Financial consolidation of banks with other financial services in recent years poses government safety net problems. The safety net intended for depository institutions may be

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The question examines how the government safety net for depository institutions has evolved in the context of bank consolidation with other financial services.
Option A: 'extended to other activities such as securities underwriting.' This choice reflects a widely observed concern: when a safety net covers depository institutions, the protections and guarantees can become relevant for related activities that these institutions engage in, such as securities underwriting, due to integrated risk and moral hazard. By extending safety nets to these ancillary activities, policy makers attempt to prevent regulatory arbitrage and systemic risk spillovers across the diversified financial group.
Option B: 'too small to do any good.' This option minimizes the effectiveness of the safety net, implying it has no meaningful impact. In reality, even if imperfect, the safety net provides stabilizing signals and allocates lender-of-last-resort support, which can influence behavior and market confidence, contrary to saying it does nothing.
Option C: 'filled with large gaps.' This answer suggests major missing elements in the safety net, but it lacks specificity about how consolidation alters coverage. While gaps can exist in many frameworks, the statement overgeneralizes the net’s adequacy without tying it to the consolidation context described in the prompt.
Option D: 'unnecessarily increased when there is a problem in an area that does not impact depository institutions.' This implies a misalignment between the problem area and the safety net. However, in practice, regulators consider cross-market linkages and contagion channels, so protections may be extended or adjusted precisely because troubles in one area can affect depository institutions indirectly.
Each option probes different angles of how safety nets interact with integrated financial activity and consolidation. The nuanced idea is that extending protections to related activities helps address systemic risk created by diversified financial groups, rather than declaring the net universally ineffective, overextended, or misaligned with the areas of risk.

Financial consolidation of banks with other financial services in recent years poses government safety net problems. The safety net intended for depository institutions may be

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Financial consolidation of banks with other financial services in recent years poses government safety net problems. The safety net intended for depository institutions may be

View Explanation

Log in for full answers

Similar Questions

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