The negative externalities9 affecting firms and

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Unformatted text preview: e these services or a breakdown in their efficient provision can be costly to both the ultimate sources (households) and users (firms) of savings. The negative externalities9 affecting firms and households when something goes wrong in the FI sector of the economy make a case for regulation. That is, FIs are regulated to protect against a disruption in the provision of the services discussed above and the costs this would impose on the economy and society at large. For example, bank failures may destroy household savings and at the same time restrict a firm’s access to credit. Insurance company failures may leave households totally exposed in old age to catastrophic illnesses and sudden drops in income on retirement. Further, individual FI failures may create doubts in savers’ minds regarding the stability and solvency of FIs in general and cause panics and even runs on sound institutions. In addition, racial, sexual, age, or other discrimination—such as mortgage redlining—may unfairly exclude some potential financial service consumers from the marketplace. This type of market failure needs to be correct...
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