finaical regulation

Question 1

types of regulation

Answer 1

1) ban market rigging and ensure strong enforcement- less collusion
2)prevent sale of unsuitable products: protect consumers from products with excessive risks
3) max interest rates prevent exploitation
4) deregulation: more competition better borrowing i.r. and saving
5) deposit reg: protect consumer deposits in case of bank run
6) set limit on bank lending (cash ratios, liquidity ratios)

Question 2

cash ratios

Answer 2

cash ratio: cash assets(cash/reserves)/short term liabilities (deposits/short run borrowing)
-reg: impose or raise to prevent liq. crisis
-basel: none

Question 3

reserve requirements

Answer 3

fraction of deposits must be held by 10%
-impose/raise it
-prevent liquidity
-no basel rec (10% in USA)

Question 4

capital ratio

Answer 4

-capital/loans
-impose or raise
-prevent insolvency and thus systemic risk
-basel: 8%

Question 5

leverage ratio

Answer 5

-capital/loans and long term investments
-impose or raise
-prevent insolvency and systemic risk
-basel: 3% minimum all loans and comprehensive

Question 6

liquidity ratio

Answer 6

liquidity ratio: current assets (same as cash w money at short notice and investments)/current liabilities
-regulation impose or raise to pay back
-basel: 2015 60% increase by 10% to 2019
liquidity coverage ratios: 100% liquidity to cover liabilities in 30 years