thus, a focus on bank capital at a point in time may not be effective in indicating whether a bank will be taking on excessive risk in the near future. Therefore, to make sure that banks are not taking on too much risk, bank supervisors now are focusing more on whether the risk-management procedures in banks keep them from excessive risk taking that might make a future bank failure more likely. 11. More public information about the risks incurred by banks and the quality of their portfolio helps stockholders, creditors and depositors to evaluate and monitor banks and pull their funds out if the banks are taking on too much risk. Thus, in order to prevent this from happening banks are likely to take on less risk and this make bank failures less likely. 12. Eliminating or limiting the amount of deposit insurance would help reduce the moral hazard of excessive risk taking on the part of banks. It would, however, make bank failures and panics more likely, so it might not be a very good idea. 13. In general, yes. A national banking system will enable banks to diversify their loan portfolios better, thus decreasing the likelihood of bank failures. In addition it may make banks and hence the economy
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