Exam 25: Exploring the Complexities of Financial Services and Regulation

Which of the following are prospects for financial markets from breakthroughs in communications technology?

The following financial firms were judged too big to fail and were bailed out by the U.S. government: Bank of America, American International Group, and Citigroup, as well as Lehman brothers.

Securitization techniques, if used inappropriately, can actually increase risk for lenders and investors.

Computers and/or phones with access to the Internet have allowed almost instantaneous transmission and reception of financial data and information, including the transfer of funds.

Loss of public confidence not only produces adverse consequences for individual institutions but also damages the efficiency of financial market processes.

The Internet offers banks and other financial-service firms a low-cost channel through which to advertise their services and offer service packages.

One of the most important ways the private market is dealing with greater risk of failure today is by encouraging the development of larger financial institutions that diversify geographically and by product line.

A way to potentially mitigate the moral hazard problem caused by deposit insurance is to charge member fees that adjust to the level of risk that the institution undertakes.

Please explain what the terms consolidation and convergence mean.

Governments will likely continue deregulating the financial industry, especially the areas concerned with derivatives trading.

An imprudently implemented risk-management tool can actually lead to greater risk for both borrowers and lenders.

The "Subsidiary Model" permitted under the new Gramm-Leach-Bliley Act allows one financial service provider (e.g., a bank) to sell other services through its own subsidiary firms.

In 1991, the U.S. Congress passed the FDIC Improvement Act, requiring regular full-scope, on-site examination of each U.S.-insured depository institution.

While mergers among many different types of financial institutions allow the institution to offer a wide variety of products and services, diversifying themselves against market risk, such mergers can also lead to firms that may be judged to pose "systemic risk" across the entire financial market.

During the 1990s interstate banking became permissible in the United States under federal and state laws.

The life-cycle hypothesis suggests that, as individuals grow older, they reduce their expectations of life-time income, mainly because their expected time in the labor force is decreasing.

In order to promote public confidence, government and the private sector can provide the following remedies:

With the subsidiary approach, the earnings or losses of each subsidiary company also affect the parent firm.