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

The initiatives of developing larger financial institutions to deal with greater risk of failure has been most evident in the rise of interstate banking in the United States and the emergence of highly service-diversified financial holding companies. The former came partly as a result of the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, while the latter came partly as a result of the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999.

What regulations in the financial sector are likely to grow in the future?

Personal communication between financial institutions and their customers will always be important in the delivery of some financial services, especially to older customers and smaller businesses. However, the cost of these traditional communications methods is rising, so their economic advantage over electronic methods continues to decline.

One model entitled the "Single Regulator" approach calls upon one regulatory agency to oversee an entire financial-services company with all of its component parts.

What is meant by the term homogenization? What do you think is motivating this trend toward service homogenization today? Why is it likely to be more important in the future?

The money and capital markets and the financial institutions that operate within them depend heavily on public confidence.

The public-sponsored insurance idea could be extended to include other financial instruments in which the public saves its money, such as life insurance policies or annuities.

As a result of the passage of the FDIC Insurance Act of 2005 federal insurance coverage of qualified retirement accounts was increased from $100,000 to $250.000.

Failure to effectively coordinate and control the diverse activities, such as: service quality, pricing, employee benefits, recruiting and portfolio selection, may weaken the diversified financial institution's performance at a time when competition in financial services is increasing.

To cope with the trend of forming more diversified financial firms, we need more disclosure of information to the public on the true condition of financial institutions and we also need more international regulatory cooperation (known as harmonization) to prevent global contagion and panics by investors and public at large. We need to use recent technological advances to improve monitoring and warning systems so that regulators can spot troubled financial firms earlier and have a chance to quickly head off service problems.

What is meant by the term market broadening? Why is this phenomenon taking place inside today's financial marketplace?

What are the principal types of risk encountered by financial institutions?

The debate over protecting the privacy of financial-service consumers is likely to persist far into the foreseeable future as consumer interests are balanced against the demands for efficiency and cost control within the financial-services marketplace.

Why are financial innovation and deregulation significant factors in today's money and capital markets? Are they also likely to be important to the future of the financial system?