Why Are Banks Regulated - Term Paper (2024)

...AnIdealSituation:’FreeEnterpriseSystemAlongWithRegulatedBanking’ TheU.S.economyisafreeenterprisesystemwhichmeanseachindividualis entitledtoearnprofits,ownprivateproperty,competeinamarketplaceforbusiness andmakeeconomicdecisionsforthemselves.Insuchasystemsomepeoplearguethat regulationofeconomyandeconomydrivingentities,suchasbanks,mayaffecttheU.S. freeenterprisesystem.HenryDavisThoreau,aninfluentialfigureinAmericanthought andliteratureandaproponentoflaissezfaire,said:“Thatgovernmentisbestwhich governsleast;andIshouldliketoseeitacteduptomorerapidlyandsystematically. Carriedout,itfinallyamountstothis,whichalsoIbelieve—‘Thatgovernmentisbest whichgovernsnotatall’;andwhenmenarepreparedforit,thatwillbethekindof government.”Ifwespeakofbanksinthecontextofregulationorderegulation,Ifeel thatregulationofaneconomicentitylikeabankwouldnotonlyprotectdepositorsbut also secure national monetary stability, preserve an efficient and competitive financial systemandprotectconsumerinterests. Businessesandindividualsholdasignificantportionoftheirfundsinbanksand use banks primarily for carrying out ......

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...In 2007, the US financial system began to collapse. The trust link between the different financial institutions, such as Investment Banks or Insurance Companies, broke – crashing all the financial system. The collapse of all the US banking system had consequences everywhere in the world. No one, from the strongest European countries to the poorest places in the world, was spared. To understand the whole current situation, we have to look back in the 80s and 90s when the deregulation started. Deregulation means lowering the laws and restrictions voted by the government, which lowers the government control over how business is done, between who and who. It started with the deregulation of how the loans are used. Before the deregulation, the financials institutions could not use the money of the individuals. But they came public, so they had access to a lot of money provided by the stockholders. This situation lead to two crises in the eighties, and in the nineties. Between 2001 and 2007 happened a period, called “bubble”, of high deregulation and speculation. It lead to the financial crisis we are now still facing. The main point of this essay is to understand how the system have collapsed, who and what was involved. It will also try to explain why the US crisis has spread to the other financial markets all around the world. 1/ The play of the interest rate during the US crisis In the early 2000s, the interest rate was kept down by the Federal Reserve (FED) to boost...

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...Explain the main reasons why financial markets and financial intermediaries exist. Why are banks special? A bank is a financial intermediary that offers loans and deposits, and payment services. In the past decade the banks have become a very important part of the economy. Banks are financial intermediaries, financial intermediaries and financial markets main role is to provide a system by which funds are transferred and allocated to their most productive opportunities. Banks need money and they get the money from people who invest in the bank and people who save their money in the bank, but the money does not stay in the bank it has to be allocated to people or companies with deficit funds (borrowers). In doing so they increase the economic efficiency by promoting a better distribution of resources. How can the transfer of wealth from surplus units to deficit units occur? There are two ways that the transfer of wealth can happen its either direct finance or indirect finance. Direct finance is the transfer of funds from surplus units to deficit units via financial markets. Indirect finance on the other hand has a different procedure as the transfer of funds does not occur directly from lender to borrowers as the financial intermediaries step in. Why is there a need for financial markets and why do they exist? Financial Market exists in order to facilitate the relations between providers of capital such as savers and investors and users of capital such as companies......

