Money and banking(Information asymmetries and information cost) Essay

Money and banking(Information asymmetries and information cost) - Essay Example ndividual or organization spends in order to ascertain that a particular activity or investment is prudent and viable to invest in due to the provisions of profitability (North, 2007, p. 06). It is necessary for companies to do enough research before engaging or entering into a business activity. This will help reduce the risks involved in starting a new business venture. Information asymmetry refers to situations where relevant information is partially conveyed to the relevant parties in line with the business on a particular product. For instance, when considering decision makers on a specified product, it is adept to enlighten all the participants in the marketing chain (both sellers and buyers), equal information in regard to a product (Eyler, 2009, p. 18). The financial crisis experienced between 2007- 2009 necessitated exploration of the ‘RCR’ regulatory capital requirements weaknesses by the financial firms to take undercapitalized risks between $dollars 2- 3 trillion in a way that compromised the US economy resulting into consolidation of the mortgage market by residential and commercial real estates. However, other explorers like commercial credits also suffered from the same (Das, 2006, p. 39). The first case was that the banks devolved funds to their risk loan portfolios through a process referred to as off- balance- sheet vehicles referred to as structured investment conduits and vehicles. However, this provided facts on remarkable asset based growth in commercial papers prior to the crisis period (Das, 2006, p. 42). The second case involved the buying of underpriced protection obtained from IAG explain this and monocline insurers due to the perception that banks would pocket the difference between the monocline and the spread of the AAA instruments of securitization tranches; since both the IAG and AAA had enough capital to back the insurance as well as insufficiency in systemic crisis. This led to effective recourse back to the institutions of