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Quiz 8 :

Governments Role in Banking

Quiz 8 :

Governments Role in Banking

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What is the government's role in the payments system, and how does that help banks?
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The process by which cash, checks, and electronic payments flow from buyers to seller is called payment system. Most transactions are followed by on banking system, credit cards, debit cards are the electric payment system.
The government supervises the banks on payment system, because there should not have any problems making payments to one another by banks.
The government plays a key role in payment system in banks; it helps the payment system work well in bank during the instances of bank run. At the bank run, the banks have to provide more money, and in this situation, majority of the banks become out of cash; therefore, the government (Federal Bank) helps as a lender of last resort.
A well-functioning payment system provides benefits to the banks because it decreases their costs the government gives helps to clear in timely and efficient manner. Thus, banks will follow the government systems for payments. The banks give a guaranty for the payments on their deposits at a risk factor.

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Describe the major costs that banks face because of the government's role in banking.
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According to the government's rules banks have to deposit a said amount in the Fed accounts. This savings would help banks in financial crisis. The banks, which need amount, would receive from Fed banks from their respective accounts. These transactions cost more to the banks due to the role of government. Apart from this, government makes few policies that protect the interest of depositors and borrowers of banks. For this banks have follow some procedures, which costs more to banks. Banks usually make profit by allowing loans to customer at higher rates for example 8%. These banks accept deposits only at 4% to 6%. The spread between accepting deposits and making loans are the profit to the banks.

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Describe the methods by which bank failures are handled by the banking authorities. In which method is the government most likely to absorb losses?
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If large banks fail in the process the Fed banking authorities do not let it fall unlike the small banks. Here the banking authorities or the federal bank provides loans to large bank to keep on. Because, large bank failure causes shortage of liquidity, and furthermore, stock prices will decline sharply.
Here the authorities will agree to merge a weak bank with a stronger bank. In addition, if the bank fails then FDIC will take an action as fallows i.e. they undertake pay off or purchase and assumption.
In the payoff transaction FDIC closes the bank, sells the assets, first pays to the insured depositors. Later it pays off to creditors if funds remain.
In purchase and assumption transaction the FDIC, find a bank purchaser to sell. Moreover, give the good assets to the buyers and assumes transaction. The FDIC keeps pen and give the loans assistance transaction, means the stockholder loss their stake while the depositor and creditors will not lose. Furthermore, FDIC will get losses.
Thus, in purchase and assumption transaction government has to absorb some losses.

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Describe the different types of fi nancial institutions and which banking authorities supervise them.
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What is the CAMELS rating system? Describe each of the elements of the system in general terms.
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Describe the ways in which the Dodd-Frank Act changes banking regulation.
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What is the Community Reinvestment Act? Why do banks complain so much about it?
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What four main factors determine whether a bank merger or acquisition will be allowed?
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The banking market in Athens, Ohio, currently has four banks with market shares of 60 percent, 20 percent, 15 percent, and 5 percent. The two smallest banks have proposed merging. Under the standard merger guidelines of the Federal Reserve and the Justice Department, is the merger likely to be approved? Why or why not? In your answer, be as quantitative as possible.
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The city of Puni has 10 banks of various sizes. Bank A has 18 percent of all Puni's deposits, bank B has 15 percent, bank C has 12 percent, bank D has 10 percent, the next fi ve banks have 8 percent each, and the smallest bank has 5 percent. Suppose that banks A and D propose a merger at the same time that banks B and C propose a merger. You, as the banking structure analyst at the Federal Reserve, must analyze the competitive situation and determine whether either or both of the mergers should be allowed. Write up your analysis as a recommendation to the Federal Reserve Board, which will use your analysis to make a decision. Be sure that your answer includes the numerical considerations relevant to the case.
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When a small bank has fi nancial problems, the banking authorities are likely to close it down, leading to substantial losses for uninsured depositors and the bank's stockholders. Yet a big bank in the same trouble may be saved by the banking authorities. Is this a sensible solution? Can it be defended on the grounds of economic effi ciency? What about on the grounds of equity (fairness)?
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In foreign countries it is quite common for banks to own nonfi nancial companies and vice versa. Do the U.S. laws restricting banking and commerce cause U.S. banks to be at a competitive disadvantage internationally? What are the benefi ts of such restrictions?
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Would bank supervision be made easier if banks' CAMELS ratings were made available publicly? What might be the downside of public announcement of such ratings?
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Why are mergers of large banks located in different geographic regions more likely to be approved than mergers of smaller banks located in the same region?
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