Explain the Death Sprial Death spiral- What if only a few of the low risk people buy and all the high risk
people buy the premium would be too expensive. The premium increases when
few people purchase. Then because only a few people purchased the premium
increases even more
An insurance company is calculating the appropriate 3500
premium for a new customer. It estimates that the risk of a
heart attack is 5% and the cost would be $50,000. In
addition, it estimates the risk of a stroke is 1% with a cost
of $100,000. How much should it charge for insurance?
An insurance company is calculating the appropriate 125,000
premium for a new customer. It estimates that the risk of a
heart attack is 50% and the cost would be $50,000. In
addition, it estimates the risk of a stroke is 100% with a
cost of $100,000. How much should it charge for
insurance
In a pooling equilibrium, everyone pays ____ while in a .
separating equilibrium everyone pays ____. The same premium; different premiums
A few ways to solve adverse selection 1.)disclose all information ( this is unlikely)
2.)Provide colorectal to the lender if the lender defaults
3.)Net worth- If a firm defaults on a loan, the lender can make a claim against the
firm's net worth
Principal Agent Problem A principal hires someone (agent) to perform a task How do you know the agent
is doing a good job
Stock options as compensation for CEOs are designed to Asymmetric information
solve Moral hazard
Principal-agent problems are an example of ____ Asymmetric information
Moral hazard
A "death spiral" is always a potential problem in markets Adverse selection problem
with a
Debt holders prefer ____ risky projects than equity holders. less, moral hazard
This is a ______ problem.
In general, adverse selection is an issue ____ a transaction before, after
and moral hazard is an issue ____ a transaction.
In the last 30 years, the number of banks with branches increased, decreased
has ____, while the number of unit banks has _____
What type of charter do most banks have? State Charter
, McFadden Act early 20's and 30's hey I know u have a national charter but u have to pay attention to at least 1 thing
that the state regulators are doing. Some state charters says we will not allow any
branches. Because you had to pay attention to at least 1 state charter rule this
made a lot of small banks. The whole rational behind this act was that the big
banks would run the small banks out of business and this will hurt small
communities. But essential this says competition was bad but were going to
eliminate all competition. But this also says banks who are run really well wont be
able to grow like they should. This hurt the banking system. This made the small
banks very risky and prone to failure.
Glass Steagle- created the FDIC it basically means depositors no longer care about what the
bank does. They know for a fact I can still get my money because there is
insurance the other important thing this did was split commercial banks and
investment banks. It also limited the assets that banks hold.
Regulation Q prohibited banks paying interest on demand deposit. Lead to money market
funds.
3-6-3 rule Pay 3% interest to depositors, Charge 6% interest to borrowers put the difference
of 3 % in your pocket for commission. This limited competition
Riegel-Neal- the first real banking de regulation. They relax the restrictions on banks. It got rid
of the Mac Fadden act. Allowed banks to branch out as much as they want.
Gramm-Leach- Appealed Glass Steagle, Well one part of glass steagle. It said u no longer have
to have separate commercial, investment banking and insurance companies
separate. They can now have everything under one roof. This was thought to
cause economies of scale which says if I can make one thing at a fair price I can
produce something similar for a smaller price
Dodd Frank- Designated banks that are so big theyre too big to fail. This changed the
regulatory apparatus from a political point of view. If u gather deposits now you
cant do proprietary trading. Which says if were going to insure you, you can not
take risky investments. Big banks hate this
What act and did it increase or decrease regulations Early 90's = Glass Steagle and McFadden Act Increase regulation
Early 1900= 90's= reduced regulations
90's= 2010 after financial crisis= increase in restriction
2010 after financial crisis=
The U.S. has many banks because: many state charters outlawed bank branching.
