Financial Institutions

Question 1

WHY DO WE NEED BANKS?

Answer 1

Question 2

What is included in Tier 1 capital?

Answer 2

Question 3

What are wholesale deposits?

Answer 3

Typically retail deposits are hard to attract: you need to advertise a good deposit rate, and then wait for individuals to move their money. Might take weeks. No direct control of the amount.

–> Wholesale deposits are the answer: issue a Certificate of Deposit (CD), which is like a short-term bond, and is widely held by companies and investment funds.

Question 4

Bank balance sheet

Answer 4

Question 5

What are the “two equilibria” for banks?

Answer 5

There are two equilibria: one where depositors keep their money in the bank, the bank earns a profit and repays the depositors. The other equilibrium is a bank run: as soon as a depositor suspects that other depositors are going to withdraw, everyone wants to withdraw as soon as possible.

Question 6

OUTSIDE MONEY vs INSIDE MONEY

Answer 6

Question 7

leverage = …

Answer 7

leverage = assets / capital (confusingly, also expressed as capital / assets)

Question 8

Non-interest income for banks

Answer 8

Question 9

FINANCIAL INTERMEDIATION OVERVIEW

Answer 9

Question 10

Adjustments to liquidity sorted by disruption

Answer 10

Question 11

New types of risks for banks:

Answer 11

Question 12

Financial crises throughout history

Answer 12

Question 13

Minsky’s three phases - Financial Crisis – General Features

Answer 13

Question 14

Bail-outs are politically difficult: moral hazards:

Answer 14

Question 15

… typically lead up to crises

Answer 15

Credit booms ….

Question 16

The clean-up ex-post is costly: median cost of banking crises
across advanced economies:

Answer 16

Question 17

Why do banks get special regulation - (i) and (ii)? And what bank regulation principles are there?

Answer 17

Question 18

Financial recessiosn by capital ratio bin

Answer 18

Question 19

Basel III (2013-…)

Answer 19

Question 20

Bank regulation – Basel II (1999-2004)

Answer 20

Question 21

Bank regulation – Basel II: the problems

Answer 21

Question 22

pre-Basel - Base I - Basel III - key “differences”

Answer 22

Historically (pre-Basel), regulation was ONLY about liquidity (reserve requirements, gold coverage ratios). Then it became ONLY about capital. Now it is both.

Question 23

Resolution: the tools for resolving banking issues

Answer 23

Bail-in –> “Contingent Convertibles”, “Co-Co”

Question 24

Macroprudential toolkit

Answer 24

Question 25

Aggregate CET1 ratio for UK banks

Answer 25

Question 26

Microprudential vs macroprudential regulation:

Answer 26

Question 27

The Central Bank’s Policy Rule (“Taylor Rule” form):

Answer 27

Question 28

How do central banks actually set interest rates?

Answer 28

When a bank holds reserves, it forgoes putting that money into other assets such as loans or securities that may have higher risk-adjusted returns. Banks, individually and in the aggregate, therefore have a downward-sloping demand curve for reserves

Question 29

How do central banks actually set interest rates? Two alternative methods

Answer 29

Question 30

From policy rate to market rate

Answer 30

Question 31

The Friedman rule

Answer 31

Question 32

The Federal Reserve adopted a system of “ample reserves” in 2016 and Operations at the Fed since 2016

Answer 32

Question 33

paying interest on reserves allows the central bank to follow a path for short-term interest rates that is...

Answer 33

...independent of the level of reserves