Question

U.S. banks are currently banned from holding equities on their balance sheets.

For each alleged effect of the ban listed below, indicate whether it is cited by proponents or opponents of the ban.

	Arguments for Banning Banks from Holding Eequities	Arguments Against Banning Banks from Holding Equities
Shields banks from stock market downturns
Lowers the probability of contagion of financial market failures
Incentivizes banks to acquire riskier assets to compete with European banks
Shifts investors’ focus to foreign banks

Answer 1

Arguments for Banning Banks from Holding Equities

· Shields banks from stock market downturns: The banks have been banned from holding equities on their balance sheet because when the markets volatility increase equities becomes very risky and the probability of loosing money is high in those circumstances.

· Lowers the probability of contagion of financial market failures: The contagion is the spread of risk from one bank to another, when one bank defaults on its obligation it can lead to a series of other defaults where the depositors are defaulting, this can lead to serious consequences for the economy.

Arguments Against Banning Banks from Holding Equities

· Incentivizes banks to acquire riskier assets to compete with European banks: This was actually done so that banks do not acquire too much risky investors on their balance sheet because then if there is sudden volatility in the market then probability of default increases and to avoid this situation this was done.

· Shifts investors’ focus to foreign banks: The idea behind this regulation was to attract investors to the home country so that they can meet their capital requirement and not to force investors to look outside the country because of the increasing risk of domestic banks.