Economic Analysis of Financial Regulation - Types of financial regulation - Prompt Corrective Action
3 important questions on Economic Analysis of Financial Regulation - Types of financial regulation - Prompt Corrective Action
If financial institution’s capital falls to low levels, which 2 serious problems can occur?
1. Bank is more likely to fail because it has a smaller capital cushion should it suffer from loan losses
2. With less capital the financial institution is more likely to take on excessive risks (bigger moral hazard problem)
2. With less capital the financial institution is more likely to take on excessive risks (bigger moral hazard problem)
Give Classification of 5 groups of bank capital:
Well – adequately – undercapitalized - significantly undercapitalized – critically undercapitalized
When is prompt corrective action needed?
When bank capital is significantly undercapitalized and critically undercapitalized
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