Question
The term risk appetite describes a corporation's preferred level of risk exposure. Generally, financial institutions have a great deal of discretion regarding the methods that
The term "risk appetite" describes a corporation's preferred level of risk exposure. Generally, financial institutions have a great deal of discretion regarding the methods that they use to determine their risk appetites. However, banks, unlike other types of businesses, are subject to strict guidelines by the Federal Reserve Board of Governors regarding the level of risk they are permitted to assume. There are several reasons for limiting the amount of risks that banks may undertake. In the event that a bank becomes insolvent, the Federal Deposit Insurance Corporation ("FDIC"), a federal government agency that also supervises banks, will assist the bank in the process of liquidation. The FDIC also guarantees the deposits that the bank holds up to a certain dollar amount. In other words, the federal government through the FDIC and the Federal Reserve agree to protect savings and deposit accountholders from losses that they would otherwise experience when the bank becomes insolvent. Do you think the federal protections against losses justifies federal regulation of banks' risk taking? Why might federal intervention in the risk decisions of banks be undesirable? Should the federal government play a more active role in limiting the risks taken by financial institutions that are not banks, such as retirement funds?
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