4.4.2- Market Failure In The Financial Sector Flashcards
What asymmetric information is there in the financial sector?
-can sell them products they don’t need, are cheaper elsewhere or are riskier than the buyer realises
-between financial institutions and regulators
What are some examples of asymmetric information?
-global financial crisis was partially caused by banks selling subprime mortgages
-PPI scandal, which was insurance that paid out if the customer couldn’t make loan repayments but most were illegible to claim
What externalities are there in the financial sector?
-cost of bailing out banks after the financial crisis to the taxpayer
-long term cost to the economy like unemployment, lost savings, growth, etc
What is moral hazard?
When risks are taken as they believe they will be bailed out if they go wrong
What is an example of moral hazard?
Banks believed they were too big to fail so sold subprime mortgages
What is a market bubble?
When the price of a particular asset rises massively and then falls due to investors buying when low and selling when price is too high
What is market rigging?
When a group of individuals or institutions collude to fix prices or exchange info that will lead to gains for themselves at the expense of others in the market
What is a type of market rigging?
Insider trading, where a trader buys/sells assets using information not known by others to make a profit
What is an example of market rigging?
Libor Scandal of 2008
What is the libor scandal of 2008?
Institutions were accused of fixing the London Interbank Lending Rate
What is a run on the bank?
When confidence falls for a bank so customers withdraw their deposits which causes a liquidity crisis so banks go insolvent
What is systemic risk?
The possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy
What is an example of systemic risk?
The gov nationalised northern rock in 2008 after a run by savers on their deposits. It had borrowed from other financial institutions so caused liquidity issues