Example of Assets for a bank Cash,Securities and loans
Example of Liabilities Deposits, and borrowings
federal funds market Banks with excess reserves will lend their surplus funds to banks that need them
though an interbank market called the federal funds market
A mortgage loan appears as a ____ on a bank's balance Asset; liability
sheet and as a ____ on a person's balance sheet
people buy the premium would be too expensive. The premium increases when
few people purchase. Then because only a few people purchased the premium
increases even more
An insurance company is calculating the appropriate 3500
premium for a new customer. It estimates that the risk of a
heart attack is 5% and the cost would be $50,000. In
addition, it estimates the risk of a stroke is 1% with a cost
of $100,000. How much should it charge for insurance?
An insurance company is calculating the appropriate 125,000
premium for a new customer. It estimates that the risk of a
heart attack is 50% and the cost would be $50,000. In
addition, it estimates the risk of a stroke is 100% with a
cost of $100,000. How much should it charge for
insurance
In a pooling equilibrium, everyone pays ____ while in a .
separating equilibrium everyone pays ____. The same premium; different premiums
A few ways to solve adverse selection 1.)disclose all information ( this is unlikely)
2.)Provide colorectal to the lender if the lender defaults
3.)Net worth- If a firm defaults on a loan, the lender can make a claim against the
firm's net worth
Principal Agent Problem A principal hires someone (agent) to perform a task How do you know the agent
is doing a good job
Stock options as compensation for CEOs are designed to Asymmetric information
solve Moral hazard
Principal-agent problems are an example of ____ Asymmetric information
Moral hazard
A "death spiral" is always a potential problem in markets Adverse selection problem
with a
Debt holders prefer ____ risky projects than equity holders. less, moral hazard
This is a ______ problem.
In general, adverse selection is an issue ____ a transaction before, after
and moral hazard is an issue ____ a transaction.
In the last 30 years, the number of banks with branches increased, decreased
has ____, while the number of unit banks has _____
What type of charter do most banks have? State Charter
, McFadden Act early 20's and 30's hey I know u have a national charter but u have to pay attention to at least 1 thing
that the state regulators are doing. Some state charters says we will not allow any
branches. Because you had to pay attention to at least 1 state charter rule this
made a lot of small banks. The whole rational behind this act was that the big
banks would run the small banks out of business and this will hurt small
communities. But essential this says competition was bad but were going to
eliminate all competition. But this also says banks who are run really well wont be
able to grow like they should. This hurt the banking system. This made the small
banks very risky and prone to failure.
Glass Steagle- created the FDIC it basically means depositors no longer care about what the
bank does. They know for a fact I can still get my money because there is
insurance the other important thing this did was split commercial banks and
investment banks. It also limited the assets that banks hold.
Regulation Q prohibited banks paying interest on demand deposit. Lead to money market
funds.
3-6-3 rule Pay 3% interest to depositors, Charge 6% interest to borrowers put the difference
of 3 % in your pocket for commission. This limited competition
Riegel-Neal- the first real banking de regulation. They relax the restrictions on banks. It got rid
of the Mac Fadden act. Allowed banks to branch out as much as they want.
Gramm-Leach- Appealed Glass Steagle, Well one part of glass steagle. It said u no longer have
to have separate commercial, investment banking and insurance companies
separate. They can now have everything under one roof. This was thought to
cause economies of scale which says if I can make one thing at a fair price I can
produce something similar for a smaller price
Dodd Frank- Designated banks that are so big theyre too big to fail. This changed the
regulatory apparatus from a political point of view. If u gather deposits now you
cant do proprietary trading. Which says if were going to insure you, you can not
take risky investments. Big banks hate this
What act and did it increase or decrease regulations Early 90's = Glass Steagle and McFadden Act Increase regulation
Early 1900= 90's= reduced regulations
90's= 2010 after financial crisis= increase in restriction
2010 after financial crisis=
The U.S. has many banks because: many state charters outlawed bank branching.
Example of Assets for a bank Cash,Securities and loans
Example of Liabilities Deposits, and borrowings
federal funds market Banks with excess reserves will lend their surplus funds to banks that need them
though an interbank market called the federal funds market
A mortgage loan appears as a ____ on a bank's balance Asset; liability
sheet and as a ____ on a person's balance sheet
