Economic Analysis of Financial Regulation - Asymmetric Information and financial regulation
10 important questions on Economic Analysis of Financial Regulation - Asymmetric Information and financial regulation
Why is the government safety net created?
What are the negative points of the government safety net?
• Adverse Selection
• “Too big to fail”
• Financial Consolidation
What are the the two government safety nets?
2. Purchase and assumption method (typically more costly): reorganization of the bank by finding a merger partner that assumes the bank’s failed liabilities so no depositor or creditor looses money
Other form of government safety net:
• Lending from the central bank to troubled institutions (lender of last resort)
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When does bank panic occur?
What is a bank run?
What is necessary to guarantee the succes of deposit insurance? And what does it lead to when this doesn't happen?
- regulation and supervisions of the financial sector
if not: leads to less banking sector stability and a higher incidence of banking crises.
Why does there appear to be moral hazard with the government safety net?
- Depositors do not impose discipline of marketplace (by withdrawing money when they think financial institutions are taking too much risk)
- Financial institutions have an incentive to take on greater risk than otherwise
Why does there appear to be adverse selection?
• Depositors have little reason to monitor financial institutions
What created a too big to fail problem?
What is the financial consolidation?
The question on the page originate from the summary of the following study material:
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- Never study anything twice again
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