WHY DO BANKS NEED REGULATION
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
Why is bank regulation considered essential in a modern economy?
Banks hold public deposits and perform critical intermediation functions; without regulation, moral hazard and information asymmetry can lead to systemic failures that harm depositors and the broader economy.
What is the concept of 'contagion' in banking and why does it necessitate regulation?
Failure of one bank rapidly spreads distress to other banks.
What is the primary rationale for prudential regulation of banks?
Prudential regulation aims to ensure the safety and soundness of individual banks, thereby protecting depositors and maintaining confidence in the financial system.
What is a 'bank run' and how does it illustrate the need for regulation?
Mass simultaneous withdrawal by depositors causing bank insolvency.
What is systemic risk and why does it justify bank regulation?
Systemic risk is the risk that the failure of one bank triggers a cascade of failures across the financial system; because banks are interconnected, regulation is needed to prevent contagion effects.
What is 'fractional reserve banking' and why does it create vulnerability requiring regulation?
Banks hold only a fraction of deposits as reserves, creating liquidity risk.
What is meant by 'moral hazard' in the context of bank regulation?
Moral hazard arises when banks take excessive risks knowing that deposit insurance or government bailouts will cover losses, making regulatory oversight necessary to curb reckless behaviour.
What is the 'safety net' concept in banking regulation?
Government guarantees protecting depositors and ensuring financial system stability.
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