Market Failure In The Financial Sector

Question 1

What is a moral hazard

Answer 1

A moral hazard exists where an individual or organisation takes more risks because they know that they are covered by insurance, or they expect that the government will protect them

Question 2

What is a speculative bubble

Answer 2

A sharp and steep rise in asset prices which is usually fuelled by high levels of speculative demand

Question 3

What can cause a speculative bubble

Answer 3

Behavioural factors such as herd behaviour
Exaggerated expectations of future price rises
Irrational exuberance of investors
Period of very low monetary policy interest rates

Question 4

Barriers to entry into commercial banking

Answer 4

Regulatory barriers
Natural or intrinsic barriers to entry
Strategic advantages of larger banks
First mover advantages

Question 5

What is systemic risk

Answer 5

Possibility that an event at the micro level of an individual banks / insurance company could then trigger instability or collapse an industry or economy