1. Describe ways in which bank regulators manage the moral hazard from the vario
ID: 1097228 • Letter: 1
Question
1. Describe ways in which bank regulators manage the moral hazard from the various protections given to the banking industry.
2. Suppose you are graduating and your rich Uncle makes you an offer. You can accept $5,000 from him today or wait 3 years and receive $10,000. What discount rate would make someone indifferent about these two options? (solve for it and show/describe how).
3. Panic during the financial crisis in 2008 produced what is known as a flight to quality. During this flight to quality, explain what happens to Treasury yields and risk spreads in the bond market.
Explanation / Answer
1)The Measures are:
1. The Committee suggests that pending the emergence of markets in India where market risks can be covered, it would be desirable that capital adequacy requirements take into account market risks in addition to the credit risks.
2. In the next three years, the entire portfolio of Government securities should be marked to market and this schedule of adjustment should be announced at the earliest. It would be appropriate that there should be a 5% weight for market risk for Govt. and approved securities.
3. The risk weight for a Government guaranteed advance should be the same as for other advances. To ensure that banks do not suddenly face difficulties in meeting the capital adequacy requirement, the new prescription on risk weight for Government guaranteed advances should be made prospective from the time the new prescription is put in place.
4. There is an additional capital requirement of 5% of the foreign exchange open position limit. Such risks should be integrated into the calculation of risk weighted assets. The Committee recommends that the foreign exchange open position limits should carry a 100% risk weight.
5. The Committee believes that it would be appropriate to go beyond the earlier norms and set new and higher norms for capital adequacy. The Committee accordingly recommends that the minimum capital to risk assets ratio be increased to 10% from its present level of 8%. It would be appropriate to phase the increase as was done on the previous occasion. Accordingly, the Committee recommends that an intermediate minimum target of 9% be achieved by the year 2000 and the ratio of 10% by 2002. The RBI should also have the authority to raise this further in respect of individual banks if in its judgement the situation with respect to their risk profile warrants such an increase. The issue of individual banks' shortfalls in the CRAR needs to be addressed in much the same way that the discipline of reserve requirements is now applied, viz., of uniformity across weak and strong banks.
2)In this case,where i can accept $5,000 from him today or wait 3 years and receive $10,000.It will be better to take $5,000 from him today as the The Fed
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