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...Syndicate 1 3. Discuss the two main reasons why financial sector are so highly regulated? The aim of Government to place strict regulation on financial sector is to protect customers and maintain stability of financial market. In terms of product innovations and technology improvement, customers are facing a more sophisticated and complex financial markets. There are several concerns with regard to customer service practices followed by financial sector. For example bundling unsolicited products with other products and sell them together to customer, mis-selling of unsuitable products to consumers intentionally, misuse of customer’s fund, lack of transparency, unfair contracts or fees and so on. Thus regulation is required in order to protect customers from losses arising from fraud or unfair dealing by financial institutions. Another goal of regulation is to protect fixed-amount creditors from losses arising from the insolvency of financial institutions, while ensuring stability within the financial system. Fixed-amount creditors are bank depositors, beneficiaries, claimats of insurance companies and account holders at brokerage firms who are owed fixed amounts of money.(Bert Ely,2008) For example regulator have created deposit insurance, investor protection funds, insurance guaranty funds to protect customers from any loss when a bank, insurance company has become insolvent. Any chain effect to the whole financial market can be limited. Regulator have implemented......

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...Bus 171a chap 1-8 HW Chapter 1 Hw probs 2,3,8,9,15-18 2) what is the difference between the claim of a debtholder of GM and an Equity holder of GM? The claim of the debt holder is established by contract, which specifies the amount and timing of periodic payments in the form of interest as well as term to maturity of the principal. The debt holder stands as a creditor and in case of default, he has a prior claim on firm assets over the equity-holder. The equity holder has a residual claim to assets and income. He can receive funds only after other claimants are satisfied. Income is in terms of dividends, the amount and timing of which are not certain. 3) What is the basic principle in determining the price of a financial asset? The basic principle is that the price of any financial asset is equal to the present value of its expected cash flow, even if the cash flow is not knows with certainty. The price of any financial asset is the present value of the expected cash flows or a stream of payments over time. Thus, the basic variables in determining the price are: expected cash flows, discount rate and the timing of these cash flows. 8) explain the difference between each of the follow a.The money market is a financial market of short-term instruments having a maturity of one year or less. The capital markets contain debt and equity instruments with more than one year to maturity; b.The primary market deals with newly issued financial...

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...decrease the extent of damage something like this could ever do again. The technological systems used today for tracking, maintaining, and storing data are much more complex, complicated, of larger capacity, and in need of complex laws to protect the information. To understand the full reasoning behind the need for this act we can look at what happened during the great depression. At that time, there were banks participating in brokerage and investment services without any oversight or regulation. When the Great Depression happened the impact it had on society, individuals, families, the economy, and the nation itself was of significant magnitude. Many people, companies, and businessmen lost everything they owned, their lives savings gone forever; banks closed and went bankrupt. Some men took their own lives over the monumental financial loss. In 1933 Congress passed the Glass-Steagall Act that prohibited commercial banks from taking these additional risks with security transactions. This helped protect people who kept their lives savings and earnings with the bank. Decades later while struggling during economic turns, financial leaders believed that if businesses could collaborate it would give them profitable divisions during downturns’ and therefore escape major losses and closures. “The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bililey Act (GLBA), removed some of the last restrictions of the Glass-Steagall Act of 1933.” Helping...

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...regulation usually state that the free market notion states that accounting information is like an economic good so it is best to leave the markets to decide what and how much information is needed. This will help achieve efficient market system, however this kind of a system exists only in theory and not in reality, and so then what is the point of a free market system when it cannot be efficient? (Y. Hong, 2007) The rewards of free market system are realized only when it is executed in isolation. But in reality, markets cannot be left completely on its own and some regulation or government intervention is required. Government intervention even at its minimum will not be able to achieve efficient markets and thus it is better to have a well regulated system. Free market system has led to market failures that have had major adverse effects globally in the past. On the contrary, planned economies have also hampered innovation and productivity like China and thus some market system should be there. Y. Hong (2007) in the article mentions the Australian accounting regulations and describes them as very stringent resulting in negative consequences. Australian reporting...

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...Explain the main reasons why financial markets and financial intermediaries exist. Why are banks special? A bank is a financial intermediary that offers loans and deposits, and payment services. In the past decade the banks have become a very important part of the economy. Banks are financial intermediaries, financial intermediaries and financial markets main role is to provide a system by which funds are transferred and allocated to their most productive opportunities. Banks need money and they get the money from people who invest in the bank and people who save their money in the bank, but the money does not stay in the bank it has to be allocated to people or companies with deficit funds (borrowers). In doing so they increase the economic efficiency by promoting a better distribution of resources. How can the transfer of wealth from surplus units to deficit units occur? There are two ways that the transfer of wealth can happen its either direct finance or indirect finance. Direct finance is the transfer of funds from surplus units to deficit units via financial markets. Indirect finance on the other hand has a different procedure as the transfer of funds does not occur directly from lender to borrowers as the financial intermediaries step in. Why is there a need for financial markets and why do they exist? Financial Market exists in order to facilitate the relations between providers of capital such as savers and investors and users of capital such as companies......

