Questions and Problem Set 5
Quinnipiac University
School of Business
FIN350 Global Financial Markets & Institutions
Questions & Problems Set 5
Spring 2013
1. Explain why commercial banks are regulated and describe the major pieces of legislation enacted to prevent bank failures.
Financial institutions are regulated because they provide products and services that the economy needs to function efficiently. Also they function in an environment where there is a great deal of asymmetric information, so they help in the screening process. Another reason why banks are regulated is to limit predatory lending practices, for example charging excessively high interest rates or imposing unreasonable conditions and penalties. A final reason why financial institutions are regulated is that some of the profits earned by financial institutions can be attributed to these financial institutions being able to create money and borrow at low costs because of explicit or implicit government guarantees. Because of this politicians often try to convince financial institutions to invest in government securities, making loans to certain classes that wouldn’t normally qualify, and making loans at lower than normal interest rates. Commercial banks are regulated because policy makers believe that the public will suffer a greater loss than the individual loss that the banks would experience if they were to go under. Due to this Congress has enacted many different pieces of legislation to prevent banks from failing. Some of the major pieces of legislation are The National Banking Act 1863, The Federal Reserve Act 1913, McFadden Pepper 1928, The Banking Act of 1933 (Glass Steagall Act), Federal Deposit Insurance Corporation 1935, Riegle- Neal 1994 (repealed McFadden Pepper), Gramm–Leach–Bliley Act 1999 (repealed Glass Steagall), Dod Frank Act 2010.
2. What are the major sources of bank funds? How do these differ between large and small banks?
The principal source of funds for most
School of Business
FIN350 Global Financial Markets & Institutions
Questions & Problems Set 5
Spring 2013
1. Explain why commercial banks are regulated and describe the major pieces of legislation enacted to prevent bank failures.
Financial institutions are regulated because they provide products and services that the economy needs to function efficiently. Also they function in an environment where there is a great deal of asymmetric information, so they help in the screening process. Another reason why banks are regulated is to limit predatory lending practices, for example charging excessively high interest rates or imposing unreasonable conditions and penalties. A final reason why financial institutions are regulated is that some of the profits earned by financial institutions can be attributed to these financial institutions being able to create money and borrow at low costs because of explicit or implicit government guarantees. Because of this politicians often try to convince financial institutions to invest in government securities, making loans to certain classes that wouldn’t normally qualify, and making loans at lower than normal interest rates. Commercial banks are regulated because policy makers believe that the public will suffer a greater loss than the individual loss that the banks would experience if they were to go under. Due to this Congress has enacted many different pieces of legislation to prevent banks from failing. Some of the major pieces of legislation are The National Banking Act 1863, The Federal Reserve Act 1913, McFadden Pepper 1928, The Banking Act of 1933 (Glass Steagall Act), Federal Deposit Insurance Corporation 1935, Riegle- Neal 1994 (repealed McFadden Pepper), Gramm–Leach–Bliley Act 1999 (repealed Glass Steagall), Dod Frank Act 2010.
2. What are the major sources of bank funds? How do these differ between large and small banks?
The principal source of funds for most