• a.Briefly explain the concepts of (i) negative externality and (ii) systemic risk.
• b.Explain why, to reduce the risk of one bank's problems spreading through the financial system, regulators require banks to hold a large stock of equity or capital on their balance sheets, along with a stock of liquid reserves.
• c.Explain why deposit protection, which ensures that depositors get their money back even if their bank cannot repay it, may give rise to 'moral hazard' in the behaviour of banks or their customers.
• 'Payday loans' are high interest-rate loans offered to people who need extra money for a few days before their next payday. In 2015 the UK financial regulator imposed an upper limit on the interest rates and total charges that payday lenders could impose. Two years later, the regulator noticed a rise in the interest rates and charges imposed on other forms of short-term credit. How does this illustrate a 'dynamic tension' between financial regulators and providers?