The meaning of money - bank regulation - Capital requirements

4 important questions on The meaning of money - bank regulation - Capital requirements

What is one problem created by depositor insurance? How?

  1. Banks take risky investments.
  2. since depositors are protected from loss they have no incenvtive to monitor their banks financial health
  3. bank owners have an incentive to engage in overly risky investments, such as speculative loans at higher interest.
    • if all goes well the bank owners make large profits
    • if all goes badly the federal deposit insurance covers the loss   

What are assets that can be used to satisfy the capital requirements?

  • They include
    • common shareholder's equity
    • noncumulative perpetual preferred shares  

What does the government use to reduce the incentives of banks engaging in overly risky investments? How does it work?

  • Capital requirements
  • regulators require that bank owners hold substantially more assets than the value of their banks' deposits
  • that way a bank will still have assets greater than its deposits, even if some of its loans go bad, and it losses will be paid by bank's owners assets instead of by the government 
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In what 4 forms do banks hold most of their assets?

  • Loans
  • mortgages loans
  • loans to consumers and businesses
  • government treasury bills and bonds   

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