2) During the financial crisis of 2007 to 2008, the Federal Reserve attempted to calm markets by...
Question:
2) During the financial crisis of 2007 to 2008, the Federal Reserve attempted to calm markets by increasing liquidity and serving as a lender of last resort. The U.S. government also bailed out Fannie Mae and Freddie Mac along with numerous commercial banks, insurance companies, and investment banks.
a) What are the strengths of lender of last resort programs and government bailouts?
b) Do the lender of last resort and government bailouts lead to any additional problems?
3) The Basel III accord is an international regulatory accord that introduced a set of reforms designed to improve the regulation, supervision, and risk management within the banking sector. The agreements under the Basel III are responses to the financial crisis of 2007 to 2008.
a) Why didn't the Basel II accord prevent the financial crisis of 2007 to 2008?
b) Compared with Basel II, what are the key improvements that Basel III accord has made?
4) An important aspect of banking regulation is capital adequacy regulation. Capital adequacy regulation is particularly important because deposit insurance and other elements of the federal safety net provide banks with an incentive to increase their leverage beyond what the market - in the absence of depositor protection - would permit.
a) What is the relationship between capital adequacy and the stability of the financial system? b) Why are regulators concerned with the levels of capital held by a financial institution compared to a non-financial institution?
c) What is the disadvantage of a required capital ratio that is too high?
5) The Dodd-Frank Wall Street Reform and Consumer Protection Act is a massive piece of financial reform legislation passed during the Obama administration in 2010 as a response to the financial crisis of 2007 to 2008.
a) Can you briefly list some of the main proposals in Dodd-Frank Act?
b) For each proposal you listed, discuss who is likely to support the changes and why.
c) For each proposal you listed, discuss who is likely to fight against the changes and why.