Role of Government in Financial Markets - Banking and Financial Markets - Lecture Slides, Slides for Banking and Finance. Aligarh Muslim University

Banking and Finance

Description: Its the important key points of lecture slides of Banking and Financial Markets are:Role of Government in Financial Markets, Types of Regulation, Regulation, Market Outcome, Financial Markets, Entire Economy, Asymmetric Information, Discourage Participation, Disclosure, Legal Accounting
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Chapter 1. Introduction

Chapter 3. Role of Government in Financial Markets

• why regulate? • types of regulation • regulation in the U.S.

I. Why regulate?

• regulation necessary when there is a market failure – market outcome is NOT optimal by itself

• financial markets important to entire economy

asymmetric information

• some investors have access to more/better information – use it to profit at expense of others – discourage participation in markets

II. Types of Regulation

• Disclosure – issuers make financial information public – level playing field?

Disclosure today

• issues about accuracy of info made public – fraud – creative but legal accounting

• Financial activity – how orders to buy/sell securities are handled – rules to avoid conflicts-of-interest – rules against insider trading (trading on info not available to public)

recent controversy

• conflicts of interest between – investment banking clients – brokerage clients

• did brokerage houses give stocks high ratings to gain the business of those companies?

• Financial institutions – depository & nondepository – permissible activities – protection of investor funds

• Foreign participation – type/amount of institution ownership

III. Regulation in the U.S.

• result of financial crises – panic 1907 – crash of 1929 & Great Depression – S&L crisis 1980s

Federal Reserve System

• 1913, after panic of 1907 • central bank to prevent bank panics • regulator of financial institutions • control of money supply and interest rates

Great Depression

• creation of SEC and rules about disclosure, insider trading

• insurance for bank deposits • other bank regulations later repealed

S&L crisis

• changes in regulation of S&Ls • changes in permissible activities of S&Ls

Current issues in regulation

• conflicts between stock research and investment banking at securities firms

• accounting rules & conflicts between accounting & consulting

• mutual fund oversight

Case 1: Mutual funds

Elliot Spitzer, NYS Attorney General • late trading

– allowing certain clients to trade mutual fund shares after 4 p.m.

– illegal

• market timing – allowed CERTAIN investors to buy and sell share

to profit from daily market movements – not illegal UNLESS only certain investors allowed

to do it

• fees – Spitzer complaining that fees are excessive – BUT fees are within SEC guidelines

Case 2: Martha Stewart

• currently on trial • accused of

– obstruction of justice (lying) – stock fraud – NOT insider trading


• Stewart sold ImClone stock before big drop – did she get tipped off? – (company Pres. or by broker)

• Stewart then lied to investigators & tampered with evidence

• Martha Stewart lied to prevent the stock in here own company from falling – stock fraud

• Stewart claims that she had a prior agreement with her broker to sell when price fell below $60

•

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