Question

1.Why do you think banks and other financial institution are regulated? Is regulation justified?

2.What is a bank run? Why is it important?

3.Do you think prudential bank regulation effective? If so why?

Answer 1

1. Banks and financial institutions deal with public money and need to be regulated so that they adhere to strict policies and guidelines set by SEC and Federal reserve. Yes, the regulations are justified so as to prevent another financial crisis like that of 2008-09.

2. A bank run means that the bank has no money to give its depositors. If you go to the bank and want your money, and the bank does not oblige, then we say that there has been a bank run. It is important to make sure that the banks adhere to BASEL norms and have adequate capital reserves so that there is no bank run.

3. Yes these are required so as to make sure that the banks have adequate reserves and adhere to capital adequacy ratios as defined by international rules like the BASEL rules. It is important because we do not want the bank to face financial distress as they are the backbone of any economy.