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• mention the three main purposes of regulation according to traditional economic theory.

  - constrain the use of monopoly power and enhance competition
  - Information provision
  - make sure that the social and overall costs of market failure exceed the private costs of failure and the extra costs of regulation

• Bank failures come along with different externalities in comparison to failure of corporations, mention 2 of them:

  - informational contagion: if a bank fails there will be distrust in ''BANK''. if a corporation would go bankrupt the consumer would just switch to another corporation
  - lost to access of future funding for customers of failed banks because other banks do not have information about the customer.
  
  other: more interbank trade than corporation trade. // bank runs and fire sales // instead of fire sales they will rise the interest rate for customers

• 4 potential sources to protect the financial system against the failure of financial markets

  banks, private insurance, central bank, government

• a funding shortage exists when it is expensive to:

  - borrow more funds (low funding liquidity)
  - sell off its assets (low market liquidity)

• describe the relation between funding liquidity and the domino model:

  because of interbank lending the soundness of one individual institution ensures the soundness of the system as a whole. if bank c gets liq problem and makes use of its claim it could deplete the equity of the sound bank bank B, leading to domino effect

• how does the asset price effect amplifies the loss spiral

  When financial institutions mark their balance sheets to market, changes in price lead to losses that may be sufficient tot transmit the shock to other institutions, even when they do not hold claims against each other. losses worsen the funding liquidity for many financial institutions and forces them to sell even more assets which further depresses prices and increases losses

• How do liquidity spirals cause pro-cyclicality?

  as asset prices drop, losses increase and margins/haicuts increase.
  
  E.G. Margins increase when prices drop due to: backward looking risk measures, time-varying volatility, adverse selection

• macro prudential regulation classify objective risk measures  which should capture the risk-spillovers from one institution to the next. define on of the spillover risk measures:

  CoVaR, conditional value at risk. quantifies how financial difficulties of one institution can increase the tail risk of others. captures the links across several institutions.

• when do financial players have high risk-spillovers?

  - if it causes financial difficulties at other institutions
  - simply correlated with financial difficulties amongst other financial insitutions

• Where are better measures of macro-prudential risk to be found:

  in leverage ratios, maturity mismatches and estimates of bank credit expansion and asset price expansions