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Financial Institution Regulations and Loopholes

1. Financial institutions are subject to regulations to ensure that they do not take excessive risk and can safely facilitate the flow of funds through financial markets. Nevertheless, during the credit crisis, individuals were concerned about using financial institutions to facilitate their financial transactions. Why do you think the existing regulations were ineffective at ensuring a safe financial system?
2. Should tax payers be asked to bailout out financial institutions that make decisions which do not pan out and place the institution in a position of insolvency? Why or why not?
3. Does a large fiscal budget deficit result in higher interest rates? Support the position you take.
4. Do you think that computer technology will cause financial intermediaries to become extinct? Why or why not?

Solution Preview

1. I think that the existing regulations were ineffective in ensuring a safe financial system, due to the fact that there are a variety of different loopholes through which financial institutions can take more excessive risks within financial markets. In areas of the law where financial regulations are not cut and dry, financial institutional leadership can find methodology by which to legally utilize banking resources for investments that have the purpose of increasing the profitability of the bank through the interest that is accumulated through these transactions, but these loans and investments add risks to the financial institution, as well as the individuals who have their money deposited within these institutions. The mortgage lending that includes increasing mortgage payments over time for individuals would not have qualified for standard Morgage loans, and the resulting high level of foreclosures is an example of this ...