Financial market failure Flashcards
(7 cards)
1
Q
What is financial market failure?
A
Where the financial markets fail to allocate financial products of the socially optimum level of output.
2
Q
What is the generic group causes of financial market failure?
A
- Excessive risk leading to overall collapse of the financial system
- Collusion and fixing interest rates
3
Q
How does excessive risk occur?
A
- assets are being created then bought and sold which is risky and those assets are likely to go bad. (Overconsumption of risk assets).
4
Q
How does excessive risk lead to overall financial market failure?
A
- systemic risk is more likely, as one bank failing could lead to a domino effect. leads to loss of confidence and faith in banking system (bad as banks are the backbone to UK economy)
- Recession - lost incomes, jobs, output, financial crisis
- bank bailouts - impacts tax payers and makes them bare the cost.
5
Q
How does collusion occur?
A
Financial market agents or banks collude together to fix interest rates or exchange rates. This will lead to monopoly pricing hurting society.
6
Q
What do some people say about the impact of deregulation of the financial market?
A
Deregulation increases financial market failure and systemic risk
7
Q
How does deregulation cause financial market failures?
A
- Taking away capital/ liquidity ratios
- Scrapping reserve requirements
- Using commercial banks funds for investment banks activities (investment banks and commercial banks could be under one firm which is risky - legalised 1980’s).
