The Orderly Liquidation Authority - Economics Assignment Help

Assignment Task

Task
(a) Why was the Orderly Liquidation Authority set up in the US, and what are its main functions?
(c) Which of the above approaches would you support? Discuss critically.
This question looks complicated, but only requires basic algebra – and a good feel for the economics of the issue! The answer to each part of the question is also quite short.Consider a bank which can lend to (or invest in) one of two different projects. The loan size of each project is the same, and given by L. Project A provides a return of with probability , and a return of 0 with probability and Project B provides a return of with probability , and a return of 0 with probability (1 –.Assume Rb > Ra, and paRa > pbRb. Thus, Project A is safer, and also more socially desirable (since paRa > pbRb), but if Project B succeeds, it provides a higher return.Also assume that a deposit insurance scheme (financed by taxpayers) is in place, so in the event of a bad outcome from either project the depositors are paid out of the insurance scheme. (Significance of this?)The bank can finance the loan either from bank deposits D or from its own capital K raise deposits, the bank pays a gross interest rate (assumed fixed) of , while the gross cost of capital to it is (1+z).Hint to get you started: we  and correspondingly for For questions (a) and (b) assume that K = 0.Suppose that the banking system is highly competitive, so that = (the bank makes zero excess profits from Project A). Which project will the bank choose?Suppose, starting from = starts rising above and rises by equal absolute amounts as . Will there be a value of at which the bank’s project choice will differ from that in part (a) above? Illustrate with 2 diagrams, one with on the vertical axis and on the horizontal, and another with on the vertical axis and on the horizontal.Now suppose that the bank is required to maintain an amount K > 0 of capital.Suppose that , are each less than (1+z), and that , are such that, when K = 0, with both of these strictly positive. Will the inequality always continue to hold as K is progressively raised above 0? Illustrate diagrammatically with on the vertical axis, and K on the horizontal.What are the economic lessons yielded by your answers to the above questions?

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