bankers are not only concerned about increasing compliance costs, but also Dodd-Frank’s restrictions on selling mortgages. Bankers argue the qualified mortgage rule, which standardizes mortgages to reduce the risk a borrower will default, penalizes small banks by diluting their competitive advantage over larger banks – the ability to be flexible with local borrowers whom they trust to make theirpayments. Small borrowers have good equity and credit, they just don’t have the data to reward them with loans from big bank.iii. Why might D-F regulation of mortgage lending be particularly harmful to small banks?DF standardized mortgages as to reduce the risk of default- a small bank relies heavily on mortgage lending for profits and this “qualified mortgage rule” penalizes small banks by diluting their competitive advantage over larger banks- the ability to be flexible with local borrowers whom they trust to make their payments iv. Why would lower interest-rate margins affect small banks more?
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Because, small banks typically focus on traditional banking – gathering deposits and making loans – so their profits are largely determined by the spread in interest rates. When rates decrease, the spread narrows and lending margins fall. Small banks are not as diversified as big banks- big banks can offset the interest rate risk v. Is the shrinking number of small banks a bad thing? Why or why not?Consolidation creates efficiency. There is operational efficiency because of lower fixed costs. Financial efficiency is from more transactions leading to better netting andpooling creating liquidity, and reputational efficiency is that more people would trust the bank.vi. Why has the number not fallen even more?There are eventually diseconomies of scale. These costs include higher management costs, banks become more difficult to control. Increasing cost of bureaucracy. FDIC makes people feel safer keeping some of their money in small dinky banks. E. Read “Tiny Luxembourg Cashes in On Germany” (Item 7.5) and answer the following questions:i. Why is Luxembourg booming as a financial center? How does this case illustratesthe principles of offshore banking as explained in the chapter?Withholding tax- they take a tax out of your income before they even giveyou your income. So, German banks helped German customers do their business in Luxembourg.German government increased withholding tax from 10% to 30%. People didn’t want to keep money in Germany and would move it to Luxembourg.Banks opened subsidiaries or maybe advertised them more considering this so they could keep doing businessOpening a subsidiary in Luxembourg was attractive because of lack regulations, allowing German banks to offer more attractive ratesOffshore banking (synonymous with Eurodollar or currency)- designed to be a loop hole to get around regulationsii. What sorts of pressures does this situation exert on other countries and on Germany? Are these pressures desirable?
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