Through regulation and supervision, government officials reduce the amount of risk banks can take, lowering their changes of failure. Regulators and supervisors
A. Restrict competition.
B. Restrict the types of assets banks can hold.
C. Require banks to hold minimim levels of capital.
D. Require banks to disclose their fees o customers and their financial indicator to investors.
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Restricting competition is not going to reduce the chances of bank failure. It could be argued that a bank facing no competition and which is the only one available for people could actually increase the consequances of a failure substantially.
The other options of restricting the types of assets banks can hold, making them hold minimim levels of capital as cash or other liquid assets and ensuring that everything they do is declared to their investors would reduce the risk of failure to a large extent.
Yeah, restricting competition is always a bad idea. I'm more inclined to choose C and D: (C) a minimum level of reserve should always be maintained instead of risked, to hedge against inflation and other factors; (D) transparency in fees,especially today, is vital to honesty and customer trust.
I think a combination of both B and C would be best if you wanted to reduce the risk that banks could engage in as part of their practice. This would be something that would be particularly effective, as you could prevent banks from engaging in mortgages that are too risky and also reduce the chances that they have of going bust by ensuring they have a minimum amount of money in stock at all time.
I see that B and C are two equally important pieces of the answer to improve the stability of a bank. Ideally, banks should always have been doing this, but clearly, the lure of high returns on more risky assets got banks in the troubles they currently have.
I agree that B would be the best way to reduce risks to banks and to the people who invest in banks or have deposits in banks. D seems focused more on reducing risks to consumers. A seems irrelevant. C would be the step, after B, that seems most sensible.
I would say that best way to make banks reduce risk is to emphasize that they need to keep more in reserve (c). The government is trying to to this. However, there are two problems. First, interest rates are low. If interest rates were at 6%, then banks would be in trouble. So, we have an unrealistic situation. Second, banks in places like China are doing the opposite of (c). And as banks are now interrelated, there seems to be problems in the horizon.
It depends, in some ways, on the relationship of B to C, on other words, the amount of capital banks hold in relation to their liabilities. In terms of answering this question however, regulators certainly have an interest in restricting the types of assets banks can hold, but I would argue that the capital requirements are the most basic form of risk minimization, and indeed are required by law.
Are you asking which of these things regulators could do to reduce the amount of risks banks can take? If so, the thing most likely to reduce risk would be B. Of course, C would reduce risk somewhat, but B would reduce it more if banks were banned from holding risky assets like the complex mortgage-backed securities that helped cause the financial crisis of 2008.
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