Question 1

Discuss new regulations under the U.S. Dodd-Frank Act and Basel III to reduce the risk of very large non-bank financial institutions as well as large financial services firm.

Accepted Answer

New regulations under the U.S. Dodd-Frank Act of 2010 and under Basel III have been established to reduce the risk of very large non-bank financial institutions, as well as extremely large financial services firms. Under Dodd-Frank, the Financial Oversight Council (FSOC) was established and is required to supervise and regulate non-bank SIFS (systematically important financial institutions) that have systemic risk because of their size, interconnectedness, leverage, liquidity, risk and maturity mismatch, as well as lack of a substitute and lack of existing regulation. Evaluation criteria initially include: (1) if they have consolidated assets greater than $50 billion; (2) Credit Default Swaps (CDS) outstanding that are greater than $30 billion; (3) Net derivative liabilities greater than $3.5 billion; (4) Total debt outstanding greater than $20 billion; (5) A leverage ratio greater than 15 to 1; and (6) a short-term debt ratio greater than 10 percent. A company meeting these thresholds is subject to further tests to see if it is systematic. Even if a non-bank is not given a SIFS designation, it may still be under greater scrutiny by other regulators including the Consumer Financial Protection Bureau or state financial regulators as it gets larger, and all non-banks are subject to the Truth in Lending Act (TILA) and other consumer protection acts. There has also been concern over non-banks with large amounts of short-term wholesale funding, such as tri-party repos, with proposals to limit this type of liquidity risk.

Question 2

Discuss reasons for the growth of larger and larger financial institutions and why regulators have been concerned about the ability to manage large financial institutions.

Accepted Answer

With the growth of technology, it became easier for larger and larger financial institutions to be managed under one umbrella. Also with deregulation, such as in the U.S. with the passage of the Gramm Leach Bliley Act of 1999 (allowing banks, insurance, investment and security firms to operate under the same umbrella), more than 640 bank holding companies elected to become financial holding companies (FHCs) to become diversified financial firms. Many financial services firms started out as finance companies, while others began with the merger of several finance, insurance, and investment companies over a decade. With cultural, regulatory, and other country differences, management complexity increases. Regulators have been concerned about the challenges of corporate control and risk management for diversified financial companies. Since a number of huge financial services firms having severe liquidity problems and were on the brink of bankruptcy during the Subprime Crisis and the Global Recession, concerns have increased about too big to manage and too big to fail institutions.

Question 3

Discuss FinTech and advantages and disadvantages suggested by Wolfe (2016).

Accepted Answer

The term "shadow banking" today encompasses any financial intermediaries that engage in bank-like activities but are not regulated and do not have access to deposit insurance or a central bank for liquidity. The term "shadow bank" was coined in 2007 by Paul McCulley to describe the special investment vehicles (SIVs) used by banks to sell loans that were repackaged as bonds and mortgage-backed securities. Non-bank shadow banks include hedge funds, finance companies, asset-backed commercial paper (ABCP) conduits, special investment vehicles (SIVs), credit hedge funds, money market mutual funds, securities lenders, limited purpose finance companies (LPFCs), and government-sponsored enterprises (GSEs), pawn shops, among many others.
This term has expanded to include what is often called FinTech firms. With new disruptive technology, different players are included from mobile payment systems to pawnshop to bond-trading platforms, peer to peer (P2P) lending websites, and other mortgage loans websites, such as Rocket Mortgages on Quicken Loans. Technology firms have rapidly entered the payments arena as well.
As noted by Wolfe (2016), new technology can help make markets more efficient and transparent by: (1) allowing for instantaneous settlement for payments with improvement in the "robustness of record keeping that could revolutionize domestic and foreign payments;" (2) transforming lending using peer-to peer (P2P) lending, a form of disintermediation by matching savers with investments, including equity crowdfunding, invoice trading, P2P consumer and business lending, and others; and
(3) serving as a potential source of transformation via "big data." However, opportunities for malfeasance could also occur, with transactions that rest on promises against an inherently uncertain future.

Question 4

What are shadow banks and how rapidly have they grown? Discuss concerns and advantages of shadow banking.

Accepted Answer

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Question 5

Discuss different types of finance companies.

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Question 6

Compare finance companies balance sheet to those of banks and discuss differences between finance companies and banks.

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Question 7

Give an overview of crowdfunding and new U.S. regulations, concerns, and crowdfunding used for good causes.

Accepted Answer

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Question 8

Discuss microfinance and well-known microfinance organizations and trends.

Accepted Answer

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Question 9

Discuss reasons for the development of financial conglomerates.

Accepted Answer

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Question 10

Discuss venture capital firms and how returns expected on investments.

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Question 11

Give a brief overview of credit card companies.

Accepted Answer

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Question 12

Discuss government-sponsored enterprises in the U.S. as part of the shadow banking system.

Accepted Answer

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Question 13

Factors affecting the growth of larger and larger diverse financial institutions include which of the following:

Accepted Answer

All of the factors mentioned, namely the growth of technology, deregulation, and economies of scale and scope, play a significant role in the growth of larger and larger diverse financial institutions. Technology allows for better management of diverse financial entities, deregulation allows for consolidation of financial institutions, and economies of scale and scope provide cost advantages to larger institutions.

Question 14

Which of the following is false concerning a systematically important financial institution (SIF)?

Accepted Answer

This statement is false as insurance companies can be designated as SIFs under certain circumstances, such as if they have a significant impact on the stability of the financial system.

Question 15

Evaluation criteria for SIFs by U.S. FSOC financial regulators include:

Accepted Answer

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Question 16

Which of the following is false about shadow banking?

Accepted Answer

Non-bank FinTech firms are considered a type of shadow bank because they engage in bank-like activities but are not regulated the same way traditional banks are and do not have access to deposit insurance or a central bank for liquidity.

Question 17

Which of the following is false about FinTech firms?

Accepted Answer

Traditional financial institutions are, in fact, concerned about the competition from FinTech firms. FinTech firms often bring new approaches to financial services, challenging the traditional business models of established financial institutions.

Question 18

Differences for finance companies and commercial banks include:

Accepted Answer

All of the above statements are correct. Finance companies are less regulated than commercial banks and do not have deposits like traditional banks. They often take on more risky customers that do not qualify for bank loans and charge higher interest rates to compensate for the increased risk. However, because they do not have deposits, they have less liquidity risk than commercial banks but may have more interest rate risk.

Question 19

Finance company types include which of the following:

Accepted Answer

All of the above finance company types are included in the options given.

Question 20

Which of the following is false about finance companies?

Accepted Answer

Finance companies do issue debentures, which are unsecured bonds that are backed by the general creditworthiness of the company rather than specific assets.

Quiz 14: Shadow Banking, Finance Companies and Diversified Financial Firms, Venture Capital, Crowdfunding, and Microfinance