Market Failure In Financial Market Flashcards
Types of MF (5)
Asymmetric info
Moral hazard
Externalities
Speculation
Market rigging
Asymmetric info (2)
Banks have more info than consumers
Exmaple = asset bubble
Exmaple of asymmetric info (4)
Northern Rock not aware of toxins assets sold to them by USA banks
This is because they weren’t doing their due diligence
BoA was hiding toxins loans at boots of pile = NR was lazy and are liable
Since 2008 = much more careful
What are toxic assets
They WILL default
What externalities
Spill over effects from 3rd party = uninvolved
Example of externalities (2)
2008 nationalisation = taxes went up to pay for it
Retirement age is now 78 = massive externality
What is systematic risk (2)
Runs through the whole industry
NR knows if something goes wrong gov will bail them out = systematic risk
What is moral hazard (3)
Risk that borrower does something that lender deems undesirable
Insurance is an example = borrower may be less careful
NR / RBS knows LoLR is always there
Speculation what (3)
HYSTERIA = asset bubble is created
Houses + crypto currency = spike in value but fallen and then rise
If asset is big (houses) = recession
What is market bubble (5+)
occurs when price of an asset is predicted to rise significantly
Causes it to be traded more + demand exceeds supply = price rises beyond the intrinsic value
The bubble then ‘bursts’ when the price steeply and suddenly falls to its ordinary level
Creates panic and investors try and sell their assets
Results in a loss of confidence + can lead to economic decline or a depression
What is market rigging (2)
Firms come together to interfere in free market equilibrium = collusion
Gain an unfair advantage
Example of market rigging (4)
The Libor Scandal - London inter-bank official rate = rate at which banks borrow from each other (not consumers)
It was discovered that banks were inflating or deflating their interest rates
Wanted to make a profit from trade or make them more financially reliable
Loans such as mortgages + student loans use Libor as a reference rate
Liberty scandal how (2(
Banks found out liberty IR before it was released and manipulated the number of their IR
Huge profits gained
