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Ch. 11 Notes (BUS G-345; Money, Banking; and Capital Markets; Self)

Ch. 11 Notes (BUS G-345; Money, Banking; and Capital Markets; Self)

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Unformatted text preview: Chapter 11: Economic Analysis of Financial Regulation l.After this chapter you should understand the following, _ 2.How financial regulations work to solve 3+6: M various asymmetric information problems. \I - Ff" .-I;._‘ .- Iii“ -l 3.How the effects of financial regulations create vet": new or enhanced asymmetric information problems. 4.The major financial legislation in the United States. You will need to know the main points of the listed legislation in Table 1, page 264 of your text. 5 .Relate the problems with regulator remedies to less developed economies. ,3! 3' Page 1 offl’za 6.The reason for and the problems with the following categories of regulations: 0 the government safety net, 0 restrictions on asset holdings, 0 capital requirements, 0 prompt corrective action, 0 chartering and examination, 0 assessment of risk management, 0 disclosure requirements, 0 consumer protection, and o restrictions on competition. Page 2 offiZC) Asymmetric Information and Bank Regulation: Government Safety Net ._._._..........._ __.. _ ._... ._ mum... —_._.___...~._..p- Bank panics and the need for deposit insurance: (FDIC: short circuits bank failures and . contagion effeCt " Meme (c:m’r¢fv"ia6"’? Jr 0 firms (INC-r35 '51“! {ml WIT-6:0! a! L1Hfl§gfi£7nL ”WWW? :h ulna/x Flaf’ewgrfpe; 0 Pa off method— . 0 Purchase and assumption method (typically ——-w——-——-—-.—.— —_._...._._...».«.-.———..-_-————-~°—“ w for the FDIC) — Lending from the central bank to troubled institutions (lender of last resort) Page 3 of8 2c; (flit/eti’z/MH 503.3% Mfg: Problems Moral Hazard o Depositors do not impose discipline of marketplace. 0 Financial institutions have an incentive to take on greater risk. W Adverse Selection 0 Risk-lovers find banking attractive. o Depositors have little reason to monitor - a n u N finan01al 1nst1tut10ns. Page 4 ofHZO Expansion of the safety net to 3 ‘_‘Too big to fail” policy Government provides uarantees of re a ent to .cu‘np‘flwww. institutions even when they are not entitled to this guarantee , (Gm-gr a my? 73” 0 Uses theihurchase and assumgtion method u Problem: Increases moral hazard incentives for big banks Financial Consolidation Larger and more complex financial organizations challenge regulation and increased “too big to jail problem. a o Extends safety net to new activities, increasing incentives for risk taking in these areas (as has occurred during the subprime financial crisis in 2007-2008). Page 5 of 5’ 2,0 ...
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