Financial Market Structure

Posted: August 27th, 2021

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Financial Market Structure

Question 1. Necessary Functions of Financial Markets

A financial market is a place which individuals trade financial securities and derivatives at very low transaction charges. Price determination, funds mobilization, liquidity, risk-sharing, easy access, reduction in transaction costs, provision of the information, and capital formation are essential functions of financial markets (Grochulski and Slivinki 1).

Question 2. Explainingthe Essence of Bank Capital Rules

Bank Capital Rules entail the necessities associated with enforcing a firm to hold some minimum the ratio of capital (the bank’s equity or preferred stock) to assets (loans and securities). Such capital requirements help banks to establish how much liquid the capital they need to hold before trading them (Grochulski and Slivinki 3). The expressed ratio of this capital requirement depends entirely on the weighted risks of different assets for banks. 

Question 3. The connection between Systemic Risk and Too-Big-To-Fail

Systemic risk is the possibility that a particular event in a company might occasion severe instability or trigger a collapse of an entire economy (Grochulski and Slivinki2). The financial crisis of 2008 resulted from systemic risk, and companies under such risk are regarded as too-big-to-fail as such. Many experts opine that the Fed needs to have more powers to regulate big firms in the sense that they strictly maintain larger capital reserves (Grochulski and Slivinki 2). Such enforcement would ensure that TBTF companies do not borrow too much, thus posing systemic risk.

Question 4. Speechon Dodd-Frank 

My boss and fellow staff, please let me state that the Dodd-Frank Act of 2010 seeks to protect consumers from unscrupulous bank dealings. Such measure is possible via the creation of a Consumer Financial Protection Bureau (CFPB). In short, I mean that the bureau works to prevent the occurrence of economic recession by stopping large bankers from offering customers risky lending (Duyn and Guerrera 1). Therefore, I opine that Dodd-Frank has managed to separate the high-risk speculative culture of Wall Street from Main Street.

Question 5.Glass-Steagall vs. Dodd-Frank Act

As a member of the Congress, I opine that there should be strong Dodd-Frank regulations to prosecute unscrupulous bankers from offering risky lending to customers. I would not support the return of the Glass-Steagall Act of 1933 since it did not have an important constraint effect on changing the culture of commercial banks to mimic Wall Street’s high-risk notion that somehow led to the financial crisis of 2008 (Duyn and Guerrera 1). It is implied that the Glass-Steagall Act only protected the most affluent individuals from economic harshness instead of cushioning the small businesspersons from risky lending. All in all, no one would care about the way regulators redefine banks’ tangible equity coupled with net derivative exposure (Duyn and Guerrera 1). Attempting to lobby financial regulators to influence extremely high liquid assets’ legal classification would seem odd.

Question 6.Justification of Wall Street as a Financial Services Industry

The share of income flowing to corporations and professional workers in the financial sector does not reflect these individuals’ marginal contribution to the total value of social output. Therefore, it implies that the professionals’ work would cease to be meaningful when their skills are assigned elsewhere (Quiggin 1). Society would be better off with a smaller financial sector, which receives fewer returns. If Wall Street is cut down in size, there would be an equal distribution of power and wealth. 

Works Cited

Duyn, Aline, and Francesco Guerrera. “Dodd-Frank bill is no Glass-Steagall.” Financial Times, 27 Jun. 2010, p. A1.

Grochulski, Borys, and Stephen Slivinki. “Systemic Risk Regulation and the ‘Too-Big to Fail” Problem.” Economic Brief, 2009, pp. 1-3.

Quiggin, John. “Wall Street Isn’t Worth It.” Jacobin Magazine, 14 Nov. 2013, p. A1.