Case $1$: Free Money: To regulate or not!

All Joshua wanted to do was buy an iPhone $11.$ Instead, he ended up with $$5,850$ in debt and a

personal loan with an annual interest of $29\mathrm{.}99$ per cent. "I was crying," Joshua says of the

moment he realised how high her interest rate was:

Debt from high$-$interest instalment loans, a reasonably new product, is becoming increasingly

common among young people with short credit histories. The Consumer Financial Protection

Bureau ensures borrowers are not getting sucked into so$-$called debt traps by putting in place

payday loan regulations that, among other things, require payday lenders to check that borrowers

can afford to pay back their loans on time by verifying information like incomes,rent, and even

student loan payments. Large banks, including JPMorgan Chase, and Bank of America, do not

provide payday loans but enable borrowers to easily access money by making the pre$-$approved

loan available with high$-$interest rates. Joshua is passionate about his encounter and stated that

"These large banks are Too$-$Big$-$to$-$Fail" $($TBTF$)$ and therefore need to be transparent and held

accountable for their actions.

Questions:

$1.$ Provide a clear explanation of why regulation is needed to address the issues

arising You must include the payday loan regulation implicitly declared in the

Case$).[8$ marks$]$

$2.$ How do we determine whether payday loan regulations are good or bad? $($You

must justify your response.$)[7$ marks$]$

$3.$ Clearly define $*$regulatory arbitrage' and provide the example seen in the case by

identifying and discussing the loophole$($s$)$ large banks took advantage of$.[7$ marks$]$

$4.$ The Banking Act of $1933$ did not make provision for the separation of two core

activities of banks. What are these activities, and what was the name Act used to

address the loopholes?

$[5$ marks$]$

$5.$ If one of the large banks $-$ JPMorgan Chase, Bank of America $-$ fails, this Act

would assist the bank supervisor in resolving the failed institution$($s$)$ and discuss

two $(2)$ methods the regulator can use to resolve the failing banks $[10$ marks$]$

$6.$ What role can deposit insurance play? $($Be sure to include in your discussion; the

thinking behind the decision to introduce deposit insurance $).$

$(8$ marks$)$