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Explain how financial intermediaries reduce
a. Adverse selection; and
b. Moral hazard.
Step by step
Solved in 2 steps
- What are the basic risk faced by financial intermediaries? Discuss each throughly.In what way might consumer protection regulationsnegatively affect a financial intermediary’s profits?Can you think of a positive effect of such regulationson profits?Would you recommend the adoption of a system ofdeposit insurance, like the FDIC in the United States, ina country with weak institutions, prevalent corruption,and ineffective regulation of the financial sector?
- Which is NOT a common characteristic of financial intermediaries? *A. None of the choices.B. Offers secure storage for their clients' assets.C. Having a diversified portfolio of investments.D. Clients are given investment advice as to which investments are profitable.E. The risks posed by various financial intermediaries are the same.(b) Discuss the roles of financial intermediaries in solving adverse selection and moral hazard.Support your answers with real-life business examples.How does a general increase in uncertainty as a resultof the failure of a major financial institution lead to anincrease in adverse selection and moral hazard problem
- Why would haircuts on collateral increase sharply during a financial crisis? How would this lead to fire saleson assets?What are the transaction costs problems facing financialorganizations? Explain how financial intermediaries canhelp reduce these problems.Summarize the government policies thatreduce the likelihoodof financial crisesin emerging marketcountries.
- “In a world without information costs and transactioncosts, financial intermediaries would not exist.” Is thisstatement true, false, or uncertain? Explain your answer.How can the existence of asymmetric information providea rationale for government regulation of financial markets?Discuss the Basic Puzzle in Financial Structure around the Globe. What is Lemon Problem? How the Financial system is influenced by Adverse Selection?