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...The very nature of banking was called into question, and the financial environment changed rapidly. Within Australia, the banking sector underwent a rapid transformation, as banks scrabbled to re-define themselves in wake of the global financial crisis. The speed of response to the changing market and subsequent internal innovation required to re-imagine a different way of banking and being in the community and sector required nothing less than a metamorphosis of the way of being. The question then became ‘How do you re-invent a large, mature bank and equip it for the current, significant change, and also prepare it for future change that you can’t see or imagine?’ How do you transform your business and people to thrive in the new world of change, and how do you do it when not only the public but the staff are cynical of quick fixes? By looking at the journey the bank has taken, you can understand the evolutionary journey the bank has taken, and is still taking to bring a different type of leadership to life. Methodology of inquiry Initially, my focus was on how to build leadership capacity within the bank, focussing on how to equip staff with the skills to deliver rapid innovation and change. However, through the course of my interviews, it became apparent that the very core values offering of the Bank was in a state of flux, that the courses offered in the internal academy were new and many of the skills required were in development. In...

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...Stoltz February 17, 2015 Week #2 Application 1. Does this case indicate that JPMorgan and the federal government were in a collaborative partnership or working at arm’s length? Why do you think so? JPMorgan and the Federal Government were working at arm’s length in the beginning. JPMorgan, along with the other “big banks”, argued with congress about Imposing government rules when it came to the trading of derivatives. 2. Which stakeholders benefited, and which were hurt, by JPMorgan’s actions in this case? For those that were hurt, wasn’t this a risk they were willing to take? The stakeholders that were hurt were stockholders, shareholders, the company itself. Competitors everyone was affected. 3. Were the regulations of derivatives trading legislated by congress in 2010 an example of economic or social regulations? What were the arguments in favor of and opposed to these regulations? This would be an economic regulation. The argument in favor for this would be that JPMorgan the largest of the banks cannot handle risk that no one as a bank. Those opposed to the regulations stated that it would reveal sensitive pricing, and could drastically reduce the banks’ profits. 4. Do you believe the government should have regulated the trading of derivatives further, and why or why not? If so, what kinds of regulations would you favor? I think they should have done more. The amount of money lost in this was drastic and could have crippled folk. Big risk should......

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...According to Wikipedia a housing bubble is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline. Four years into the housing bubble downturn, much of the country remains hopelessly confused about what happened, why it happened and who is to blame. In my research paper I will try and demonstrate what a housing bubble is, some of the reasons for the bubble, was it preventable, how it kept growing, how it burst and how it has affected our economy. By definition a housing bubble is a temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices. As with most economic bubbles, it eventually bursts, resulting in a quick decline in prices. The end of a housing bubble is hard to predict given the fact that economic conditions can change without warning. If a housing bubble swells to an extremely high level, the aftermath of a burst may set the housing market back years. There is little consensus as to the cause of the housing bubble that precipitated the financial crisis of 2008. Numerous explanations exist: misguided monetary policy; a global savings surplus; government policies encouraging affordable homeownership; irrational consumer expectations of rising housing prices; inelastic housing supply. Some......

