FIN 133 University of California Davis Finance Questions

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Fuveyrl0211

Economics

FIN 133

University of California Davis

FIN

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1. Why are bank failures considered to have a greater impact upon the economy than other types of business failures? Do you agree with this conclusion? 2. What are the major lessons that have been learned from past bank failures? Do you think that history can or will repeat itself? 3. Which of the bank safety regulations enacted in the 1930's do you believe are most important in actually achieving bank safety? Which of the safety regulations would you classify as being anticompetitive? 4. What is moral hazard, and how is it created by deposit insurance? 5. Why did bank failures increase, with a lag, after deposit insurance became available to banks? What else contributed to the increase in bank failures in the 1980's? 6. How can an effective lender of last resort prevent financial panics from developing? Why was the Fed unable to prevent the Great Depression of the 1930's? 7. What are risk-based capital standards? What are they designed to do? 8. Why is capital adequacy more of a problem for commercial banks than for most other businesses? 9. Explain why bank regulators are so concerned about capital adequacy for the banking system.
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1. Why are bank failures considered to have a greater impact upon the economy than other types of
business failures? Do you agree with this conclusion?

Bank failures have a greater impact upon the economy than other
types of business failures because of their systemic nature. A
bank failure can result in a cascade of negative effects.
Consumers become concerned about the security of their deposits
and may withdraw their money from other banks. This can lead to
a run on the bank, which can cause the bank to become insolvent.
If a bank is rendered insolvent, it is forced to sell its assets
at distressed prices and may even be liquidated.
Yes, I agree with this conclusion. Bank failures have a greater
impact upon the economy than other types of business failures
due to their

2. What are the major lessons that have been learned from past bank failures? Do you think that
history can or will repeat itself?

The past few years have seen a string of bank failures,
including the demise of Lehman Brothers and Wachovia, both of
which were some of the largest banks in the country at the time.
While we have learned a lot from these failures and are better
prepared now, it is reasonable to assume that future crises will
occur. Any time there is an economic downturn, consumer spending
decreases, which affects the r...


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