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INTRODUCYION a) Financial Market:
Broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade.
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities y y y A central bank A commercial bank A saving bank
SUPERVISION: RATIONAL OF REGULATION:
c) Monetary policy
The process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low
and this encourages further withdrawals. in a kind of selffulfilling prophecy (or positive feedback): as more people withdraw their deposits.unemployment. it generates its own momentum. and contractionary policy expands the money supply more slowly than usual or even shrinks it. and associated borrowing d) Bank Runs: A bank run (also known as a run on the bank) occurs when a large number of bank customers withdraw their deposits because they believe the bank is. or might become. Monetary policy differs from fiscal policy. the final sale of goods to zero inventory. which refers to taxation. As a bank run progresses. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. typically when the seller faces bankruptcy or other impending distress. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. A fire sale may or may not be a closeout. This can destabilize the bank to the point where it faces bankruptcy e) Fire Sale A fire sale is the sale of goods at extremely discounted prices. where an expansionary policy increases the total supply of money in the economy more rapidly than usual. Types of regulation Systemic regulation . insolvent. Monetary theory provides insight into how to craft optimal monetary policy. the likelihood of default increases. It is referred to as either being expansionary or contractionary. government spending. The term may originally have been based on the sale of goods at a heavy discount due to fire damage.
As an integral component of an effective financial safety net. Commercial and Islamic banks that are member institutions of PIDM are also referred to as µmember banks¶. and reporting information about significant interactions between and risks among financial institutions. against the risk of loss on their assets. This focus on individual firms ignores critical interactions between institutions. principally commercial banks. the deposit insurance system was brought into effect in September 2005 and is administered by Perbadanan Insurans Deposit Malaysia (PIDM). a deposit insurance system enhances consumer protection by providing explicit protection to depositors. Attempts by individual banks to remain solvent in a crisis One regulatory organization in each country should be responsible for overseeing the health and stability of the overall financial system. analyzing. Deposit insurance: Deposit insurance is a system established by the Government to protect depositors against the loss of their insured deposits placed with member institutions in the event the member institution fails. how much and how their deposits are insured in the event that a member institution fails or is unable to make payment to depositors. including capital requirements. We argue below that the central bank should be charged with this important new responsibility. Depositors will know when. designing and implementing systemically sensitive regulations. and coordinating with the fiscal authorities and other government agencies in managing systemic crises. In Malaysia.Financial regulations in almost all countries are designed to ensure the soundness of individual institutions. PIDM protects your bank deposits and will promptly reimburse you on your insured deposits should a member bank fail . a) Benefits to depositors 1. The role of the systemic regulator should include gathering.
A central bank offers extension of credit to financial institutions experiencing financial difficulties which are unable to obtain necessary funds elsewhere. The main task in front of the lender of last resort is to preserve the stability of the banking and financial system by protecting individuals¶ deposited funds and preventing panic-ridden withdrawing from banks with temporary limited liquidity. this process involves direct market support.2. PIDM promotes public confidence in Malaysia¶s financial system by protecting depositors against the loss of their deposits 5. There is no charge to depositors for this protection b) Benefits to the financial system 4. . Subsequently trough open market operations. Such institution is usually a country¶s central bank. it lowers interest rates on safe assets. In this case. this act provides liquidity at a penalty rate. PIDM contributes to the stability of the financial system by dealing with member institution failures expeditiously and reimbursing depositors as soon as possible Lender of last resort A lender of last resort is an institution which is willing to offer loans as a last resort. And finally. The protection is provided by PIDM automatically and no application is required 3. At first. we talk of a wholesale lender of last resort. PIDM minimizes costs to the financial system by finding least cost solutions to resolve failing member institutions 7. PIDM reinforces and complements the existing regulatory and supervisory framework by providing incentives for sound risk management in the financial system 6. central banks have been trying to avoid great depressions by acting as lenders of last resort in times of financial crisis. For more than century and a half.
prevent their bankruptcy. real or Personal Property. In New Zealand this role is taken by the Reserve Bank of New Zealand. the central bank. the Federal Reserve serves as a lender of last resort. For instance in the USA. A distinguishing feature between an agent and a broker is that a broker acts as a middleperson. the Bank of England functions as a lender of last resort.Commercial banks usually resort to lender¶s help only in times of crisis because such actions indicate financial difficulties. possession. the International Monetary Fund also serves as an international lender of last resort. On a global level. The client is considered the principal and the broker acts as the client's agent. . its central bank. Conduct of business regulation An individual or firm employed by others to plan and organize sales or negotiate contracts for a commission. A broker's function is to arrange contracts for property in which he or she has no personal interest. or services. Rules applicable to agency are generally relevant to most transactions involving brokers. The broker is an intermediary or negotiator in the contracting of any type of bargain. even private companies. bonds. Loans may be granted not only to commercial banks but also to any other eligible financial institution. commodities. or concern. Different institutions may act as a lender of last resort in different countries. and avoid negative impact on the economy. Production type regulation A. acting as an agent for parties who wish to buy or sell stocks. which is considered highly risky. In the United Kingdom. When a broker arranges a sale. he or she is an agent of both parties. Its main purpose is to provide credit to financial institutions that are short of reserves. taking such role because of the recent financial crisis. An agent's powers generally extend beyond those of a broker.
You might borrow money to buy a home. Forbearance: Forbearance is a special agreement between the lender and the borrower to delay a foreclosure. The primary reason for this "capture" of the agencies is because the companies offer better jobs to a few of the agency workers. If you fail to repay the loan. It will be more difficult for you to borrow in the future. Moral Hazard and Loans: Moral hazard is also important for lenders. These leads the agency workers to strive to make the companies happy in the dream of later gaining better jobs for themselves by working for the industry.B.´ Loan borrowers sometimes have problems making payments. someone whose car is insured against theft may be more careless about reducing the chances of theft than they would have been without such insurance. the lender delays his right to exercise foreclosure if the borrower can catch up to his payment schedule in a certain time. the lender and the borrower can make an agreement called "forbearance". To avoid foreclosure. a. Moral Hazard A person or organization who has insurance cover may be more prepared to take risks than someone who does not. You may even have difficulty getting a job or insurance coverage. Your credit is the "stick" (along with your morals. This period and the payment plan depend on the details of the agreement that are accepted by both parties. The literal meaning of forbearance is ³holding back. . Agency Capture: Agency capture is the defect whereby government agencies established to regulate industries end up being influenced and controlled by the companies the agencies were supposed to regulate. One example of a government agency captured by industry is the Food and Drug Administration. This may cause the lender to start the foreclosure process. what happens? In most cases. your credit will suffer. According to this agreement. For example. and you may have to pay higher interest rates. presumably) that keeps you from chasing the carrot of taking free money.
LIMITATION OF REGULATION: .
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