week 3 additional notes Flashcards
(9 cards)
historical examples of bank runs?
- great depression
- 2008 crisis
- russia
preventing bank runs procedure?
- holding reserve ration at central bank
- having strong liquidity - easy-convertable-to-cash
- deposit insurance
- temporarily shuttting down for inspection of banks (bank holiday)
why do bank runs occur?
due to individuals who in the face o fear start withdrawing all their accounts simultaneously
why are reserves most liquid?
- they are cahs or asset which can be immediately used to settle financial obligations
- immediately available
why are securities, bonds, stocks less liquid than reserves?
they are dependent on market conditons, and have potential higehr risk and volatility, subject to fluctuations, information assymetry
what is liquidity?
- how fast and easiliy an asset can be converted into cash without losing its value
what are the three different types of securities?
- equity securities: stocks - represent ownership in a company, giving shareholders a claim on assets and earnings
- debt securities: bonds - represent borrowed money to be repaid with interest - bonds
- default risk: possibility that borrowers may not make reqiured payment, affecting the value of loans and debt securities
what is keynes’s liquidity preference theory?
individuals hold moeny for three reasons:
1) transaction motive: meet everyday expense
2) precautionary motive: cover unexpected needs
3) speculative motive: take advanatge of future investment opportunities - sensitive to interest rates and expectations
as wealth increases, the demand for liquidity decreases since individuals seek higher returns
wealth change in houeholds?
- shift from highly liquid checkable deposits into interest-bearing savings accounts, less liquid
- reflects speculative motives by Keynes
- wealthier houeholds are more likely to invest in certificates of deposits which offer higher returns but limit liquidity
