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While gross notional exposures are huge, net exposures at the banks are much smaller, on the order of 0.1 percent of gross exposures. Since most financial risk (but perhaps not operational risk) is proportional to net exposures this is a more sensible measure of total derivative risk at the banks. Since net exposures at the 6 banks with the largest ...


12

"Cash" is an emergent phenomenon of human economic organization. It exists for lots of reasons, as a provider of economic anonymity, a low transaction cost solution to the double-coincidence of wants, a portable medium of exchange, and a tool of economic accessibility for all including those in the informal economy, foreigners, the unbanked, and those with ...


5

I found two of two papers discussing this period, the second at length. Throughout the 1970s, the capital position of many banking institutions declined significantly. To address this decline, in December 1981, the bank regulators issued explicit minimum capital standards for banks and bank holding companies. These standards required banks to hold ...


4

Jean Tirole just won the Nobel Prize for his studies in regulation in different markets, including the banking market. Check: Balancing the Banks: Global Lessons from the Financial Crisis and The Prudential Regulation of Banks


4

To elaborate on @HerrK’s comment: The product rule of differentiation is $$\frac{d}{dx}fg=f’g+fg’$$ The text in your question states that you are trying to maximize the quantity $$[a-Q-c]q_i$$ So, as you predicted, we must differentiate this and find when the derivative equals $0$. If we differentiate this with respect to $q_i$ and use the product rule, ...


4

As far as we can tell, no, there is no way to do it using only a free market. Coase postulated that within a free market, agents would negotiate private contracts to internalise the externalities. In reality, this didn't happen. It turned out that humans aren't perfectly informed hyper-rational beings. And as Coase himself had inferred, the transaction ...


3

This article states: In both of his seminal works in political theory, The Constitution of Liberty and Law, Legislation and Liberty, Hayek endorsed as a legitimate function of the state the power to regulate monopolies and curtail industry practices in restraint of trade. For example, in the first book, in Chapter 15, Hayek ...


3

(source: dineshbakshi.com) As you can see in the graph, price controls policies create excess demand, therefore you will end up with shortage or you will import more bananas. I'm not a banana expert, but I assume bananas are pretty inelastic. Also, banana supply is inelastic in the short run (they have already planted bananas), therefore the excess ...


3

In general, yes it's an externality: it's a cost borne by others. How do we know it's a cost with real economic value? Because in general, properties with good light and better views tend to attract higher purchase prices and higher market rents. And there's a difference between "view/light might be obscured some time in the future" versus "they are ...


3

As well as most of the positions being hedged, Big banks have large desks of mathematicians modelling these things. The sensitivity to first, second and cross derivatives of possible market moves are monitored, and the Value at Risk (a measure of Risk) is reported to markets and to regulators. Banks must hold capital (ie. allocated equity) against this risk. ...


3

I think in the literature of uncertainty I once read that increasing the number of laws increases the potential source of uncertainty. However, it was probably more related to investment than to working performance. However, if you are interested "Measuring economic policy uncertainty" by Baker, Bloom and David (2013) might be a good start.


2

Restoring Financial Stability, a series of essays focusing on policies to address the issues that led to the most recent crisis, edited by Viral Acharya and Matthew Richardson, is good and accessible.


2

A good historical survey is "The History of Cyclical Macroprudential Policy in the United States" by Elliot, Feldberg, and Lehnert: Since the financial crisis of 2007-2009, policymakers have debated the need for a new toolkit of cyclical “macroprudential” policies to constrain the build-up of risks in financial markets, for example, by dampening ...


2

It's not really introductory in the sense that it focusses on what Macro-Prodential means (reducing risk at the cost of efficiency), but rather applied: Martin and Philippon (2014) analyze the great recession in Europe and simulate to what end more macruprudential policies would have ameliorated the situation. We provide a first comprehensive account of ...


