Position A: Financial Institutions' role as specialists in risk measurement and management is reduced. Position B: Financial Institutions' role as specialists in risk measurement and management is increased. Required: Read the "background" below. After reading, select the position you agree with and write a position paragraph supporting either Position A or Position B. Background: A major event that changed and reshaped the financial services industry was the financial crisis of the late 2000s. As Financial Institutions adjusted to regulatory changes brought about in the 1980s and 1990s, one result was a dramatic increase in systemic risk of the financial system, caused in large part by a shift in the banking model from that of "originate and hold" to "originate to distribute." In the traditional model, banks take short-term deposits and other sources of funds and use them to fund longer term loans to businesses and consumers. Banks typically hold these loans to maturity, and thus have an incentive to screen and monitor borrower activities even after a loan is made. However, the traditional banking model exposes the institution to potential liquidity, interest rate, and credit risk. In attempts to avoid these risk exposures and generate improved return-risk trade-offs, banks shifted to an underwriting model in which they originated or warehoused loans, and then quickly sold them. Indeed, most large banks organized as financial services holding companies to facilitate these new activities. More recently activities of shadow banks, nonfinancial service firms that perform banking services, have facilitated the change from the originate-and-hold model of commercial banking to the originate-and-distribute banking model. In the shadow banking system, savers place their funds with money market mutuals and similar funds, which invest these funds in the liabilities of other shadow banks. Like the traditional banking system, the shadow banking system intermediates the flow of funds between net savers and borrowers. However, instead of the bank serving as the middleman, it is the non-bank financial service firm, or shadow bank, that intermediates. Further, unlike the traditional banking system where the complete credit intermediation is performed by a single bank, in the shadow banking system, it is performed through a series of steps involving many non-bank financial service firms. These innovations remove risk from the balance sheet of financial institutions and shift risk off the balance sheet and to other parts of the financial system. Thus, the financial institutions, acting as underwriters, are not exposed to the credit, liquidity, and interest rate risks of traditional banking. In your own words, explain what is meant by business and financial risk. Suppose Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of equity capital? Why or Why not? ExplainBank of America is one of the world's largest financial institutions, serving individual consumers, small and middle market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk-management products and services. The company provides unmatched convenience in the United States, serving more than 59 million consumer and small business relationships with more than 6,100 retail banking offices, more than 18,000 ATMs and an online banking with more than 25 million active users. Bank of America offers services to more than 4 million small business owners through a suite of innovative, easy-to-use online products and services. The company serves clients in more than 150 countries and has relationships with 99 percent of the U.S. Fortune 500 companies and 83 percent of the Fortune Global 500. Bank of America Corporation stock (NYSE: BAC) is a component of the Dow Jones Industrial Average and is listed on the New York Stock Exchange. In late-2008, Bank of America acquired Merrill Lynch, a long-standing, global investments and financial services firm. Even if you are not a Bank of America customer, you have used some bank's ATM system and/or online banking services. Whether you use an ATM or a bank Web site, you are employing an information technology platform to access banking services. The services themselves are enabled through powerful transaction processing systems that allow the bank to manage, as examples: customer deposit accounts (a.k.a. bank accounts) customer checking credit card operations consumer loans corporate loans mortgages trust accounts corporate checking accounts corporate payroll services certificates of deposit and in the case of Bank of America because they now own Merrill Lynch a host of other investment management services The ATM and Bank Web site allow you as a customer to access information about your own personal or corporate accounts and to carry out a range of transactions in a secure manner. From your remote location you are accessing vast computing power in the bank's data center via data networks that provide the pathways for transaction data. The following questions require you to consider the business processes delivered to you as a consumer of banking services via an ATM and to help you explore the underlying information management requirements of the bank. Be detail-oriented in your thinking and presentation.