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Questions Covered in the Solution
B1. Competition in the banking sector.
What is the best method to measure competition in banking markets? Within your discussion consider at least two different approaches used to measure competition in banking markets within the academic literature and critically discuss their relative benefits and failings.
B2. Implications of bank mergers for efficiency, profitability and competition.
The EU witnessed a reduction in the number of banks from the 1990s to the present. M&A played a central role during this process. Analyse the impact of financial consolidation on the structure and performance of the EU banking system.
C2. Testing the Capital Asset Pricing Model and multifactor models of asset pricing.
a) How would you calculate the average returns predicted by the CAPM on the graph?
b) Explain the implications of the above graph for the CAPM and the Fama-French Factor model.
c) Critically discuss whether the CAPM is dead.
Sample of Solution
B1. What is the best method to measure competition in banking markets? Within your discussion consider at least two different approaches used to measure competition in banking markets within the academic literature and critically discuss their relative benefits and failings.
Banking is the system that controls the supply and demand of money in a country. Banking system plays the important role of protecting the Wealth of people. The banking system also helps the people settle their needs by lending the reserved money to the people where the demand exceeds the supply. Banks are there to create extra money to use while residing in the same country by creating fake money in the form of loans. Fake Money is not fake rather it is an illustration of the multiplier effect of money. Due to these certain attributes, banks are considered as a vital part of a country’s financial cycle. In the present time with the advancement of Globalization, the competition and hence the importance of banking system has increased than ever before. Banking competition has been the subject of many studies since the great financial crises. Stability in the banking system has the impact on the economy of the country. Ambiguity in the determination of competition in the banking sector has resulted in the generation of many approaches to measure it. There are many methods of measuring the competition in the banking sector and hence the consequences of this competition on the economy of the country.
B2. The US banking system has experienced rapid consolidation over the last 20 years driven by market power, scale economy and Too-Big-To-Fail motives. Please analyse the impacts of bank mergers and acquisitions on US bank risk-taking behaviour.
There are many reasons of change in the banking system of a country. Such reasons intrigued the change in US banking system. The banking system of not the only United States but also of the whole world has been transformed in the recent past. The reasons for such transform count the globalization of modern world in which all the countries are inter-dependent and interconnected than ever before. Countries in the present world are also financially connected making the whole economic system of the world more complex.