Final answer:
Fractional reserve banking and information asymmetry create systematic risks in banking systems by leading to bank runs and moral hazard. The integration of financial systems has changed the nature of these risks and introduced new ones such as cyber threats and high-frequency trading.
Step-by-step explanation:
Fractional reserve banking and information asymmetry combine to create systematic risks in banking systems. Fractional reserve banking is a system where banks keep only a fraction of their deposits as reserves and lend out the rest. This can lead to a situation where multiple depositors try to withdraw their funds at the same time, causing a bank run and potentially a bank failure.
Information asymmetry refers to the situation where one party in a transaction has more information than the other. In banking, this can lead to moral hazard and adverse selection. Banks may engage in risky behavior or lend to borrowers with high credit risk without fully disclosing this information to depositors and creditors.
The integration of financial systems has made certain risks in banking systems different from when regulation was adapted with the creation of the UK Prudential Regulatory Authority. The globalization of financial markets has made it easier for risks to spread across borders, increasing the interconnectedness of banks and making it more difficult to contain the effects of a financial crisis. Additionally, advancements in technology have created new risks such as cyber threats and high-frequency trading.