Regulations that will make large banks easier to break up, separating their retail (deposits and lending) business from their wholesale (investment banking) operations, are sensible to the extent they:
a. Will make large banks less able to use cheap retail deposits to fund their trading business and take risks
b. Will diminish an implicit taxpayer subsidy that supports banks that are too big to fail
c. Will benefit retail clients e.g. through lower account fees and higher deposit rates since banks will be more profitable and safer
d. Will benefit the bank shareholders since it will be easier to force banks’ creditors, rather than shareholders, to foot the bill if a bank fails
e. All of the above answers.
During a financial crisis, a central bank may opt to print new money to buy long-term mortgage bonds while simultaneously borrowing back this money for short periods using reverse repos. This is likely to:
a. Raise anxieties that money printing could fuel inflation later
b. Steepen the yield curve (by raising long-term rates), while forcing market players out of supposedly safer, longer-term instruments
c. Take distressed assets off banks’ balance sheets and free up usable capital that should in turn spur investment in equities, and help homeowners refinance their mortgages
d. All of the above answers
e. None of the above answers.