Chapter 11 Economic Analysis of Financial Regulation I Asymetrical information and Financial Regulation a Government Safety Net i Bank Failures and FDIC Deposits 1 FDIC keeps depositor insurance safe a 2 Methods to rectify i Depositors get all money up to limit then bank sells off assets to pay the remainder usually around 90 ii Govt finds a merger partner and new merger partner takes on all loans and dpesits and depositors are given 100 of value ii Govt providing lending from the central bank that can allow this to shore up assets and institutions 1 AIG 2 Lender of Last Resort iii Moral Hazzard when one party to a transaction to engage in activities detrimental to the other party iv Adverse Selection people who are most likely to produce adverse outcomes insured against are those who most want take advantage of insurance b Restrictions on Asset Holdings i Cant hold risky assets to reduce the risk pf panics and bank failures i Leverage Ratio c Capital Requirements assets ii Risk Based Capital Requirements of their risk weighted assets d Prompt Corrective Action the amount of capital divided by the banks total holding capital as a percentage i When banks become undercapitialized they begin to take on risky assets in order to regain capital this can cause a worse effect of loan is defaulted ii FDIC places banks in different categories in order to prevent this e Financial Supervision i Financial Supervision institutions and how they are run overseeing the people who run financial 1 keep crooks out from running them f Assessment of Risk Management i Managing risk at a bank g Disclosure Requirements that is available h Consumer Protection i Restriciotn of Competiton i Must disclose information so customers are aware of information i Increase competition can increase moral hazard for financial institution as they work to take on more risk II 1980s Savings and Loan and Banking Crisis a Advent of more and different financial instruments ment banks lost deposits to money markets and commercial paper market b Banks thus for more ways to make money i Often riskier ways c FDIC insurance increased from 40k to 100k i Increased moral hazard III Banking Crisis throughout the World a D j vu all Over Again i Start with financial liberalization and innovation with weak bank regulatory systems and a governemnet safety net Increases Moral Hazard ii b Not all have deposit insurance FDIC but all had Governements step in to bail out banks IV
View Full Document
Unlocking...