Question

What type of bank regulations are designed to reduce moral hazard problems? Will they completely eliminate moral hazard problems?

Answer 1

Restrictions on Asset Holding

Regulations limit the type of assets banks may hold as assets. Forinstance since land has drop in price cannot be use as a sec in a loan

Capital requirements

Banks are also subject to capital requirements. Banks are required to hold acertain level of capital (book equity) that depends on the type of assets that the bank holds

measured by ratios of capital structure

. To insure proper balance:- Leverage ratio must exceed 5% to avoid restrictionsandCapital must exceed 8% of the banks risk-weighted assets and off-balance sheet activities- New capital requirements are forthcoming to address problems with risk-weighted assets

Prompt Corrective Action

it is obvious that undercapitalized bank is more likely to fail and morelikely to engage in risky activities even fraudulent. So, Improvement in Act of 1991 requires the FDICto act quickly to correct or avoid losses when banks get into trouble.

No Example: Eliminate or limit the amount of deposit insurance would be a good idea. So banks

don’t take excessive risk expecting insurance to pay for it.But would make bank failures and panics more likely so may not be a very good idea. It can cos

Please upvote sir.....???