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SEMESTER SPRING 2018

Money and Banking (MGT411)

GDB No. 1

Government Safety Net

 

Due Date: July 31, 2018                                                                                                         Marks: 5

 

Learning Objective:

 

The objective of this question is to enable the students to understand the functions and objectives of Central Bank and how they work for a stable economic and financial system.

 

Discussion Question:

 

Government is involved in the financial system for three reasons; to protect investors, to protect bank customers from exploitation and to ensure financial system stability. Liquidity risk and information asymmetry directs the instability of financial system. Thus government officials use different strategies to protect investors and ensure the stability of financial system. They provide safety net to protect small depositors, work as a lender of last resort (usually country’s central bank) by making loans to banks that face sudden deposit outflows and also provide deposit insurance.

As a lender of last resort; Central Bank prevent financial panic or failure of the banks / other solvent institutions experiencing financial difficulty by providing sufficient liquidity so that they can meet withdrawal demands of their depositors. However, the existence of a lender of last resort can only reduce the disorder, but does not eliminate. Keeping this in mind;

 

  • Do you think that the central bank, as lender of last resort, should also supervise the financial industry? Why or why not?

 

  • An institution has Rs. 100 million assets (70% as long term assets) and Rs. 85 million liabilities (out of which 40% are deposits) facing high rate of withdrawal on its demand deposits. It contacts lender of last resort and requests a loan to bridge the gap. Do you think lender of last resort should grant the loan? Support your answer with logical reasoning. 

 

Important Instructions:

  1. Your discussion must be based on logical facts.
  2. The GDB will remain open for 07 working days.
  3. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
  4. Obnoxious or ignoble answer should be strictly avoided.
  5. Questions / queries related to the content of the GDB, which 

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