Net regulatory burden for FIs is higher because regulators may require the FI to

Question

Quizplus · Accepted Answer

Regulatory burden for FIs is higher if they are required to hold more capital than what they would hold without regulation. This is because holding more capital reduces the risk of the FI failing, but it also reduces profitability because capital is expensive to hold. Therefore, regulatory requirements that increase the amount of capital held represent an additional burden. Producing less information than would be produced without regulation (B) would not increase regulatory burden since less information means less work. Holding more debt than what would be held without regulation (C) can reduce regulatory burden since debt is cheaper than equity and can increase profitability. Holding fewer reserves than what would be held without regulation (D) is also likely to reduce regulatory burden since reserves are costly to hold.

Net Regulatory Burden for FIs Is Higher Because Regulators May