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Akash answered on
Nov 07 2021
THE ECONOMICS OF FINANCIAL INSTITUTIONS
Table of Contents
1. 3
2. 4
3. 4
4. 4
5. 5
6. 6
References 8
1.
The main objective for regulating the banking system is to ensure safety in operational work of the financial sector, to protect the banking confidentiality. Moreover, banks are regulated for keeping the stability in the market along with the equitable and fair market for the customers in their financial transactions (Agresti & Giron 2019). Banking systems may be controlled by government or by the non-governmental organisations. The structure of the banking system is been influenced by the different financial regulation, as per the increasing compliances. Additionally, it constitutes the financial law and other market practices.
The banking system is regulated by several federal and state regulatory along with the Federal Reserve. The state of various departments also regulates financial institutions like, The Office of the Comptroller of Cu
ency (OCC), The Federal Deposit Insurance Corporation (FDIC) The Office of Thrift Supervision (OTS). Banking system acts under the rules, which are mainly made to prevent the inefficient development, which can inte
upt in the smooth functioning of the whole banking system.
A financial institution plays a very important role in several areas:
i. Maturity and denominational intermediation- These intermediation are licensed to take the deposits, giving of loans and also they provide many other services to the general public. They play a great role to the economic stability of a country and also face high regulations.
ii. Reducing the principal-agency problem faced by corporations- principal agency problem is a conflict between the person and the representative who is authorised to act on his behalf. The financial institution resolves the problem of the principal- agency and improves the flow of information.
iii. Risk transfer- financial institutions usually focuses in the practices of risk management, so as to get exposures to risk and also to protect the value of the assets. Financial institutions has incorporations of different kinds of risks such as credit risk, market risk, operational risk, liquidity risk, reputational risk, systematic risk and several others. Some financial institutions manage risk, while others contract so as to avoid them.
iv. Lowering in participation cost- Financial institutions mainly tries to lower the participation cost as to save the cost of the intermediary of both the parties in the financial transactions. If we, think about a climate finance financial intermediaries mainly refers as a private sector intermediaries. Moreover, such intermediaries are banks, leasing companies, insurance and micro credit providers.
2.
According to Berger et al. (2016), the interest rates of the banks are analysed mainly by the three forces. Federal Reserve is the first force that sets the fed rate, which affects the short term and also the variable interest rates. The second force is the demands of the investors, which affects the fixed and long term interest rates. Additionally, banking industry also acts as a force, which offers loans and also the mortgages which can alter the interest rates depending on the requirements of the business. The strategies which can be employed to deal with interest rate risk are not to take out any of the variable rate loans. Moreover, by doing such it can provide the potential benefit to drop the rate below the fixed rate.
Volker’s rule is been named after the former chairman named Paul Volker. Volker’s rule is a federal regulation which prohibits the banks to make certain investment with the own account, along with...