2

There is a movement in automotive and pedestrian traffic management called Shared Spaces. Under Shared Spaces the vast majority of formal and informal road signage is removed, such as stop signs, traffic lights, raised curbs, road lines. The idea is that these signs makes pedestrians and drivers run follow the signs instead of watching the road and the ...


2

The reserve requirement on deposits ensures that (for a given $reserve\ requirement(\%)$ and $deposits(\$)$): $$loans(\$) \leq deposits(\$) \cdot (1 - reserve\ requirement(\%))$$ Fully loaned up means that this holds with equality: $$ loans(\$) = deposits(\$) \cdot (1 - reserve\ requirement(\%)) $$


2

ICAAP stress tests are for internal capital or economic capital, which are requirements under Basel II pillar II. CCAR stress testing is for regulatory capital, which is also under Basel II. US regulators provide specific scenarios and risk factor shocks.


2

The point @EnergyNumbers raises is correct, and it's easy to understand from an intuitive standpoint: One of the key roles of financial intermediaries is to match the demand for liabilities of a given tenor to the demand for assets of a given tenor. Financial intermediation allows maturity mismatches to exist in non-finance sectors of the economy by taking ...


2

Equity/stock/capital does absorb losses. Here is a stylized example: Ann creates a new bank. She puts in \$100 of her own money. This \$100 is her equity/stock/capital. She borrows another \$900 (debt). (For simplicity we'll assume that all debt/loans have an interest rate of 0%.) She has a total of \$1,000. She lends all of it to Bob. A little later, ...


2

One argument is that it creates a sort of moral hazard: An insider may take (potentially harmful) actions so as to create fluctuations in the share price and profit from such fluctuations. His actions may be harmful to the firm and to society. Example. Suppose a scientist working at a pharmaceutical company on a cure for cancer. All indications are that ...


1

If I understand your question correctly, you are proposing that the government sets prices and observes the behavior of market actors to elicit the demand and supply functions. I see two possible concerns: Unless the monopoly is obligated to serve all customers, the market may not be in equilibrium, full demand may not be observed. Similarly the government ...


1

In a nutshell, pro-business policies help currently existing businesses and their shareholders. Pro-market economies are those that follow the tenets of the free market - competition, no barriers to entry and so on. Pro-business policies may not imply a pro-market environment. This is discussed at length for the case of India in Rodrick, D. and Subramanian, ...


1

Depends on what you mean by 'possible'. The liquor stores in your example could form a union, and collectively bargain with brands. Then if a brand breaks a contract with one of them, they all break the contract. This would greatly disincentivize the brands' strong arm practice. In my opinion this is unlikely to work (it is very hard to organize), but it is ...


1

Progressive income taxes on individuals is not very likely to have any real impact on market power, but progressive income taxes on corporations can certainly have this effect. The key idea is that in many industries (for example, the financial industry), there are geniune economies of scale: having a big balance sheet allows an investment bank to take ...


1

The first thing we must ask is about which part of advertising are we speaking? Are we talking about advertising on television and other entertainment mediums or are we talking about advertisement via the packaging of the good itself? One impact either way would be an increase in competition amongst monopolistically competitive firms. These firms are often ...


1

It comes down to net exposure (and hedging as much as you can). Simple example: hold 1 bond maturing in 3 years. Sell 1 future that delivers that 1 bond in 3 years. If you can't perfectly hedge (which does happen), you either have risk (the unhedged amount or security) or you over-hedge (because you have to hold something to offset your risk). Assuming not ...


1

This is a good question to ask, and the short answer is no there isn't. There probably should be, but the system itself is extremely complex and at the moment this is really the bleeding edge of research in Economics. It's an extremely involved subject, in no small part because the financial system itself is a moving target - it keeps being changed by ...


1

Bonds and stocks, and in general all securities related to a firm, are regulated by the SEC in the US. Some other financial instruments are regulated by the CFTC (mainly commodities and derivatives, though some of the latter are regulated by the SEC) Stocks Stocks are a share in the firm. Meaning they are actually ownership securities. Hoilding a stock ...


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