Too - much risk • unfair to small banks because small...

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Too-Big-to-Fail Because the failure of a very large bank makes it more likely that a major financial disruption will occur, the FDIC has adopted the policy that the very largest banks are "too big to fail". The FDIC would bail them out so that no depositor or creditor would suffer a loss; it uses the purchase and assumption method. For example, when Continental Illinois (then one of the ten largest banks in the U.S.) became insolvent in May 1984, the FDIC guaranteed all deposits, even those exceeding $100,000 and it prevented losses for Continental Illinois bondholders. criticisms: increases the incentive for moral hazard by big banks because large depositors have no incentive to monitor the bank and withdraw their deposits when the bank takes on too
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Unformatted text preview: much risk • unfair to small banks because small banks are put at a competitive disadvantage because their large depositors may suffer losses if the bank fails Restrctions on Banking Industry Competition • branching restrictions These limit the ability of banks to expand outside their regions or states and make the banking industry less competitive. Bank holding companies (firms that own many different banks as subsidiaries) are allowed to operate interstate. • restrictions on the scope of bank activities The Glass-Steagall Act (1933) separated commercial and investment banking. Also, banks are not allowed to engage in nonfinancial activities....
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This note was uploaded on 11/22/2011 for the course FIN FIN1100 taught by Professor Bradrifkin during the Fall '09 term at Broward College.

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