SEMESTER SPRING 2018
Money and Banking (MGT411)
GDB No. 1
Government Safety Net
Due Date: July 31, 2018 Marks: 5
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.
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;
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