Exam 4: The Future of the Financial System and the Money and Capital Markets

The trend toward market-expanding operations has encompassed not only financial firms that have traditionally served broad markets (such as insurance companies, money-center banks and security brokerage firms) but also locally oriented financial institutions (such as credit unions and savings banks).

The recent trend toward deregulation of the worldwide financial sector is likely to continue. Governments will be under continuing pressure to

Regulators are likely to be looking closely in the years ahead at which of the following rules that apply to each financial institution?

There will be a need for new institutions to facilitate the continuing trend toward securitization of many of the credit-related assets held by lending institutions and other corporations.

Which of the following are the newer financial instruments and services that appear to have good prospects for rapid market development in the future?

What technological changes are likely to have the greatest impact on the production and delivery of financial services to the public in future years?

Why do you think consolidation and convergence are taking place today in the financial-services sector of the economy? What are their consequences for the managers of financial institutions? For regulators of finance-service institutions?

In 2001 the Federal Reserve Board invited public comment on the possibility of allowing banking companies to provide real estate brokerage services.

Please explain the reasoning behind the concept known as the life-cycle hypothesis? How will the life-cycle idea affect the financial system of the future, in your opinion?

The more likely future developments in deregulation will be

In what ways can we promote and protect public confidence in the financial-services sector of the economy? Why is this important to the public and to financial institutions?

Radiofrequency identification cards can be passed in front of scanners without physical contact to pay for goods and services.

What exactly is meant by the concept of functional regulation? What are its advantages and disadvantages for financial institutions and their customers?

Many members of the public regard financial institutions as less secure today than in the past, especially in the wake of failing banks, securities firms and other financial institutions in a number of countries around the world (especially in Japan, Argentina, Asia and the former Soviet Union).

Most of the remaining vestiges of the traditional distinctions between one type of financial-service institution and another will be swept away in the years ahead-a process we have called homogenization.

How can we reduce risk in the financial sector?

Financial-services competition is increasingly taking the place of government rules in the hope that the public will benefit in terms of more convenient services at lower cost.

With greater disclosure requirement, more financial institutions will be subject to the risk of public disfavor. Ultimately the "discipline of the market" will be more completely unleashed to help ensure prudent management and to control risk taking.

The dual concern-letting markets and competition do their essential work to benefit customers, while preserving safety and soundness to protect the most vulnerable customers-has led to the development of several different regulatory approaches, any one of which may come to dominate the future of the financial-services business.

The recent Financial Services Modernization (Gramm-Leach-Bliley) Act, passed in the U.S. in November 1999, now allows banks, thrifts, insurance companies and securities firms to enter each other's backyard through a centuries-old financial structure, the holding company. In the holding company, different affiliated firms offer different groups of services but all are owned by one controlling company at the top of the organization. A model of this kind is called the "Financial Holding Company Model."