Economic Analysis of Financial Regulation - Types of financial regulation

10 important questions on Economic Analysis of Financial Regulation - Types of financial regulation

What was put into place to Attempt to restrict financial institutions from too much risktaking?

Bank regulations to minimalize moral hazard by Promoting diversificationand Prohibiting holdings of common stock

What is the CAMEL rating? (examinations)

• Capital adequacy
• Asset quality
• Management
• Earnings
• Liquidity
• Sensitivity to market risk

What are the interest rate limits focused on?

• Internal policies and procedures
• Internal management and monitoring
• Implementation of stress testing and Value-at risk (VAR)
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What are disclosure requirements?

requirements about the information they have to reveal to avoid a free rider problem

What is the Markt-to market (fair value) accounting?

The facts that the books have to reflect the market value of the assets also had an important impact on the disclosure requirement

How did the subprime mortgage crisis illustrate the need for greater consumer protection.

Because many borrowers took loans they did not understand and were beyond their means to repay (NINJA loans: no income, no job, and no assets)

Why were restrictions on competition also very important?

Increased competition can also increase moral hazard incentives to take on more risk.

What are the disadvantages on restriction on competition?

• Higher consumer charges
• Decreased efficiency of banking institutions

Explain Macroprudential Vs. Microprudential Supervision:

• Before the global financial crisis, the regulatory authorities engaged in microprudential supervision, which is focused on the safety and soundness of individual financial institutions.
• The global financial crisis has made it clear that there is a need for macroprudential supervision, which focuses on the safety and soundness of the financial system in the aggregate.

Why was there a period of deregulation in the 1980s?

Financial innovation and new financial instruments increased risk taking
+ Increased deposit insurance led to increased moral hazard

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