【正文】 age transactions from more than 7,700 institutions each calendar quarter. 29. What legislation has been passed specifically to protect investors who use investment banks directly or indirectly to purchase securities? Give some examples of the types of abuses for which protection is provided. The Securities Acts of 1933 and 1934 and the Investment Company Act of 1940 were passed by 9 Congress to protect investors against possible abuses such as insider trading, lack of disclosure, outright malfeasance, and breach of fiduciary responsibilities. 30. How do regulations regarding barriers to entry and the scope of permitted activities affect the charter value of financial institutions? The profitability of existing firms will be increased as the direct and indirect costs of establishing petition increase. Direct costs include the actual physical and financial costs of establishing a business. In the case of FIs, the financial costs include raising the necessary minimum capital to receive a charter. Indirect costs include permission from regulatory authorities to receive a charter. Again in the case of FIs this cost involves acceptable leadership to the regulators. As these barriers to entry are stronger, the charter value for existing firms will be higher. 31. What reasons have been given for the growth of investment panies at the expense of “traditional” banks and insurance panies? The recent growth of investment panies can be attributed to two major factors: a. Investors have demanded increased access to direct securities markets. Investment panies and pension funds allow investors to take positions in direct securities markets while still obtaining the risk diversification, monitoring, and transactional efficiency benefits of financial intermediation. Some experts would argue that this growth is the result of increased sophistication on the part of investors。Ls and savings banks traditionally serve the credit needs of the residential real estate market. Third, life insurance and pension funds monly are encouraged to provide mechanisms to transfer wealth across generations. Fourth, depository institutions efficiently provide payment services to benefit the economy. Finally, mutual funds provide denomination intermediation by allowing small investors to purchase pieces of assets with large minimum sizes such as negotiable CDs and mercial paper issues. 16. How do depository institutions such as mercial banks assist in the implementation and transmission of moary policy? The Federal Reserve Board can involve directly the mercial banks in the implementation of moary policy through changes in the reserve requirements and the discount rate. The open market sale and purchase of Treasury securities by the Fed involves the banks in the implementation of moary policy in a less direct manner. 17. What is meant by credit allocation regulation? What social benefit is this type of regulation intended to provide? Credit allocation regulation refers to the requirement faced by FIs to lend to certain sectors of the economy, which are considered to be socially important. These may include housing and farming. Presumably the provision of credit to make houses more affordable or farms more 6 viable leads to a more stable and productive society. 18. Which intermediaries best fulfill the intergenerational wealth transfer function? What is this wealth transfer process? Life insurance and pension funds often receive special taxation relief and other subsidies to assist in the transfer of wealth from one generation to another. In effect, the wealth transfer process allows the accumulation of wealth by one generation to be transferred directly to one or more younger generations by establishing life insurance policies and trust provisions in pension plans. Often this wealth transfer process avoids the full marginal tax treatment that a direct payment would incur. 19. What are two of the most important payment services provided by financial institutions? To what extent do these services efficiently provide benefits to the economy? The two most important payment services are check clearing and wire transfer services. Any breakdown in these systems would produce gridlock in the payment system with resulting harmful effects to the economy at both the domestic and potentially the international level. 20. What is denomination intermediation? How do FIs assist in this process? Denomination intermediation is the process whereby small investors are able to purchase pieces of assets that normally are sold only in large denominations. Individual savers often invest small amounts in mutual funds. The mutual funds pool these small amounts and purchase negotiable CDs which can only be sold in minimum increments of $100,000, but which often are sold in million dollar packages. Similarly, mercial paper often is sold only in minimum amounts of $250,000. Therefore small investors can benefit in the returns and low risk which these assets typically offer. 21. What is negative externality? In what ways do the existence of negative externalities justify the extra regulatory attention received by financial institutions? A negative externality refers to the action by one party that has an adverse affect on some third party who is not part of the original transaction. For example, in an industrial setting, smoke from a factory that lowers surrounding property values may be viewed as a negative externality. For financial institutions, one concern is the contagion effect that can arise when the failure of one FI can cast doubt on the solvency of other institutions in that industry. 22. If financial markets operated perfectly and costlessly, would there be a need for financial intermediaries?