Lecture 13 - Regulations

Question 1

What is asymmetric information

Answer 1

-The friction between the borrower and the lender
-Borrowers and Lenders do not have the same level of information
-Lenders need reliable information to see how risk it is to lend money

Question 2

What is the concept of credit rationing

Answer 2

-Banks have the power because they are the ones that are giving away the credit
-They can deny, limit or charge higher fees for specifc people/Insitutions that they deem risky
- Redlining is a tactic used to justify rationing
-The Community reinvestment act attempts to mitigate the impact on risy communites

Question 3

Why is it more risky for a bank to fail than other businesses

Answer 3

Because there is usually an effect on the entire economy and reduces the amount of credit which disrupts commerce

Question 4

What are the 2 most common reasons banks fail

Answer 4

Insolvency and Illiquidity

Question 5

Explain what is insolvency

Answer 5

When the companies assets do not cover all its liabilities

Question 6

Explain Illiquidity

Answer 6

When a bank is not able to disburse cash as promissed. It probably has too many illiquid assets that they cannot convert to cash

Question 7

How did SVB fail in terms of illiquidity

Answer 7

Heavily ivnested in long term gouverms bonds and MBS
- High concentration of uninsured deposits
-Too many diposirots withdrew at once

Question 8

How did SVB fail in terms of insolvency

Answer 8

• Insufficient Capital to absorb losses
  -When intrest rates rose, the maret alue of these securitites fell

Question 9

What is the FDIC

Answer 9

-Government agency in which helps protect people moneu in banks
-Ensure people wont lose their money and insures up to 250k per account

Question 10

What is the Emergency Economic Stabilization Act of 2008

Answer 10

Provide relif for the US by allowing the goueverment to increase the supply of credit in the economy to stabilize it

Question 12

What are bonds clawbacks

Answer 12

Feature which allows to buy back part of the bond early

Question 13

What is the order of claims for liquidation

Answer 13

Expenses of receiver, Depositors, General Creditors, subordinated Creditors, Shareholders

Question 14

What are the 2 ways new ownership for institutions can happen

Answer 14

Clean bank, Whole Bank

Question 15

What is the Clean Bank situation

Answer 15

Clean Bank - Buyer can put troubled assets back to the FDIC

Question 16

What is Whole Bank

Answer 16

Buyer assums entire bank holding (aka Balance Sheet)

Question 17

What is the Moral Hazard scenario

Answer 17

Banks or people know they are insurred so they take on more risk

Question 18

How do insurance agencies act as policy in terms of deposit insurance

Answer 18

Depositors are no longer worried because they are inssured. So the Agencies try to protech the public because its their balance sheet that is at risk. Regular examination of their comapny occurs because of this

Question 19

How do stakeholders and creditors act as police in terms of deposits

Answer 19

There are no insurance for them. So if the bank is taking on increased risk, they would demand a higehr premium which balanes it

Question 20

Explain Basel III

Answer 20

As a result of the financial crisis, there was increased capital and liquidyt requirements for banks. In general the vasal act tried to address capital adequacy of banks

Question 21

WHat does each aconym is CAMELS stand for

Answer 21

Capital Adequacy, Asset Quality, Managment Compenty, Earnings, Liquidity, Sensitivity to Market Risk