Week 11 Confederation Life and RBC

This lea the banks and other lenders holding a large

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Unformatted text preview: t as one of the causes of the current economic crisis, by crea)ng companies that were “too big to fail”, although that is open to debate. Banking Regula)on •  Why does the government regulate banks? –  Consumers deposit their savings into banks. The government wants to ensure that their money is protected from undue risk caused by ac)ons taken by the bank. –  They also do so to root out criminal ac)vity (like money laundering) that can happen through the bank). –  And as a means to ensure that there is sufficient credit available to keep the economy robust. Banking Regula)on •  Banks are given minimum requirements in which to be able to operate. •  Banks are required to have a certain amount of capital, determined by a measurement system (called the Basel Capital Accords) to minimize risk to the ins)tu)on. •  The frac)onal reserve requirement discussed earlier in the course also applies. Banking Regula)on •  Other requirements include a strict set of corporate governance guidelines, financial repor)ng and disclosure guidelines and credit ra)ng requirements (i.e. a ra)ng from a ra)ng agency such as Standard and Poor’s that indicates to investors and depositors how much of a risk this financial ins)tu)on is). U.S. Sub- prime Mortgage Crisis •  Aaer the dot- com bubble burst in the early 21st century, interest rates were kept extremely low to encourage investment. •  Financial service companies, now able to merge and offer a diversity of products, saw opportunity. •  Low interest rates encouraged home ownership. Readily available credit made it easy for people to buy homes. U.S. Sub- prime Mortgage Crisis •  People who previously could not afford a home of their own rushed to do so. •  This influx of consumers, driven by easy credit, drove up housing prices. •  Others, seeing the value of their homes going up, saw this as a buffer to debt and started to spend money in other areas, buoyed by an inflated financial worth. U.S. Sub- prime Mortgage Crisis • ...
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