ways financial intermediaries can reduce transactions costs correct answers - economies of scale
- expertise
- liquidity services
lemons problem correct answers lender is unable to tell good borrowers from bad borrowers
solutions to eliminate information asymmetry correct answers - private ...
ways financial intermediaries can reduce transacti
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FINC 4320
FINC 4320
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FINC 4320 Final || Already Graded A+.
ways financial intermediaries can reduce transactions costs correct answers - economies of scale
- expertise
- liquidity services
lemons problem correct answers lender is unable to tell good borrowers from bad borrowers
solutions to eliminate information asymmetry correct answers - private production & sale of
information
- gov't regulation
- financial intermediation
- collateral
- net worth
ways to solve moral hazard problems correct answers - monitoring
- gov't regulation
- financial intermediation
- debt contracts
collateral correct answers reduces the losses when default occurs which reduces the adverse
selection problem
monitoring and enforcement of restrictive covenants correct answers - to discourage bad
behavior
- to encourage good behavior
- to protect collateral
- to ensure information is provided to lender
solving moral hazard in debt contracts correct answers - net worth and collateral
- monitoring and enforcement of restrictive covenants
- financial intermediation
causes of financial crises correct answers - increases in interest rates
- increases in uncertainty
- asset market effects on balance sheets
- problems in the banking sector
- government fiscal imbalances
conflicts of interest correct answers - underwriting and research in investment banking
- auditing and consulting in accounting firms
- credit assessment and consulting in credit-rating agencies
, asset management correct answers keeping risk at an acceptable level by reducing default risk
and diversifying the asset portfolio
liability management correct answers acquiring funds at a reasonably low cost
capital adequacy management correct answers maintaining sufficient amounts of bank capital
3 reasons to hold sufficient capital correct answers 1. minimum bank capital amounts are
required by regulators
2. bank capital is a safeguard against bank failure aka insolvency
3. amount of capital affects ROE
3 ways to increase bank capital relative to assets correct answers 1. sell stock
2. lower dividends
3. decrease bank assets ad liabilities by equal amounts
liabilities correct answers sources of funds obtained by borrowing or taking in deposits
assets correct answers uses of funds for things like buying securities or making loans
main types of bank assets correct answers - reserves
- cash items in process of collection
- deposits at other banks
- securities
- loans
- other assets
main types of bank liabilities correct answers - checkable deposits
- non-transaction deposits
- borrowings
- bank capital
what banks make profits through correct answers asset transformation
what must a bank do to be profitable correct answers they must earn a higher rate of return on
assets than it pays on liabilities
deposit insurance and the FDIC correct answers set up in 1934 as a solution to the bank panics
adverse selection correct answers people who like to take big risks or even crooked people may
be attracted to bank management
moral hazard correct answers bank managers may take on high risk, knowing that gov't will bail
it out if bets go wrong
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