EXC 3732 Financial Bubbles, Crashes and Crises
EXC 3732 Financial Bubbles, Crashes and Crises
EXC 3732 Financial Bubbles, Crashes and Crises
Kartei Details
| Karten | 13 |
|---|---|
| Sprache | English |
| Kategorie | VWL |
| Stufe | Universität |
| Erstellt / Aktualisiert | 30.05.2023 / 01.06.2023 |
| Weblink |
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Why is the financial industry so heavily regulated?
- Fragility
- Opacity
- Centrality
Why so heavy regulated Elaborate Fragility
- Financial sector is intrinsically fragile (borrowing short and lending long)
- intrinsically reliant on trust (suspected cause for fragility)
- main source of trouble are unexpected losses. (which are inevitable in a sector dedicated to forecasting the future)
- assymetric information -> adverse selection and moral hazard problems -> credit risk
Why so heavy regulated Elaborate Opacity
- financial sector is partially opaque/ non-transparent
- feature not a bug: allows funding of new, unconventional or marginal projects/borrowers (banks won't reveal your business idea to others)
- enables diversification and efficient investment
- allows bad, unethical, misguided practices to foster and spread unchecked
Why so heavy regulated Elaborate Centrality
- Fin. sys. provides necessary services in a monetary economy: transactions, credit, insurance
- Necessary for modern economies to function (as much as electricity)
- Fin. distress extremely costly for society at large
Why is the financial industry so heavily regulated? short
-> a necessary and important sector, intrinsically prone to dramatic collapse (because of opacity and fragility) requires regulation
- has always been regulated under any political/ideological regime (only a question of scope and effectiveness)
Describe the main forms of fin. regulation and supervision
- restrictions on asset holdings
- capital requirements
- chartering
- disclosure requirements
- general consumer protection
- regulate competition
- financial supervision
Elaborate 2.1 restrictions on asset holdings
- risk: restrict amount of risk held
- liquidity: liquidity coverage ratio - given amount of very liq. assets
- diversification: diversification rules , limiting the share of total assets held in one or few asset classes
Elaborate 2.2 capital requirements
- two types
- basic leverage ratio (capital/assets)
- risk based capital requirements (capital/risk weighted assets)
- more equity -> more to loose -> less risk taking
- more equity capital gives safety buffer
Elaborate 2.3 chartering
>Prerequisites that have to be met to open a bank or other fin. institution
Elaborate 2.4 Disclosure requirements
>Rules on disclosure of credit & risk exporsure, reserves, capital
Elaborate 2.5 general consumer protection
- General consumer protection rules apply also in the financial services industry
- many court cases (also in Norway) based on allegations that banks violated rules for consumer protection
Elaborate 2.6 regulate competition
- increased competition -> increased risk taking
- measures to reduce competition (to reduce risk taking) have included:
- restrictions on branching
- very strict chartering rules
- restrictions on non-banks' ability to provide fin. services
- restrictions on establishment and operation of foreign-owned banks
Elaborate 2.7 financial supervision
- incl. on-site examinations (of diff. areas)
- analysis of asset holdings (loans, other investments)
- .. of capital holdings (level, risk-weights)
- assessment of the bank credit and risk management process (evaluate the bank credit routines, evaluate the banks risk management procedures)
