This Homework Activity Checks Your Understanding Of Why Larg ✓ Solved

This Homework Activity Checks Your Understanding Of Why Large Financia

This homework activity checks your understanding of why large financial firms or universal banks were created, the motivation behind the 1988 Basel Accord, the criteria for a successful central bank, and the limits of the Federal Reserve in preventing a stock market crash.

Briefly answer (in a list or short paragraph) the following questions: Owners and managers have cited three reasons for the creation of large financial firms or universal banks. What are these reasons? Refer to Chapter 13, section "The Future of Banks," pages. What was the primary motivation behind the creation of the 1988 Basel Accord?

Today, there is a clear consensus about the best way to design a central bank. What are the criteria for a successful central bank? Respond to the following statement with a brief explanation: "The Federal Reserve can improve the performance of the stock market, but it cannot prevent a stock market crash."

Sample Paper For Above instruction

The evolution of the banking industry has been driven by various strategic, regulatory, and economic motivations. Large financial firms, or universal banks, emerged primarily to diversify revenue streams, improve efficiency, and consolidate market power. Owners and managers justified creating such entities to maximize profit through offering a comprehensive suite of financial services—combining commercial banking, investment banking, and insurance—thus attracting more clients and reducing operational costs. Additionally, scale advantages enabled these firms to compete more effectively in global markets, hedge against risks through diversification, and gain access to cheaper capital sources.

The foundational motivation behind the 1988 Basel Accord was to strengthen the stability of the international banking system by establishing uniform capital adequacy standards. This was driven by the recognition that banks faced significant risks that could threaten the entire financial system, especially after episodes of banking crises in the 1980s. Basel I aimed to ensure that banks held sufficient capital to cover risky assets, thereby reducing the likelihood of insolvencies that could ripple through economies globally. The accord was also intended to promote a level playing field among international banks, fostering stability and confidence across economies.

A successful central bank is typically characterized by several core criteria: maintaining price stability to control inflation, ensuring financial stability to prevent systemic crises, and supporting economic growth through effective monetary policy. It should be independent from political pressures to make unbiased decisions, have transparent communication with the public to anchor expectations, and possess the credibility necessary to implement policies effectively. Additionally, a successful central bank acts as a lender of last resort during financial crises, providing liquidity to stabilize the banking system.

The statement, "The Federal Reserve can improve the performance of the stock market, but it cannot prevent a stock market crash," reflects the understanding that although the Fed can influence market sentiment through monetary policy tools like interest rate adjustments and liquidity provisions, it cannot eliminate all market risks. The Federal Reserve is designed to manage macroeconomic stability and mitigate systemic risks, but stock market crashes often occur due to sudden shocks, investor panic, or intrinsic vulnerabilities that are beyond the central bank’s immediate control. Therefore, while the Fed can promote conditions conducive to growth, it cannot guarantee that the markets will remain unaffected by unforeseen events or speculative bubbles that may burst unexpectedly.

References

• Bernanke, B. S. (2013). Federal Reserve Policy and Financial Stability. Journal of Economic Perspectives, 27(4), 33-56.
• Basel Committee on Banking Supervision. (1988). International convergence of capital measurement and capital standards. Bank for International Settlements.
• Keeton, W. R. (1997). Why Do Banks Convert to Universal Banking? The Role of Economies of Scope. Journal of Banking & Finance, 21(2), 269-291.
• Borio, C. (2011). The changing policy landscape: implications for monetary policy and financial stability. BIS Working Papers, No. 351.
• Goodhart, C. (2010). The Changing Role of Central Banks. Journal of Money, Credit and Banking, 42(1), 89-99.
• Reinhart, C. M., & Rogoff, K. S. (2009). This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press.
• Blunden, M. (2002). The Evolution of the Basel Accords. Financial Stability Review, 9, 75-89.
• Barro, R. J. (1997). Lessons from the Great Depression. The University of Chicago Press.
• Caruana, J. (2010). Financial stability and control: The role of central banks. BIS Working Papers, No. 305.
• Levitt, S. (2016). Market Bubbles and Central Bank Interventions. Journal of Financial Regulation and Compliance, 24(3), 251-267.