Read the following passage carefully and answer the questions based on the passage: "Bank failures raise serious concerns about supervisory oversight." The case studies of Credit Suisse and Silicon Valley Bank highlight the deficiencies in supervisory supervision. In many instances, supervisors are hesitant to come into conflict with bank management when weaknesses are identified, preferring to do nothing rather than take corrective action at a point in time when key issues are building into a problem. Regulators must adopt an attitude change in which they place more emphasis on the results rather than the details. Overemphasis on trivial matters might lead regulators to overlook more fundamental issues, such as whether financial institutions have adequate capital in case of a shock. Regulating requirements must be simplified. Complex regulation requirements in relation to capital may overlook systemic risk in their approaches when stress tests result in activities gravitating towards less heavily regulated institutions in the non-bank sector. Improved supervisory and bank communications would promote better supervision as a tool for managing risk. Recommendations include being up front about supervisory goals, openness to change within the bank organization, and increased transparency in supervisory contracts as a way of promoting swift problem resolution. These would aid shareholders as well as the overall economy. In conclusion, rather than pursuing a micro-management strategy, a move towards a clearly defined regulation that supports positive incentives is what is needed to ensure that banks behave within frameworks that promote financial stability.
The use of "stress tests" by the author is an example of illustrating which of the following consequences?
The movement of risk-related financial activities into industries that are less heavily regulated.
The question asks what the stress-test example is used to illustrate, so we read it in its own sentence.
The passage says complex capital-regulation requirements "may overlook systemic risk in their approaches when stress tests result in activities gravitating towards less heavily regulated institutions in the non-bank sector".
The stress test is therefore an example of an unintended consequence: heavy, complex rules push risky financial activity out of tightly supervised banks and into lightly regulated non-bank bodies.
That migration of risk into less-regulated industries is exactly option (2).
Option (1), banks misreporting capital, is never mentioned. Option (3) asserts a direct link between complex rules and long-term stability, the reverse of the author's warning.
Option (4), clearer shareholder communication, belongs to a different part of the passage and does not describe what the stress-test example shows.
The example illustrates The movement of risk-related financial activities into industries that are less heavily regulated.
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Important Questions from Reading Comprehension
Why, according to the writer can't people be motivated to use a resource prudently?
1. They feel that others may overuse the resource
2. It is possible to substitute the resource
3. Abundance of the resource availability
Select the correct answer using the code given below:
When do people use resources exhaustively?
The self-interest of people affects the use of renewable resources
People rooted in a locality
Which among the following is closest in meaning with the word 'deplete'?
