What are some of limitations to basel and basel two accords

Assignment Help Macroeconomics

Reference no: EM133743149

Assignment: Economics Limiting the Amount of Deposit Insurance

Part I

A. Do you think that eliminating or limiting the amount of deposit insurance would be a good idea? Explain your answer.

B. Suppose that you have $300,000 in deposits at a bank. After careful consideration, the FDIC decides that this bank is now insolvent. Which method would you like to see the FDIC apply? What if your deposit were $200,000?

C. At the height of the global financial crisis in October 2008, the U.S. Treasury forced nine of the largest U.S. banks to accept capital injections in exchange for nonvoting ownership stock, even though some of the banks did not need the capital and did not want to participate. What could be the Treasury's rationale for doing this?

D. What are some of the limitations to the Basel and Basel 2 Accords? How does the Basel 3 Accord attempt to address these limitations?

E. Why might more competition in financial markets be a bad idea? Would restrictions on competition be a better idea? Why or why not?

F. Consider a failing bank. A deposit of $350,000 is worth how much to the depositor if the FDIC uses the payoff method given the typical recovery rate? How much is the same deposit worth to the depositor if the purchase-and-assumption method is used? Which is more costly to taxpayers?

G. Oldhat Financial starts its first day of operations with $9 million in capital. A total of $130 million in checkable deposits is received. The bank makes a $25 million commercial loan and another $50 million in mortgages with the following terms: 200 standard, 30-year, fixed rate mortgages with a nominal annual rate of 5.25%, each for $250,000. Assume that required reserves are 8%.

1. What does the bank balance sheet look like?

2. How well capitalized is the bank?

3. Calculate the risk-weighted assets and risk-weighted capital ratio after Oldhat's first day.

Part II

A. Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks?

1. National banks

2. Bank holding companies

3. Nonfederal Reserve member state banks

4. Federal Reserve member state banks

5. Federally chartered savings and loan associations

6. Federally chartered credit unions

B. "If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today." Is this statement true, false, or uncertain? Explain your answer.

C. How do sweep accounts and money market mutual funds allow banks to avoid reserve requirements?

D. Why have banks been losing income advantages on their assets in recent years?

E. Given the role of the loan originator in the securitization process of a mortgage loan described in the text, do you think the loan originator will be worried about the ability of a household to meet its monthly mortgage payments?

F. Why is there only two U.S. bank among the 10 largest banks in the world?

G. What has been the likely effect of the Gramm-Leach-Bliley Act on financial consolidation?

Part III

A. How does the concept of asymmetric information help to define a financial crisis?

B. How can the bursting of an asset-price bubble in the stock market help trigger a financial crisis?

C. How does the process of financial innovation impact the effectiveness of macroprudential regulation?

D. Why would haircuts on collateral increase sharply during a financial crisis? How would this lead to fire sales on assets?

E. What role did the shadow banking system play in the 2007-2009 financial crisis?

F. True, false, or uncertain: Deposit insurance always and everywhere prevents financial crises.

G. Describe two similarities and two differences between the United States' experiences during the Great Depression and the Great Recession financial crisis of 2007-2009.

H. What is a credit spread? Why do credit spreads rise significantly during a financial crisis?

Reference no: EM133743149

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