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Flashcards in Chapter 17 Deck (29):

subprime mortgages

Loans to home buyers with too little income or too few assets to qualify for standard ("prime") mortgages


Credit crunch

Either loss of access to credit of find themselves forced to pay drastically higher interest rates


financial panic

a sudden and widespread disruption of financial markets


Banking crisis

When a significant portion of the banking sector ceases to function


matuirity transformation

the transformation of short-term liabilities into long-term assets


Shadow banking

The fact that that before the 2008 crisis these financial institutions were neither closely watched nor effectively regulated

Investment banks; hedge funds such as LTCM; money market funds


Depository banks

Banks that accept deposits

Commercial banks and savings and loans


Maturity transformation

The conversion of short-term liabilities into long-term assets


Shadow bank

A nondepository financial institution that engages in maturity transformation


Repo market

The overnight credit market


Banking crises

Occurs when a large part of the depository banking sector or the shadow banking sector fails or threatens to fail


Asset bubble

The price of an asset is pushed to an unreasonably high level due to expectations of further price gains


Financial contagion

A vicious downward spiral among depository banks or shadow banks: each bank's failiure worsens fears and increases the likelihood that another bank will fail


Financial panic

A sudden and widespread disruption of the financial markets that occurs when people suddenly lose faith in the liquidity of financial institutions and markets


Bank holiday

When Franklin Delano Roosevelt declared a temporary closure of all banks to put an end to the vicious cycle


Three main reasons why banking crises normally lead to recessions:





1. Credit crunch arising from reduced availability of credit

2. Financial distress caused by a debt overhang

3. The loss of monetary policy effectiveness


Credit crunch

Potential borrowers either can't get credit at all or must pay very high interest rates


Debt overhang

Occurs when a vicious circle of deleveraging leaves a borrower with high debt but diminished assets


The FED's normal response to a recession:

It engages in open-market operations, purchasing short-term government debt from banks


Three main kinds of action banks and governments take in an effort to limit the fallout from banking crises:

1. They act as the lender of last resort

2. They offer guarantees to depositors and others with claims on banks

3. An extreme crisis, a central bank will step in and provide financing to private credit markets


Lender of last resort

An institution, usually a country's central bank, that provides funds to financial institutions when they are unable to borrow from the private credit markets


When will a lender of last resort not help?

If the public believes that the bank's assets aren't worth enough to cover its debts even if it doesn't have to sell these assets on short notice


When governments take on bank's risk, they often demand a ________________

quid pro quo

they often take ownership of the banks they are rescuing


4 main elements of the Wall Street Reform and Consumer Protection Act "Dodd-Frank Bill"

Consumer protection

Derivatives regulation

Regulation of shadow banks

Resolution authority over nonbank financial institutions that face bankruptcy


Consumer protection

Dodd frank bill

Creates the Consumer Financial Protection Bureau dedicated to poicing financial industry practices and protecting borrowers


Derivatives regulations

Supposed to help spread risk but simply concealed it

Under new law, most derivatives have to be gought and sold in open, transparent markets, limiting the extent financial players can take on risk


Regulation of Shadow Banks

Gives a special panel the ability to designate financial institutions as "systemically important" mean that their activities may create a banking crisis

Such institutions will be subject to bank-like regulation of their capital, their investments, and so on


Resolution authority

having the legal authority over nonbank financial institutions that face bankruptcy