This chapter is about thrift institutions, which are consumer-orientated financial institutions that accept deposits from and make loans to consumers. Thrift institutions are composed of savings institutions and credit unions. There are two types of savings institutions that focus on residential mortgage lending: savings associations and savings banks. The chapter also is about finance companies, which provide specialized financial services to consumers and businesses. | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University And Lanny R. Martindale, Texas A&M University CHAPTER 16 REGULATION OF FINANCIAL INSTITUTIONS Financial institutions are heavily regulated because society heavily depends on them. Financial intermediation necessarily involves “asymmetric information”. Failures of financial institutions involve high social and economic costs. The power to allocate credit is a significant and valuable social and economic power. Financial intermediation necessarily involves “asymmetric information”. Most SSUs cannot expertly gauge a financial institution’s safety or soundness. Regulation is a mechanism for trust without personal verification. Regulators impose uniform standards of safety and soundness Reliance on regulatory standards replaces individual trust in institutions Benefits of financial intermediation are institutionalized into society Failures of financial institutions involve high social and economic costs. “Fallout” is worse than that of other business failures. Abrupt shrinkage of credit disrupts commerce; economic uncertainty inhibits saving, investing, and social progress; total costs to society typically exceed value of the institution. Regulation is a mechanism for preventing failures, or confining their effects. Regulators monitor safety and soundness proactively; deposit insurance protects against panic; central banks maintain liquidity in system “lenders of last resort.” The power to allocate credit is a significant and valuable social and economic power. So significant that government naturally seeks to share it. So valuable that financial institutions accept regulation as a condition of it. Major Banking Laws, 1913-1980 (Exhibit ) Major Banking Laws, 1982-1999 (Exhibit ) Much bank regulation is aimed at preventing bank failures Generally, banks fail . | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University And Lanny R. Martindale, Texas A&M University CHAPTER 16 REGULATION OF FINANCIAL INSTITUTIONS Financial institutions are heavily regulated because society heavily depends on them. Financial intermediation necessarily involves “asymmetric information”. Failures of financial institutions involve high social and economic costs. The power to allocate credit is a significant and valuable social and economic power. Financial intermediation necessarily involves “asymmetric information”. Most SSUs cannot expertly gauge a financial institution’s safety or soundness. Regulation is a mechanism for trust without personal verification. Regulators impose uniform standards of safety and soundness Reliance on regulatory standards replaces individual trust in institutions Benefits of financial intermediation are .
