Talous Flashcards
(35 cards)
What are the four types of money?
Central bank reserves, bank deposits, treasuries, fiat currency.
How are bank deposits created?
Commercial banks create deposits when they issue loans or buy assets, often exceeding their actual currency holdings.
What are central bank reserves primarily used for?
For inter-bank transactions and maintaining banking system liquidity.
What are the two main purposes of a central bank?
Maintain price stability (control inflation) and optimal employment.
What happens during Quantitative Easing (QE)?
Central banks lower interest rates and buy treasuries to stimulate economic activity.
What do central banks do when inflation is too high?
Raise lending rates and make investing in safe treasuries more appealing.
What are commercial banks’ two main concerns?
Solvency (avoiding risky loans) and liquidity (having enough capital to fulfill deposit withdrawals).
What’s the primary role of the treasury?
Financing government deficits by issuing treasury securities.
What’s the difference between treasury bills and bonds?
Treasury bills are short-term, stable, and safer, while bonds are long-term, riskier, and sensitive to interest rate changes.
What is shadow banking?
Financial institutions performing banking activities outside traditional regulations, often riskier but offering unique financial services.
What role do primary dealers play with the Fed?
They exclusively carry out Fed’s open market operations and use the repo market to finance securities holdings.
How do primary dealers profit using the repo market?
They earn from the yield difference between securities and lower repo interest rates, leveraging repeated short-term borrowing.
What are Money Market Funds (MMFs)?
Funds investing in short-term, liquid securities, acting similarly to bank deposits but without government insurance.
How do Exchange-Traded Funds (ETFs) maintain prices aligned with underlying assets?
Through Creation (buy assets, exchange for ETF shares at NAV) and Redemption (buy discounted ETF shares, exchange for underlying assets).
What is securitization?
Pooling loans or mortgages into securities, freeing up lenders’ capital and transferring risk to investors who earn returns from underlying cash flows.
What percentage of offshore currency holdings are in US dollars?
About 60%. (2024)
Why is the US dollar preferred in offshore markets? (4 reasons)
Safety, ease of trade, lower costs, and high liquidity.
Why is the US dollar considered a safe currency?
It’s backed by the largest economy, strong military, impartial legal system, and trustworthy central bank.
How did offshore dollar banking bypass US regulations before the 2008 crisis?
Offshore banks avoided US rules on deposit interest rates and loan-to-deposit ratios, allowing riskier but potentially more profitable activities.
How were European banks heavily tied to the US economy before the 2008 crisis?
By purchasing US treasuries and participating in US repo markets to fund mortgage-backed securities and US loans.
What risk is reduced for US investors buying offshore dollar-based bonds?
The risk associated with foreign currency fluctuations.
Why are smaller offshore banks more vulnerable to liquidity crises?
They lack direct access to the Federal Reserve and its liquidity facilities.
Why is the Federal Reserve called the “world’s central bank”?
It provides global liquidity and stability through the dollar’s dominant role in international finance. Helps out other central banks.
What do interest rates represent?
The price of money, based on the risk-free rate of treasury bonds.
