294 $
© 2014 Pearson Canada Inc.$
What is the evidence on the spread of government deposit insurance throughout the world?
Answer: The spread of government deposit insurance throughout the world was intended to
minimize banking crises but the evidence shows that it did not help to improve the performance
of the financial system and prevent financial crises. Research at the World Bank has found that
on average, the adoption of explicit government deposit insurance is associated with less banking
sector stability and a higher incidence of banking crises. However the negative effects of deposit
insurance appear only in countries with weak institutional environments: an absence of of rule of
law, ineffective regulation and supervision of the financial sector, and high corruption. The
conclusion is that adoption of deposit insurance may be exactly the wrong medicine for
promoting stability and efficiency of banking systems in emerging-market countries.
Diff: 2 Type: SA Page Ref: 231
Skill: Recall
Objective List: 10.5 Future regulation in response to the global financial crisis
Describe the four ways in which financial regulation may be heading given the current global
financial crisis. In what way is new financial regulation constrained?
Answer: The four directions include increasing capital requirements, changing compensation to
reflect the "good health" of financial institutions and imposing regulations to restrict conflict of
interests at credit rating agencies. Too many strict regulations will restrict the financial industry
and reduce economic growth.
Diff: 2 Type: SA Page Ref: 223 - 224
Skill: Applied
Objective List: 10.5 Future regulation in response to the global financial crisis