Banking Essay Example | Topics and Well Written Essays - 4000 words

Banking - Essay ExampleDepository insurance can be obtained instantly and they are not traded debts since bank incentive take risks and they have no discipline from market prices. Depository insurance have a role of disciplining the management and reduction example hazard that is, infinite maturity infers that deposits can rapidly disappear leading to moral hazard sequential examination also gives a benefit to monitor lizard such services(Pastre?, 2007). Depository insurance helps in ensuring less costly and unnecessary liquidations, duplication of deposits are avoided through monitoring and less probability of runs on outcome thus reducing shock to supply of money at macro level. Depository insurance relates to bank runs in that without monitoring of projects may be undefended resulting into socially uneconomical of projects. Allman (2006) describes the lender of the last reanimate as that institution which is willing to give loans as a last option to banks or another(prenomin al) financial institutions that are undergoing financial problem that is considered highly risky. Such a firm is usually the countrys central bank. The lender of the last resort produces currency at its discretion to support institutions facing financial problems. ... Since they provide liquidity assistance they help curb the insolvency problem. The lender of the last resort therefore, eases glow bank runs through recapitalizing the insolvent banks. This helps the financial institutions to enhance their consumer protection. In conclusion, both depository insurance and lender of the last resort have the one affaire in common in that they tend to protect various financial institutions from insolvency challenges leading to efficient and effective bank runs. Essay Two An economic system is a concept or an idea put forward to explicate various economic aspects that exist in the world economy. Economic theories are those specifically, these theories explain the aspects in line with mo netary effects and financial aspects related to the management and utilization of scarce resources exhaustively (Allman, 2006). The major theories that illustrate the existence of bank allow in Economies of scale possibleness Here, transaction prices at core tend to increase this is due to fixed cost of evaluating assets thus reducing average costs of trading. This shows that single(a) cannot at any time diversify perfectly since, bank pool risk and diversify portfolio are cheaper and that the payment services are also cheaper (Pastre?, 2007). A special situation is where liquidity insurance and economies of scale in risk pulling is experienced. Liquidity focuses on the banks cashable deposits as assets are long end point and illiquid. Therefore, banks as pools of liquidity gives people with insurance in opposition to idiosyncratic shocks that they can only observe. Banks also protect borrowers from early encashment of loans. Asymmetrical information theory This involves screeni ng to overcome adverse selection whereby intermediaries screen the quality