The Regulation and Reform of the American Banking System

Topics: Bank, Bank regulation, Bank run Pages: 22 (4528 words) Published: April 20, 2015


FINA 650

Final Work




Difference in bank regulation between the United States and Dominican Republic3 Asymmetric information and banking regulation6
Moral Hazard and the Government Safety Net8
Too Big to Fail9
Assessment of risk management14
Disclosure requirements16
Consumer protection16
Restrictions on competition16
International banking regulation18
Problems is regulating international banking19
Banking Regulation in Dominican Republic19

Difference in Bank Regulation Between The United States And Dominican Republic

Banking regulations viewed for a positive impact on the protection of depositors and to the institution as such, this important action that banking institutions are more supervision, and individual staff members are more likely to do their work carefully and honesty. Banking regulations existed since 1869 in the Dominican Republic, since for DR is very important that they find these methods by high uncertainty by the banking authorities in DR. Asymmetric Information and Banking Regulation

The fact that different parties in a financial contract do not have the same information leads to adverse selection and moral hazard problems that have an important impact on our financial system. The concepts of asymmetric information, adverse selection, and moral hazard are especially usefully useful in understanding why government has chosen the form of baking regulation the people see in the United States and in other countries. There are eight basic categories of baking regulation: the government safety net, restrictions on bank asset holding, capital requirements, chartering and bank examination, assessment of risk management, disclosure requirements, consumer protection, and restrictions on competition (Mishkin & Eakins, 2009). Government Safety Net: Deposit Insurance and the FDI

Banks are particularly well suited to solving adverse selection and moral hazard problems because they make private loans that help avoid the free-rider problem. However, this solution to the free-rider problem creates another asymmetric information problem, because depositors lack information about the quality of these private loans. This asymmetric information problem leads to two reasons why the banking system might not function well (Mishkin & Eakins, 2009). First, before the FDIC started operations in 1934, a bank failure (in which a bank is unable to meet its obligations to pay its depositors and other creditors and so must go out of business) meant that depositors would have to wait to get their deposit funds until the bank was liquidated (until its assets had been turned into cash); at that time, they would be paid only a fraction of the value of their deposits (Mishkin & Eakins, 2009). Unable to learn if bank managers were taking on too much risk or were outright crooks, depositors would be reluctant to put money in the bank, thus making banking institutions less viable. Second, depositor’s lack of information about the quality of bank assets can lead to bank panics, which, can have serious harmful consequences for the economy. To see this, consider the following situation. There is no deposit insurance, and an adverse shock hits the economy. As a result of the shock, 5% of the banks have such large losses on loans that they become insolvent (have a negative net worth and so are bankrupt). Because of asymmetric information, depositors are unable to tell whether their bank is a good bank or one of the 5% that are insolvent. Depositors at bad and good banks recognize that they may not get back 100 cents on the dollar for their deposits and will want to with draw them. Indeed, because banks operate on a sequential service constraint (a first...

References: Mishkin, F.S. & Eakins, S.G. (2009). Financial markets and institutions (6th ed.). Boston, MA: Pearson Prentice Hall.
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