CHAPTER 10 Economic Analysis of Financial Regulation 251 KEY TERMS bank failure, Basel Accord, p 226 p 230 Basel Committee on Bank Supervision, p 230 coinsurance, fair-value accounting, p 235 financial supervision (prudential supervision), p 231 leverage ratio, p 230 p 244 mark-to-market accounting, p 235 off-balance-sheet activities, p 230 regulatory arbitrage, p 231 regulatory forbearance, p 241 QUESTIONS You will find the answers to the questions marked with an asterisk in the Textbook Resources section of your MyEconLab Give one example each of moral hazard and adverse selection in private insurance arrangements *2 If property and casualty insurance companies provided fire insurance without any restrictions, what kind of adverse selection and moral hazard problems might result? What financial regulation is designed to reduce adverse selection problems for deposit insurance? Will it always work? *4 What financial regulations are designed to reduce moral hazard problems created by deposit insurance? Will they completely eliminate the moral hazard problem? What are the costs and benefits of a too-big-to-fail policy? *6 Why did Canada s bank crisis not occur until the 1980s? *8 The Differential Premiums By-law, introduced in 1999, is designed to increase the incentives for Canadian banks to hold more capital Describe its major features What steps were taken in recent CDIC legislation to improve the functioning of deposit insurance? *10 What are the advantages and disadvantages of the CDIC s risk-based insurance premiums? 11 How can the 1980s Canadian banking crisis be blamed on the principal agent problem? *12 Do you think that eliminating or limiting the amount of deposit insurance would be a good idea? Explain your answer 13 Should the overlap between the OSFI and CDIC be eliminated? Why or why not? *14 How could higher deposit insurance premiums for banks with riskier assets benefit the economy? 15 How could market-value accounting for bank capital requirements benefit the economy? How difficult would it be to implement? Why is regulatory forbearance a dangerous strategy for a deposit insurance agency? WEB EXERCISES Go to www.cdic.ca and click on International Work Write an essay summarizing how globalization and international financial integration affect Canada s financial sector safety net Go to www.fdic.gov/regulations/laws/important/ index.html This site reports on the most significant pieces of legislation affecting U.S banks since the 1800s Summarize the most recently enacted bank regulation listed on this site Be sure to visit the MyEconLab website at www.myeconlab.com.This online homework and tutorial system puts you in control of your own learning with study and practice tools directly correlated to this chapter content On the MyEconLab website you will find the following appendix for this chapter: Appendix 10.1: Banking CrisesThroughout the World