ECO 205 Lecture Notes - Lecture 10: Arbitrage, Financial Regulation, Adverse Selection

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27 May 2020
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This chapter develops an economic analysis of financial regulation. Identify the reasons for and forms of a government safety net in financial markets. List and summarize the types of financial regulation and how each reduces asymmetric information problems. Asymmetric information as a rationale for financial regulation. Bank panics and the need for deposit insurance: Fdic: short circuits bank failures and contagion effect. Purchase and assumption method (typically more costly for the fdic) Lending from the central bank to troubled institutions (lender of last resort) The answer seems to be no. research at the world bank seems to answer no, since on average, the adoption of explicit government deposit insurance is associated with less banking sector stability and a higher incidence of banking crises. Furthermore, on average, deposit insurance seems to retard financial development. Financial institutions have an incentive to take on greater risk. Depositors have little reason to monitor financial institutions.

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