FINANCE-Indicate whether each of the following regulations and restrictions

QUESTION

Answer the following questions, each part. Be sure to define key terms and, where appropriate, show your calculations.Indicate whether each of the following regulations and restrictions im- posed on banks can be seen as a response to the adverse selection prob- lem (AS), the moral hazard problem (MH), both (B) or neither (N), and give a brief explanation of their rationale. (a) Restrictions on bank branching. (b) Minimum capital requirements.Suppose that a bank has $300 million in assets with an average duration of 8 years and $250 million in liabilities with an average duration of 6 years. Calculate the change in the market value of this bank’s (a) assets, (b) liabilities, and (c) bank capital resulting from a one percentage point increase in interest rates.Discuss the validity and, where appropriate, the invalidity of the following statements. [20 points] “Since federal deposit insurance induces banks to take on excessive risks, there is no doubt that it should be abolished.”“There is no meaningful distinction between the problems of adverse selection and moral hazard, and solutions to each of them are roughly the same.

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