07-16-2014, 02:44 AM
[B]MGT411 Money & Banking GDB No 2 Solution Ideas Spring 2014 Due Date: July 17, 2014
Topic for Discussion: “THE GOVERNMENT SAFETY NET"
THE GOVERNMENT SAFETY NET
There are three reasons for the government to get involved in the financial system To protect investors To protect bank customers from monopolistic exploitation To ensure the stability of the financial system Investor Protection Small investors are unable to judge the soundness of financial institutions In practice only force of law ensure the bank's integrity, thus investors rely on government to protect them from mismanagement and malfeasance Protection from monopolistic exploitation Monopolists exploit their customers by raising prices to earn unwarranted profits Government intervenes to prevent firms in an industry from becoming too large. The same mayapply to banks as wellStability of financial systemLiquidity risk and information asymmetry indicate the instability of financial systemFinancial institution can create and destroy the value of its assets in a very short period, and asingle firm's failure can bring down the whole systemGovernment officials employ a combination of strategies to protect investors and ensure thestability of the financial systemThey provide the safety net to insure small depositorsThey operate as the lender of last resort[/B]