Financial institutions-moral hazard and adverse selection

Assignment Help Financial Management

Reference no: EM131576530

Financial Institutions, Moral Hazard, Adverse Selection, Regulation of Financial Institutions

Financial intermediaries as part of the financial system are very important for a vibrant economy to move funds from surplus units to the deficit units in order to finance a productive investment. The financial system includes banks, insurance companies, mutual funds, stock and bond markets, and so on. All of these are regulated by government. However, the role of information in the financial system plays a critical part in the transfer of funds.

You are a manager of a financial institution that gave a loan to a large corporation involved in trading in the energy market. It has a successful operation, making it among the largest corporation at the time. However, the company crashed and came with large amounts of losses. You as a manager found out that the company has been involved in a complex set of transactions by which it was keeping substantial amounts of debts and financial contracts off of its balance sheet and you were not aware of these transactions. Even after securing additional new financing from other institutions, the company was forced to declare bankruptcy and large numbers of people were laid off at the time that the economy was suffering from a downturn in economic activities. You as a manager are involved in answering several questions in order to minimize the chance of defaults on your loans.

1. What is moral hazard? Do you think in this case moral hazard was an issue, or we need to have more information?

2. In case this was an example of moral hazard, explain how the manager could reduce the problem.

3. What are the adverse economic consequences of moral hazard?

4. What is asymmetric information?

5. Do you think that further government regulations could reduce the existence of asymmetric information of financial institutions? If so, what type of regulation do you suggest for this case?

Reference no: EM131576530

Questions Cloud

What is the cumulative mtbf : What is the cumulative MTBF (MTBFc) at the end of the test (350 hours)? Use the value given by the fitted line, not the data point itself.

How technology might improve your processes : What are your thoughts about how technology might improve your processes? What are challenge and obstacle that would be overcome with use of information system?

Procurement planning and project planning : What is the difference between procurement planning and project planning?

Compute pension expense for the year : Question - SuperSports provides you the following pension data for the year 2016. Compute pension expense for the year 2016

Financial institutions-moral hazard and adverse selection : What is moral hazard? Do you think in this case moral hazard was an issue, or we need to have more information? What is asymmetric information?

Explain the pros and cons of adjusting pay : Explain the pros and cons of adjusting pay based on cost-of-living differences from company's perspective and an employee's perspective.

Evaluate nike by using the competitive forces : 1. Evaluate Nike by using the competitive forces and value chain models.

Bad news demonstrating application : Ajax Company employees that delivers this "bad news," demonstrating application of the use of the four-paragraph model shared

Create a family or friend tree using a php script : Create a family or friend tree using a PHP script. The tree should date far enough back to include at least 5 family members.

User Account

All Pages