1.What are five risks common to all financial institutions? 2. Explain how econo
ID: 1136239 • Letter: 1
Question
1.What are five risks common to all financial institutions?
2. Explain how economic transactions between household savers of funds and corporate users of funds would occur in a world without financial institutions.
3. Identify and explain three economic disincentives that would dampen the flow of funds between household savers of funds and corporate users of funds in an economic world without financial institutions.
4. What are two of the most important payment services provided by financial institutions?
5. To what extent do these services efficiently provide benefits to the economy?
6. Why are FIs among the most regulated sectors in the world? When is the net regulatory burden positive?
7. What are the differences between community banks, regional banks, and money center banks? 8. Contrast the business activities, location, and markets of each of these bank groups.
8. What are the major sources of funds for commercial banks in the United States?
9. How is the landscape for these funds changing and why?
Explanation / Answer
1. The risks common to FIs are market risk, operational risk, credit risk, liquidity risk and interest rate risk.
2. In the absence of FIs, the users of funds will have to directly approach the households for the funds and loans. This will cause serveral inefficiencies in the process such as cost inefficiency such as huge administrative and operational costs, time inefficiency because of difficulty in finding the right provider of loans etc.
3. They are price risks, liquidity costs and monitoring costs. Monitoring the usage of funds and the source of funds become difficult thereby giving rise to the need for FIs. The liquidity risks arise because the funds may not be available at all times or the corporates may not be able to source them at all times of need that's why they need FIs to provide them with possible avenues and sources of funds.
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