Monday, January 6, 2020

The Financial Crisis Of 2013-14 - 1958 Words

Part 1: Defending the idea of implementing regulations to avoid or limit the consequences of too big to fail During the financial crisis of 2007-2008 too big to fail was a major problem for some economist. They believed that size limit could have prevented the financial crisis, researchers suggested that the government could also raise the cost of providing banking services, this will prevent big banks from exploiting economies of scale. A production process is considered economies of scale if the cost of producing one unit of output falls with the increase in the amount produced. Bankers often use economies of scale to justify mergers and acquisitions. Treating the banks as too big to fail generated economies of scale by lowering the†¦show more content†¦Banking is one of the most regulated industries, risk management is the most important aspect. More specifically, risk management techniques that reduce volatility i.e hedging risk. Before the crisis, value added of derivat ives was necessary for the process of wealth creation. Higher use of derivatives corresponds to greater systematic risk, there is a positive relationship between the derivatives and risk in trading as well as hedging. The figures below shows that this positive relationship is stronger for the large business holding companies (BHC) than for small BHC. This indicates that the large BCH with operations in brokerage, asset management and trading primarily uses derivatives to derive their gains further exposing them to systematic risk. The small BCH results indicate that they use derivative to a larger extent to hedge against the systematic risk. Policy implications was imperative, caution was needed regarding the BHCs’ involvement in derivatives business, and limiting the use of these derivatives. Regulations aimed to separate commercial banks from risky banking activities. The regulators wanted to reverse the positive relationship between derivatives and systematic risk, at the same time they wanted to maintain the bank’s efficiency. Part 2: Opposing the idea of implementing regulations to avoid or limit the consequences of too big to fail The financial crisis of 2007-2008 revealed the connection between

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