Large financial institutions face risks of fraud, privacy violations, and illiquidity. Excessive regulation is also a concern, as it may harm capital markets and corporate profits. To protect against these risks, institutions engage in dialogue with regulators, implement freeze periods for illiquid assets, and invest in data protection and risk management systems. Concerns also exist regarding funds of hedge funds and potential investment scams.
The large sums of money that are traded on the equity and debt capital markets often go through the channel of large financial institutions. These financial firms are exposed to a high risk of potential fraud and other factors, causing concern throughout the industry for the future. For some, these concerns surround the potential for a fraud response from lawmakers that triggers overregulation. Others may have concerns about privacy violations, while others have still been victims of scams.
Excessive regulation is a concern of large financial institutions. This concern includes the foreboding that lawmakers could create arbitrary rules in markets to avoid doing anything. Such a trend could be made possible by regulators after a series of events demonstrating instability and severe market losses have the potential to create a systemic effect on the economy. The concern is that what is decided will cause more harm than good to capital markets and corporate profits. One way key executives of large financial institutions protect against harmful regulation is by becoming part of the dialogue with regulators to increase the chances that any changes that manifest themselves will not be overly harmful.
Liquidity represents the ease with which securities and financial assets can be converted into cash. Some of the assets held by large financial institutions are extremely illiquid, which can be a cause for concern for these companies. There are ways to protect yourself from the threat of not being able to generate cash. For example, if a large financial institution supervises capital for clients in securities deemed illiquid, it may assign a freeze period during which investors cannot withdraw capital. This feature can prevent the financial institution from selling any asset in a frantic way in an attempt to meet customer demands.
Fraud is a concern of large financial institutions. These companies have knowledge of highly sensitive information belonging to customers. If a security breach of some kind occurs, over the Internet or through some other unscrupulous leak, the results could be harmful to customers and the company’s reputation. To counter this problem, large financial institutions spend large sums of money on data protection and risk management systems.
Funds of hedge funds are investment vehicles managed by professionals who invest in other hedge funds. Some large financial institutions operate funds of funds and concerns exist regarding the potential for investing in some fraudulent scheme. Large steps with due diligence and scrutiny are usually taken to protect the institution from fraud, but historically large companies have been exposed to other investment scams.
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