Chapter 10, Problem 1LO

To determine

The reason for government safety net in financial industry and the forms of the safety net introduced by the government

Concept introduction:

Safety Net:

To reduce the uncertain scenarios for the customers in the financial sector, the government or the federal legislation has introduced various safety net reforms.

Explanation of Solution

Reasons for Federal Legislation providing financial safety nets

• Reduce the uncertain scenarios such as closure of banks
• Reduction in the negative impact created by the external environment on banks runs
• Improve the trust on the government-aided loans and deposit insurance
• Proof of ability of government meeting the social-obligations

Forms of Safety Nets in the financial industrial

• Risk-adjusted Deposit insurance premiums
• Risk-adjusted-Capital
• Structured early resolution and intervention
• Stringent rules or limitations on the activities or assets of bank

It is evident that the Government has taken various steps to enhance the productivity of the banks by reducing the threats to both the banks and the customers.

Risk-adjusted-Capital − The capital is adjusted based on the overall risks of the financial organization

Structured early resolution and intervention − Identifying the issues and provide prompt solutions

Limitations on the activities or assets of bank − Based on the return on assets, a set of policies would be developed by the government for the banks to abide by to enhance the financial performance

Risk-adjusted Deposit insurance premiums − Banks strive to make effective action plans when investing from the investment made by the customers