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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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- Spring '09