Intro V2 Flashcards
Commercial banking services
Individual Banking
Business Banking
Digital Banking
Deposit accounts, give loans, basic investment services such as savings accounts
Investment banks
- Function as a underwriter/agent in the issuance of securities
- Help (mainly) businesses and corporations to raise capital
Interbank market (what, rate, purpose)
- Debt market among banks
- use FED (US), LIBOR (UK) and Euribor (Eurozone).
a) Manage liquidity - Banks may need to borrow money from other banks on a short-term basis to meet their own liquidity needs.
b) and satisfy regulations (such as reserve)
Central banks main tasks
a) Control nation’s money supply (OMO, interest rates, reserve)
b) Oversee commercial banks (reserve)
How does central banks control the money supply
a) Open Market Operations: Buy or sell government securities in the open market. BUY = liquidity injection. SELL = liquidity withdrawal
b) Reserve Requirements: Higher requirement, less capital. By adjusting, central banks can control the amount of money banks have available to lend
c) Lender of Last Resort: Act as a lender of resort during hard financial times
(IKKE PENSUM):
d) Interest rate: Set rate that banks can borrow from other banks and central bank. Courage or discourage banks from borrowing, which in turn affects amount of money in economy
Commercial versus IB
- Deposits: IB does not take
- Regulation and freedom: IB can take more risk. Commercial banks are more regulated to protect the customer
- Insurance: Commercial banks are insured by the federal government
Credit Union
- Offer same services as banks
- When you invest in a credit union, you get ownership in the union. Banks are normally owned by investor, which does not need to have money in that bank.
- Not-for profit organization, but not for charity.
Revolving lines of Credit
A revolving line of credit is a type of loan that allows you to borrow money when you need it and pay interest only on what you borrow. Then, if you pay back any of the borrowed funds before the end of the draw period, you can borrow that money again.
C&I loan market
- Commercial & Industrial Loans
- To business or corporation for operational purposes: Working Capital or CAPEX.
- Made due to operational purposes
- Always collateral
Government Housing policy pre 2008
a) Fannie Mae & Freddie Mac (GSEs)
To provide liquidity for banks
Due to the low interest rate, a lot of the banks liquidity was lended away in exchange for mortgages. They created a pool of mortages, which they sold to private investors. The investors would then receive the interest payment on the mortage
b) LMIs:
Started first in 1977
Congress started program to expand mortgage lending to minorities and low- and moderate-income groups.
Gave away “affordable housing loans
Goal was to push home ownership higher
Pushed the credit standards lower
c) Subprime Loans
Loans to borrowers with poor credit scores
Conventional down payment declined from 20% to 3.5%
What was the LIBOR scandal
- 2012.
- Banks manipulated the interest rates. Falsely inflating or deflating their rates. They did this because they wanted to:
a) Profit from trading
b) Impression of creditworthiness
How did many financial institutions survice during/after the financial crisis? Come with an example.
- Bailout of banks by national governments
- Northern Rock was nationalized
What are the main reason for the past financial crisis?
a) The Low FED rate
b) Government Housing Policy
c) Soaring risk from securitization
- Why (and what) was the Federal Funds Rate so low before the financial crisis?
a) Dot-com bubble busted 2001
b) Japanese stagnation in the 90s
c) Concerns about inflation
* 1% until 2004, combined with 2% inflation. Hence, a negative real rate
What happened in the house market due to the easy ways to get funding?
a) Household debt increased
b) Housing prices increased
