Course Work Coursework Example | Topics and Well Written Essays - 500 words

Course Work - Coursework Example The moral hazard problem occurred as a result of asymmetric information after transaction happens and prompts dispute of interests. It is the hazard that borrower in a monetary contract has the motivating forces to participate in hazardous activities that are making it more difficult that the loan amount will be paid back. On the off chance that there is no asymmetry in the data that a lender and a borrower had, which implies the lender can keep enlightened about the borrower whereabouts and screen borrower to follow the terms of the transaction they agreed upon. There should not have the problem of moral hazard. Yet, as a general rule, if financial intermediaries proceed as a lender, to set up a refined and frequently monitor system for every individual borrowers may cause a tremendous cost for financial organizations, or significantly bigger than the loss from the expected default hazard (Dionne and Lasserre). Moreover, if a monetary organization works as a borrower, the administration can limit the trading on insider trading on the biggest stockholders, yet different representatives in the organizations, for example, directors and senior managers might additionally increase profit from the special data which could influence the offer value when unveiled, and trades generate profit or evade losses before the public be informed of the data. Since these data are internal and confidential, therefore, it is hard for potential investors to get knowledge from this and cannot evade the hazard issue from it. Consequently, the problem will still exist (Dionne and Lasserre). In 2008, as a financial crisis began to unfold in the United States, the FDIC raised the limit on insured losses to bank depositors from $100,000 per account to $250,000 per account. How would this help stabilize the financial system? As the 2008 financial crises occurred due to the failure of financial institutions like Lehman Brothers