ECONOMICS (CBSE/UGC NET)

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ECONOMICS

FINANCIAL MARKETS

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
If the regulation of the financial market is too strict it can lead to restrictions on credit, which harms economic growth, and could lead to the growth of the shadow banking system, which isn’t regulated.
A
Yes, I understand this from the notes
B
No, I don’t understand this from the notes
C
No, I don’t understand this, as I have not read the notes
D
None of the above
Explanation: 

Detailed explanation-1: -They state that shadow banking benefits the financial system by providing liquidity and increasing asset prices, but it also makes the system fragile. The increase in uncertainty caused by the spread of shadow banking is forcing financial institutions towards collateral-intensive funding.

Detailed explanation-2: -Successful financial regulation prevents market failure, promotes macroeconomic stability, protects investors, and mitigates the effects of financial failures on the real economy.

Detailed explanation-3: -The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking. It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.

Detailed explanation-4: -Liquidity risk – This is one of the most common risks faced by shadow banks, as these entities undertake maturity transformation i.e., funding long term assets with short term liabilities. The risk of ALM mismatch leading to liquidity problems is quite high.

There is 1 question to complete.
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