Market Failure in the Financial Sector
Types of Market Failure in Financial Markets
Market Failure | Explanation |
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Asymmetric information | Many financial products are complex and difficult for consumers to understand The sellers often have a significant information advantage over the buyers E.g. During the financial crisis, financial institutions bundled thousands of mortgages together and sold them on to investors. The sellers had more information on the risk profile of each bundle than the buyers E.g. Mortgage sellers often understand the implications of interest rate changes to repayments much better than the average consumer
The Global Financial Crisis demonstrated that asymmetric information even exists between financial markets and the regulators set up to monitor them
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Externalities | |
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Moral hazard | |
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Speculation and market bubbles | |
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Market rigging | There have been allegations that some banks and individual bankers have been involved in rigging key interest rates or exchange rates in order to profit maximise This is considered to be fraudulent activity but is often difficult to identify or trace unless there is a whistleblower who reveals the fraud
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