Public policy toward financialinstitutions, and depositories
Public policy toward financialinstitutions, and depositories in particular, has attempted to promotecompetition within a framework of regulation intended to ensure the financialintegrity of the institutions.a. Discuss the fundamental reasons for financialregulation as discussed in class and in the text. As part of this discussion,provide an analysis of the potential conflicts between a policy of promotingcompetition and a policy of reducing the chance of financial institutionfailure. In this context what are the dangers of the too-big-to-let-fail policyin promoting financial intermediary efficiency, productivity and competition asmore large FIs are formed through mergers and consolidation. Consider whetherthe problem of moral hazard facing regulators and the federal deposit insurancefunds is more or less of a problem under this policy.Pick one of the statements below to answer based onclass lectures and the text:1. Give an example of a recent regulatory reform orchange in federal or state laws that are intended to promote competition amongfinancial intermediaries and how they are to do so. Within your discussion,provide an analysis of how market forces, such as rising interest rates,inflation, and financial innovation, have stimulated the development of newfinancial instruments and new institutional arrangements and intensifiedcompetition among financial institutions.2. Several dominant movements in determining thestructure of the U.S. banking system have been the spread of branch banking,the growth of bank holding companies and interstate banking and branching whichpermit the geographic expansion of banking services and the ability of bankingorganizations to offer new and diversified product lines. In the 1970s, nonbankfinancial firms, such as insurance companies and stock brokers, began competingwith depository institutions. Does this revitalized competition, recentlycharacterized by the innovation of by specialized banking firms and thepotential for expanded product lines, cause present prudential regulation(e.g., capital adequacy standards, examinations or asset compositionconstraints) and federal deposit insurance to be outmoded? In your answer,discuss the role and administration of prudential regulation when majordepository institutions may be highly diversified financial service companiesproviding life and casualty insurance sales and underwriting, corporatesecurities underwriting, household and business depository services,sophisticated EFT and telecommunications services as well as traditionallending to business.
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