How Financial Markets' and/or Institutions' Efficiency Have Been Improved (Case Study Sample)
Using the quotations and references presented below as guides and based on your understanding of the fundamentals of the need for efficient financial markets and institutions in a capitalist economy. Prepare a case for how financial markets' and/or institutions' efficiency have been improved or how much greater instability and or fragility has resulted over the past 25 years due to any or all of the factors mentioned above. In addition, provide an analysis of the need for regulation (benefits, burdens and costs) in the example you have chosen. If you believe regulation is unnecessary, provide an analysis of either the lack of benefits and/or the burden imposed by regulation.
Please follow the requirement in the word document, you can choose financial crisis of the quotation and reference as a guide or choose something you think is easy to write in the quotation and reference.
How financial markets' and/or institutions' efficiency have been improved
The aspect that concerns the traditional concept especially of the productive efficiency points out to microeconomic efficiency of institutions. Such efficiency surrounds the production of goods and services having the prices for the inputs attached to the end product. However, in the financial system, the concept could easily be translated to refer to intermediation cost or rather interest spread. In a broader sense, the productive efficiency within the financial system refers to its capability in providing finance at the lowest possible cost of production. The entire process depends on several factors that include the extent to which cost of intermediation is minimized between the ultimate lender as well as the ultimate borrower and also capability of the financial system in minimizing the lender’s interest rate. Notably, the efficiency expected within the financial system is fully dependent on the nature of the organization of the banks that impacts the degree of risk, instability as well as uncertainty. The reality out of the experiences in the industrialized world reveals numerous options on the organization of the financial system. It is also important to identify the types of financial institutions as well as markets that require promotion (Bamiatzi et al., 2016).
Need for regulation of finance
The concept of stability presents an essential characteristic that defines an efficient financial system within the banking sector. The turmoil that has historically taken place within the financial markets has led to the creation of some level of agreement on the need for prudent regulations for the purposes of stability (Gup, 2010). The nature of imperfect and asymmetric information within the financial system as given by the theory of finance whereby the borrowers seem to be more informed concerning investment as compared to the lender. Further, there are cases of incomplete contracts whereby all lenders are unable to control various aspects of the behaviors posed by borrowers. In most instances, banks tend to implement their own quantity rationing through imposing credit ceilings as well as restricting deposit and rates on loans. This is done of the purposes of avoiding cases on excessive risk-taking. In the banking sector, the higher interest rates tend to reduce the average quality of loans in the cases where high-risk borrowers seem to be willing to pay higher interest rates as well as the aspect where borrowers are induced to invest in riskier projects. Such instances ensure that the expected rate of return net of default leads to a decline in the event that the loan rate reaches certain levels. The implication is that even in the absence of prudent regulations; there exist limits to price competition as well as risk-taking within the banking system (Gup, 2010).
The aspect of self-restraint within the banking sector is not fully reliable especially in the prevention of financial instability and specifically in developing countries. At times banks practice speculative financing as well as excessive risk-taking with the hope that failure does not present dire consequences on the side of shareholders and managers. Such condition is a possibility in the event that deposit insurance can easily be acquired, implicit or explicit guarantees for bail-out are easily accessible, and when the penalties, as well as sanctions associated with failing bank managers, are inadequate. In some instances, the moral hazard is experienced in the presence of deposit insurance schemes geared towards the protection of depositors which eventually attract funds into the bank (Singh, 20...
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