Economic Analysis of Financial Structure

These flashcards cover key concepts related to the economic analysis of financial structures, including terms, definitions, and important regulatory considerations in finance.

Adverse Selection

Occurs when one party in a transaction has more information about risk than the other, leading to high-risk participants dominating the transaction.

Financial Intermediaries

Institutions that facilitate indirect finance by channeling funds from savers to borrowers, primarily including banks.

Collateral

An asset pledged by a borrower to secure a loan, which the lender can claim if the loan is not repaid.

Moral Hazard

The risk that a borrower will engage in risky behavior because they are insulated from the consequences.

Principal-Agent Problem

A situation where the interests of the owner (principal) and the manager (agent) diverge, leading to a lack of alignment in goals.

Deposit Insurance

A government scheme that protects bank customers' deposits in the event of a bank failure.

Transaction Costs

Expenses incurred when buying or selling securities, which financial intermediaries aim to reduce.

Regulatory Arbitrage

The practice of taking advantage of loopholes in regulations to circumvent unfavorable laws or capital requirements.

Basel Accord

An international banking regulation framework that sets out risk-based capital requirements for banks.

Purchase and Assumption Method

A rescue strategy where a healthy bank buys the assets and assumes the liabilities of a failed bank.