Assignment Your assignment is to write a “memo” that proposes a financial regula

Question

Assignment

Your assignment is to write a “memo” that proposes a financial regulation or innovation to improve outcomes for individual investors. Your response is limited to a maximum of 250 words. Your memo should include a clear description of the following:

1. What is the problem that your regulation or innovation solves?

2. What is the specific regulation or innovation that you propose?

3. How could you implement the regulation or innovation in practice in a way that is cost effective?

You should write your memo as three “paragraphs” that address each of the questions above.

Grading

I will grade the assignment based on:

1. Creativity (10 points). Do you identify a legitimate problem with a financial market or institution? Do you come up with an original idea that could potentially resolve the problem?

2. Clarity (5 points). Can I easily understand your response to all three underlying questions? Remember, your future bosses, colleagues, clients, and customers have limited attention!

3. Mechanics (5 points). Did you turn in a Microsoft Word document? Is your memo formatted in three distinct paragraphs? Is your memo less than 250 words? Is your memo free of spelling and grammatical errors?

Tips

1. Think about one of the important regulations (Sarbanes-Oxley, Glass-Steagall, FDIC) or innovations (Junk Bonds, TIPS, STRIPS) we discussed in class. For practice, write a memo for one of these regulations or innovations as if they didn’t already exist. This may inspire you to find a topic and hone your writing style.

2. Don’t wait until the last minute. Write up a draft in the next month and give it to one of your classmates or friends for comments and suggestions. If you have a draft and come to my office hours, I can also give you feedback.

Explanation / Answer

1. What is the problem that your regulation or innovation solves?

Ten years back, USA faced a huge financial crisis due to the bankruptcy of Lehmann brothers. It was one of the largest financial institutions of the world. It is believed to be one of the major corporate governance failures in the world. In the case of Lehmann brothers the main cause of their failure was the huge amount of money that they had given as subprime mortgage loans without being aware of the risk involved in such loans. Thus, the lack of proper awareness about the risks faced by the bank through its activities led to their bankruptcy. In today’s times also, the same problem is noticed. Most of the banks are not clear about the risks that they are facing. Thus, there is a need for a banking and financial regulation that ensures that the bank or financial institution understands its risks and makes it public for their customers, shareholders and stakeholders also.

2. What is the specific regulation or innovation that you propose?

The regulation that I wish to propose is an add-on or more of an amendment to the already existing Principles for effective risk data aggregation and risk reporting published by the Basel Committee. According to this, all banks are supposed to publish the reports about their potential risks and the supporting data has to be presented. However, this has not been followed by most of the banks. So, a regulation is needed that will empower the financial regulatory bodies to take action against such banks that did not comply by the principles given by Basel Committee. The action may include measures like restricting the business activities of the banks, not allowing the banks to give dividends to its shareholders etc. Such strict measures are required for making the banks comply by the rules and regulations that they are supposed to follow.

3. How could you implement the regulation or innovation in practice in a way that is cost effective?

In order to implement this regulation, the financial regulatory bodies need to be stern in their approach. A reminder needs to be sent to all the banks and financial institutions throughout the financial year so that the banks can keep recording the required data from time to time. The financial regulatory bodies may also ask the banks to present the reports in a quarterly basis. This will make the job easier for the banks as they will only have to compile the quarterly reports to make the annual report. Moreover, the financial regulatory bodies can make these regulations public through advertisements in different forms of media. This will make the banks more responsible towards their customers and stakeholders. These steps will also make the process cost effective.

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