Exam 25: Exploring the Complexities of Financial Services and Regulation

Managers of successful financial institutions today must be intimately familiar with both the benefits and drawbacks of risk-management tools such as:

Government regulation is likely to increase especially when it comes to securitized assets like mortgage backed securities and derivatives trading.

The success of mortgage-backed securities over the past three decades demonstrate that a financial institution can more easily take some of the loans it has made and use them as collateral for borrowing money through the sale of securities.

One problem with government insurance that must be faced is how to avoid distorting risk-taking decisions by the managers of privately owned financial institutions.

Due to the increasing globalization of the financial and economic system, economic conditions within any one nation have become increasingly sensitive to foreign developments and harder for domestic policymakers to control or influence.

Greater disclosure of information works to facilitate the "discipline of the market" and allows the industry to more effectively serve as its own regulator.

Using the the description or the definition below, identify each of the key terms and concepts presented in this chapter a. Allowing different regulatory agencies to examine the particular elements or components of a financial firm that they know the most about with the reports being pooled and given to an overall or umbrella regulatory supervisor. b. Different nations agreeing on common regulatory rules. c. Requiring financial-service firms to divulge more information to the customer about the features and terms of a financial service. d. Protecting customers' personal information and allowing customers to decide if they wish their personal data to be shared among different financial-service providers. e. Using law and regulation to promote competition among financial-service firms by equalizing the rules to which different types of financial firms are subjected.

Government-provided insurance can lead to a moral hazard problem in which agents (such as managers of an insured financial firm) take advantage of a guarantee underwritten by principals (in this case, the nation's taxpayers).

Convergence is when firms from the same industry merge to form a larger institution.

The radiofrequency identification card (RFID):

The process of increasing financial disclosure in the market is referred to as "harmonization."

According to the FDIC Improvement Act passed by the U.S. Congress in 1991, the federally insured depository institutions must:

Recently, the upper limit on account balances receiving FDIC insurance increased $100,000 to $350.000.

In the holding company, different affiliated firms offer different groups of services but all are owned by one controlling company at the top of the organization.

Consolidation is when firms from two or more different financial industries combine their operations.

The Federal Reserve has no limits upon how much in total a payments-system participant can owe to everyone else who belongs to the same clearing system.

Capital market investors can only approximately price the securities of financial institutions that do not fully disclose their financial condition and prospects.

Prior to the 2007-2009 credit crisis, financial-services competition was increasingly taking the place of government rules in the hope that the public will benefit in terms of more convenient services at lower cost.

List the principal trends in the economy, society and population that you believe will affect financial institutions and financial services the most over the next five years. How about the next 10 years? For each trend listed, describe at least one response the management of a financial service firm might make to that trend.

Because cost control and productivity will be key factors for the future success of financial-service firms, financial institutions with extensive service delivery systems (including electronic delivery channels) already in place will have a competitive advantage.