Problem-
Below, please find an article by Nicholas Brady, a former US Treasury secretary, of 27 August 2012 titled, "We need much simpler rules to rein in the banks". Read it carefully. Then, answer the questions below.
Beware of one thing. This is an exercise in economics. Not in politics.
- Explain what "derivatives" are.
- Give a few examples of derivatives and explain how they work.
- What does "leverage" mean?
- What is the problem with too high leverage?
- What is the Volcker rule?
- What is the purpose of the Volcker rule?
- Argue in favour of regulation switching to simplicity
- Argue against regulation switching to simplicity
In the article we find the following paragraph:
"Certainly, the complexity of the models behind the trading makes it exceptionally difficult for the regulators to have benchmarks that allow them to make their own independent - and different - assessments of the risks. The regulators themselves may have an alternative view of the underlying assumptions in the derivatives."
- Why would the regulators want to make their own assessments of the risks?
- Suggest some areas in which regulators may have an alternative view of underlying assumptions.
Additional Information-
The problem is belongs to Economics, mainly macroeconomics. It is a review about the news article titled, "We need much simpler rules to rein in the banks" by Nicholas Brady. The article is about how the banking sector has been functioning and how it ought to function in the wake of 2008 global crisis.
Word limits- 1400