【正文】 sley. All rights reserved. 1129 Responses to Changes in Demand Conditions: Interest Rate Volatility ? Adjustablerate mortgages – Flexible interest rates keep profits high when rates rise – Lower initial interest rates make them attractive to home buyers ? Financial Derivatives – Ability to hedge interest rate risk – Payoffs are linked to previously issued (. derived from) securities. Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 1125 FIGURE 1 Time Line of the Early History of Commercial Banking in the United States Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 1121 Whither Financial Regulation After the Subprime Financial Crisis? (cont’d) ? Additional regulation of privately owned government sponsored enterprises – Fully privatize them – Completely nationalize them – Leave them as privately owned government sponsored enterprises and ? Strengthen regulation ? Reduce their size Copyright 169。 vu all over again” – Deposit insurance is not to blame for some of these banking crises – The mon feature of these crises is the existence of a government safety , where the government stands ready to bail out troubled financial institutions. Copyright 169。L and Banking Crisis ? Financial innovation and new financial instruments increased risk taking ? Increased deposit insurance led to increased moral hazard ? Deregulation – Depository Institutions Deregulation and Moary Control Act of 1980 – Depository Institutions Act of 1982 Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 1112 Table 1 Major Financial Legislation in the United States Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 118 Assessment of Risk Management ? Greater emphasis on evaluating soundness of management processes for controlling risk ? Trading Activities Manual of 1994 for risk management rating based on – Quality of oversight provided – Adequacy of policies and limits for all risky activities – Quality of the risk measurement and monitoring systems – Adequacy of internal controls ? Interestrate risk limits – Internal policies and procedures – Internal management and monitoring – Implementation of stress testing and Valueat risk (VAR) Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 114 Government Safety Net:Too Big to Fail ? Government provides guarantees of repayment to large uninsured creditors of the largest financial institutions even when they are not entitled to this guarantee ? Uses the purchase and assumption method ? Increases moral hazard incentives for big banks Copyright 169。Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 113 Government Safety Net ? Moral Hazard – Depositors do not impose discipline of marketplace. – Financial institutions have an incentive to take on greater risk. ? Adverse Selection – Risklovers find banking attractive. – Depositors have little reason to monitor financial institutions. Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 117 Financial Supervision: Chartering and Examination ? Chartering (screening of proposals to open new financial institutions) to prevent adverse selection ? Examinations (scheduled and unscheduled) to monitor capital requirements and restrictions on asset holding to prevent moral hazard – Capital adequacy – Asset quality – Management – Earnings – Liquidity – Sensitivity to market risk ? Filing periodic ?call reports? Copyright 169。 2020 Pearson AddisonWesley. All rights reserved. 1111 Restrictions on Competition ? Justified as inc