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The Dodd-Frank Act’s mandate that the Board of Governors of the Federa

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The Dodd-Frank Act’s mandate that the Board of Governors of the Federa  [#permalink]

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New post 16 Nov 2015, 21:05
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The Dodd-Frank Act’s mandate that the Board of Governors of the Federal Reserve System adopt enhanced capital standards to mitigate the risk posed to financial stability by certain large financial institutions provides the principal statutory impetus for enhanced capital requirements for systemically important financial institutions ("SIFIs"). Because the failure of a SIFI could undermine financial stability and thus cause far greater negative externalities than could the failure of a financial institution that is not systemically important, a probability of default that would be acceptable for a non-systemic firm may be unacceptably high for a SIFI.

The Dodd-Frank Act's mandate is based on the assumptions that

(A) Reducing the probability that a SIFI will default reduces the risk to financial stability
(B) A financial institution that is not systemically important has a far greater probability of default than a SIFI
(C) The default of a Non-SIFI institution causes far greater negative externalities than the failure of a SIFI
(D) The high probability of default of SIFIs is the only reason for the enhanced capital requirements
(E) Negative externalities cause SIFIs to default
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Re: The Dodd-Frank Act’s mandate that the Board of Governors of the Federa  [#permalink]

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New post 09 May 2016, 10:37
Marchewski wrote:
The Dodd-Frank Act’s mandate that the Board of Governors of the Federal Reserve System adopt enhanced capital standards to mitigate the risk posed to financial stability by certain large financial institutions


The Dodd-Frank Act’s

Federal Reserve adopt capital standards to mitigate risk posed by large financial institutions

Large financial institutions ---->Risk-----> Federal Reserve

Large financial institutions ---->Risk---->|Protects|----> Federal Reserve

Marchewski wrote:
provides the principal statutory impetus for enhanced capital requirements for systemically important financial institutions ("SIFIs").


Statutory reasons for enhanced CAP requirements for SIFI

Marchewski wrote:
Because the failure of a SIFI could undermine financial stability and thus cause far greater negative externalities than could the failure of a financial institution that is not systemically important


Failure of a SIFI > Failure of a non SIFI { Negative externalities due to failure }

Marchewski wrote:
a probability of default that would be acceptable for a non-systemic firm may be unacceptably high for a SIFI.


Probability of default for a non-systemic firm > Probability of default for a Systemic firm


Does it make sense now ??
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Re: The Dodd-Frank Act’s mandate that the Board of Governors of the Federa  [#permalink]

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New post 16 May 2016, 02:39
Marchewski wrote:
The Dodd-Frank Act’s mandate that the Board of Governors of the Federal Reserve System adopt enhanced capital standards to mitigate the risk posed to financial stability by certain large financial institutions provides the principal statutory impetus for enhanced capital requirements for systemically important financial institutions ("SIFIs"). Because the failure of a SIFI could undermine financial stability and thus cause far greater negative externalities than could the failure of a financial institution that is not systemically important, thus cause far greater negative externalities than could the failure of a financial institution that is not systemically important,
The Dodd-Frank Act's mandate is based on the assumptions that

(A) Reducing the probability that a SIFI will default reduces the risk to financial stability
(B) A financial institution that is not systemically important has a far greater probability of default than a SIFI
(C) The default of a Non-SIFI institution causes far greater negative externalities than the failure of a SIFI
(D) The high probability of default of SIFIs is the only reason for the enhanced capital requirements
(E) Negative externalities cause SIFIs to default


Here in the stimulus it is stated that failure of a SIFI could undermine financial stability and thus cause far greater negative externalities than could the failure of a financial institution that is not systemically important, thus cause far greater negative externalities than could the failure of a financial institution that is not systemically important,
from this statement it is clear that risk of financial stability reduces as the probability of default of SIFI redduces.
hence A
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Re: The Dodd-Frank Act’s mandate that the Board of Governors of the Federa  [#permalink]

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New post 20 Aug 2018, 02:41
Kanika3agg wrote:
Why is B not correct here?


B is wrong since the questions doesn't discuss probabilities of default. The question says that if systematic institution fails then it causes far greater externalities than failure of non-systematic institution. Hence probability of default is not an assumption. If you try to negate B conclusion still holds true
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Re: The Dodd-Frank Act’s mandate that the Board of Governors of the Federa  [#permalink]

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New post 20 Aug 2018, 05:58
Its very hard to understand plz explain how A is correct.
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Re: The Dodd-Frank Act’s mandate that the Board of Governors of the Federa  [#permalink]

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New post 20 Aug 2018, 08:26
tejyr wrote:
Its very hard to understand plz explain how A is correct.


Ok i will try to explain

Premise: D-F Act is an impetus for SIFI to use enhanced capital requirments
Premise: Failure of SIFI causes more externalities than that of non-SIFI
Conclusion: A probality of default that is acceptable for non-SIFI would not be acceptable for SIFI

Assumption is something that links premises to conclusion. As i said in the previous post, if you negate assumption then the whole argument collapses.

B says that probabilitites of default are different. But this is clear from the conclusion. A says that using enhanced requirements default can be prevented. This is what argument assumes. If you negate this assumption argument collapses. Hope it is clear
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Re: The Dodd-Frank Act’s mandate that the Board of Governors of the Federa  [#permalink]

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New post 20 Aug 2018, 09:03
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tejyr wrote:
Its very hard to understand plz explain how A is correct.


If you cut down the complex verbiage of the premise , you will find the following :

AIM: To lessen the risk posed to financial stability (FS)
Proposed Plan : DF Act
What does the Act do : employs enhanced rules / standards to SIFI Loans.
Why is it applied to SIFI : If a NON-SIFI loan defaults, the loss is acceptable BUT if a SIFI defaults , the loss is not acceptable.

GAP: SIFI Defaults -------> risk to FS

Assumption : Reducing the SIFI defaults will lessen the risk to FS ------> Option A
(In case you don't understand the term 'Defaults' , the question can be quite challenging.)
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Re: The Dodd-Frank Act’s mandate that the Board of Governors of the Federa &nbs [#permalink] 20 Aug 2018, 09:03
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