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... | |Executive pay should be regulated to prevent executives paying themselves too much. | | | Table of Contents 1.Introduction3 2.Case of Bank of America CEO Compensation3 3.Arguments on Steep Executive Compensation4 4.Conclusion6 References6 1.Introduction In this period of severe economic recession in Europe and America, executive pay should be regulated to prevent executives paying themselves too much. This topic has been rising presently as due to recession and critical competition , the performance of multinational and large organization become Important to the stakeholders and also the heavy remuneration packages of top executives become objectionable. In view of the importance of this debate, following pages present the arguments on the validity and relevance of heavy remuneration of executives and their counter arguments. According to my analysis, the executive pay should be highly regulated by board of governors and other competent authorities to prevent the transfer of large sums to few executives’ accounts and to interconnect the pay and performance of these executives. 2.Case of Bank of America CEO Compensation The financial crisis of 2008 has......

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...counterparties on one or more companies' loan or bond. One party who buys the protection called "protection buyer" has to pay a periodic premium to another party called "protection seller" until expiry of the contract, in return for protection against a credit event (financial difficulty such as bankruptcy, failure to pay or restructuring) of a known reference entity (company). The protection buyer receives protection in form of the right to sell bonds issued by a particular company for their face value or receives principal amount of loan if the company defaults. An example from the case, Charles Bank International (CBI) wanted to lend $50 million to CapEx Unlimited (CEU) company. However, if the amount was lend to CEU, the bank would have high risk exposure to the company and the risk exceeded CBI's risk guidelines. Thus, CBI bought a CDS on CEU company from First American Bank (FAB), these method would mitigate the extra credit risk for CBI from the new $50 million loan. CBI had to pay a periodic fee to FAB until the CDS expired. In this case, if CEU company defaulted before the contract expired, FAB would pay the principal loan amount. The settlement in the event of default involves either "physical delivery" or "cash payment". In the physically settlement, CBI would deliver the CEU's loan to FAB. Then FAB would pay CBI the loan amount which in this case was $50 million. In the cash settlement, FAB would pay CBI the difference between the loan amount and the market......

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...printed in the colony of New Jersey in 1776. (Gilder Lehrman Collection) Banks are among the oldest businesses in American history—the Bank of New York, for example, was founded in 1784, and as the recently renamed Bank of New York Mellon it had its 225th anniversary in 2009. The banking system is one of the oldest, largest, and most important of our industries. Most adult Americans deal with banks, often on a fairly regular basis. Nonetheless, banks and banking seem rather mysterious. What do banks do? Why have they for so long been an integral part of our economy? Why, as in the financial crisis that commenced in 2007, do banks every so often get into trouble and create serious problems for the country? Banks have two important economic functions. First, they operate a payments system, and a modern economy cannot function well without an efficient payments system. We make most of our payments by writing checks, swiping credit cards issued by banks or tied to them, and by paying bills via online banking. Most of the money stock of the country is in fact bank money; the rest of the currency is “legal tender” issued by the government, namely Federal Reserve Notes and coins. We have confidence in bank money because we can exchange it at the bank or an ATM for legal tender. Banks are obligated to hold reserves of legal tender to make these exchanges when we request them. The second key function of banks is financial intermediation, lending or investing the money we deposit......

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...who sets it? Why do banks commonly borrow in the federal funds market rather than through the Federal Reserve? “Borrowing at the discount window” represents the borrowing by depository institutions from the Federal Reserve. The interest rate charged on these loans is known as the discount rate is set by the FED. Banks tend to prefer the federal funds market over the discount window because the Fed may monitory the bank’s reasons for borrowing. The Fed’s discount window is intended to accommodate banks that experience “unanticipated” shortage of funds. 9) Bullet Loan: Explain the advantage of a bullet loan. A bullet loan is a loan that specifies a date in the future in which the principal is paid off in a lump sum. This type of loan is useful for a borrower will have limited funds in the near future. 10) Bank Use of Funds Why do banks invest in securities even though loans typically generate a higher return? Explain how a bank decides the appropriate percentage of funds that should be allocated to each type of asset. Securities provide a bank with liquidity, because they can often be sold easily in the secondary market. In addition, many securities purchased by banks have low risk. Therefore, the securities can be used to minimize liquidity risk and default risk. The optimal allocation of funds is dependent on a bank’s degree of risk aversion and anticipated economic conditions. There is no formula to determine the optimal allocation, so banks must......

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