Highly Diversified Financial Service George Mason

Public policy toward financial
institutions, and depositories in particular, has attempted to promote
competition within a framework of regulation intended to ensure the financial
integrity of the institutions.

a. Discuss the fundamental reasons for financial
regulation as discussed in class and in the text. As part of this discussion,
provide an analysis of the potential conflicts between a policy of promoting
competition and a policy of reducing the chance of financial institution
failure. In this context what are the dangers of the too-big-to-let-fail policy
in promoting financial intermediary efficiency, productivity and competition as
more large FIs are formed through mergers and consolidation. Consider whether
the problem of moral hazard facing regulators and the federal deposit insurance
funds is more or less of a problem under this policy.

Pick one of the statements below to answer based on
class lectures and the text:

1. Give an example of a recent regulatory reform or
change in federal or state laws that are intended to promote competition among
financial intermediaries and how they are to do so. Within your discussion,
provide an analysis of how market forces, such as rising interest rates,
inflation, and financial innovation, have stimulated the development of new
financial instruments and new institutional arrangements and intensified
competition among financial institutions.

2. Several dominant movements in determining the
structure of the U.S. banking system have been the spread of branch banking,
the growth of bank holding companies and interstate banking and branching which
permit the geographic expansion of banking services and the ability of banking
organizations to offer new and diversified product lines. In the 1970s, nonbank
financial firms, such as insurance companies and stock brokers, began competing
with depository institutions. Does this revitalized competition, recently
characterized by the innovation of by specialized banking firms and the
potential for expanded product lines, cause present prudential regulation
(e.g., capital adequacy standards, examinations or asset composition
constraints) and federal deposit insurance to be outmoded? In your answer,
discuss the role and administration of prudential regulation when major
depository institutions may be highly diversified financial service companies
providing life and casualty insurance sales and underwriting, corporate
securities underwriting, household and business depository services,
sophisticated EFT and telecommunications services as well as traditional
lending to business.