Banking Flashcards
What is a bank?
A financial intermediary between lenders and borrowers which benefits from economies of scale.
What do economies of scale allow banks to do?
Economies of scale allow it to lend large sums at lower interest rates and with lower risks than an individual.
What is the reserve rate requirement?
Also known as
What are excess reserves?
The reserves that are left with the bank after the legal reserve requirement has been met.
What does it mean when the bank lends money?
When the bank lends money, economists say that the bank has lended money or created credit, since it does not actually print money.
What happens if two people come at the same time? What is this called?
The bank will shut down as they used the money to give credit. This is called a run on the bank
What is a run on the bank?
The bank is unable to meet it’s obligations
Why do banks continue to give credit if a run on the bank is possible?
Banks do not only have two customers so it is rare that everyone wants their money at one time.
How does a bank earn revenue?
- Interest rate spread - They charge more and pay less.
2. Investments
What is the interest rate spread?
The different between the interest rate that the bank pays to depositors and the interest rate that it charges the borrowers.
How can one be sure that his money is safe in the bank?
An insurance service is provided to the depositors.
How can one be sure that his money is safe in the bank?
An insurance service is provided to the depositors. In the US for example, all your deposits are insured up to 250,000.
What insures the deposits?
In the US it is the FDIC - Federal Deposit Insurance Corporation.
Where does the money from the FDIC come from?
The banks pay a premium while they are running. Originally the FDIC had money from the government. Because most banks do not have a run on the bank, it works.
If you are a millionaire what should you do?
Spread the money across multiple accounts.
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Where was the first central bank made?
Sweden
What does the central bank do?
- Determines how much money will be printed
- Acts as a banker to the banks
- Acts as a banker to the government
- It is the lender of last resort to the banks
- It is the regulator and examiner
- It is the cheque clearing centre
- It intervenes in foreign exchange markets
- It establishes exchange controls
- In many developing countries it lends to industries, sectors and regions
- It is the monetary policy authority
What does x mean?
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What does x mean?
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What does x mean?
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What does x mean?
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What does x mean?
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What does regulator and examiner mean?
establishes rules and regulations
examines banks to ensure they follow regulations
What do we mean by cheque clearing centre?
It doesn’t go from bank to bank
What does it mean to intervene in foreign exchange markets?
if the exchange rate is too high or too low the central bank can buy currency or sell currency.
What does x mean?
y
What does x mean?
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What does x mean?
Monetary base in order to achieve the desired macro goal.
What is the discount rate?
The name given to the rate of interest at which the central bank lends money to the banks
What are open market operations?
Take place when the central bank goes into the financial market and buys or sells bonds. They are usually government bonds, but they could also be corporate bonds.
What do you want to do when you are in a deflationary gap?
increase aggregate demand, shift it to the right
Why increase money supply?
Solves deflationary gap
decrease reserve ratio
decrease discount rate
buy bonds
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Designes to impact the purpose of qhich money is lent or borrowed
