Financial Regulation and Supervision - Rationale for government intervention

8 important questions on Financial Regulation and Supervision - Rationale for government intervention

What is regulaion of financial services?

It refers to the process of rule maink and thte legislation underlying the supervisory framework

What are the three  main reasons for government intervention?

1) asymmetric information 2) externalities 3) market power 

In what kind of cases does asymmetric infromation excised?

a) custumor is not able to asses safety & soundness of financial institution b)  customers may not be in a position to asses the behaviour of a financial institution = outcome in the futher/pensioen
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What is prudential supervision for asymmetric information?

1) Aims to protect customers by ensuring the soundness of financial institution (direct protection of 100.000) 

What is the risk of externalities?

=besmetting / Banks are subjected to contagion as balanced sheet contain illiquid assets financed by redeemable deposits. (aflosbaar)

What aims macroprudential supervision ?

It aims to foster financial "stability" & contain/control the effects of systemic failure 

What is government failure?

When government intervention causes a less efficient allocation of goods and resources

What are the two outcomes of government failure?

1) custumors are not carefull because of the protection by government 2) it may lead to bureaucracy

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