Financial Markets Flashcards
1
Q
Name 2 Pros of Regulating the Financial Markets
A
- Helps to protect Consumers
- Often lowers systemic risk due to interconnectivity between firms
- Equitable for society
2
Q
Name 2 Cons of Regulating the Financial Markets
A
- Moral Hazard can occur if bankers know that risky behaviour will be protected
- Regulatory Capture often occurs because the best regulators understand banking and work in banking, having relationships with CEOs
- Government Failure Arguments
- Asymmetric Information and Adverse Selection because banks will withhold certain information
- Deregulation can often be quite dangerous as it reduces necessary tape
- Can increase the size of ‘Shadow-Banking’ like Hedge-funds, but reduce the competition in the banking industry
- Max. IR can have unintended consequences like insufficient lending and excess demand
- The Cost of enforcing these regulations
3
Q
What are some of the Evaluation points for Regulating the Financial Markets?
A
- The balance between the profitability of commercial banks and the protection of consumers
- The balance between the efficiency of the market and the equity of the market
- Weigh up the Costs and the Benefits
