Question

The dynamics of asset price bubbles weaken financial regulation just as financial markets begin to overheat and the risk of crisis spikes. At the same time, the failure of financial regulations adds further fuel to a bubble.

a) Explain the main features of financial bubbles.

b) Discuss the reasons for and against the prudential regulation of banks

Answer 1

1. Features of the financial bubbles are as follows-

A. Irrational and Exhuberant asset pricing for sustainable longer period of time.

B. There is very high level of greed in the assets purchasing

C. There will be a very high level of liquidity which will fuel the rally of the Bull market.

D. Investors will be buying out various kinds of assets due to to fear of missing out.

E. There will be very high stock markets which will be leading to multi year highs

F. There will be Fueling of the stock markets through easing of the monetary policies for a larger period

2. Prudential regulation of bank will help in managing the Assets of the bank to the large extent and providing them with quality Assets and there will be also very high security which will be provided to various depositors of the bank and it will also mean that there will be a lower risk related to any kind of financial emergency.

Prudential regulation of banks will also lead into unwanted interference into the management of the banking regulation and it will also mean that there will be lower chances on the Bank management to make higher profits because they will be regulated regularly.