Chapter 8 - Banking and the Management of Financial Institutions Flashcards

1
Q

Much of the last financial crisis can be attributed to what sort of activities?

A

off-balance-sheet activities (service charges, etc)

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2
Q

How is a bank defined in federal law?

A

accepts deposits from savers AND makes loans to borrowers

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3
Q

What do banks do?

A

efficient at matching savers and borrowers, pooling funds, gathering information about borowers

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4
Q

General accounting equation?

Assets =

A

Liabilities + Capital
or
Debt + Equity

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5
Q

Bank Liabilities (Sources of Funds)

A
  • Transaction Deposits
  • Non-transactions Deposits
  • Bank (equity) Capital
  • Borrowing
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6
Q

Bank Assets (Uses of Funds)

A

-Loans
-Securities (US Gov’t, Agency Securities and Munis)
-Reserves & Cash Items
Other Assets (buildings and infrastructure, etc)

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7
Q

If a bank can’t meet reserve requirements, what do they do?

A

Transform Assets or Borrow

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8
Q

What is the best option for banks to meet the reserve requirement?

A

Borrow in the Fed Funds Market from other banks - lowest cost loans on the market (typically 3-4%)

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9
Q

What is the cost to banks for selling US Gov’t securities to meet reserve requirements?

A

The loss of revenue generating assets - may also prevent the bank from meeting secondary reserve requirements

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10
Q

What is the advantage to banks that lend through repurchase agreements to provide funds to banks to meet reserve requirements?

A

The bank makes interest for the duration of agreement on the securities and the loan is fully collateral (if a bank can’t repurchase at the end of the time frame, the lending bank now owns the securities)

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11
Q

What are the explicit and implicit cost of using discount window borrowing?

A

Explicit: the discount rate levied to borrow funds
Implicit: makes an indication to the Federal Reserve that you are unable to borrow from other banks in the private sector and may send in bank regulators to do a bank audit

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12
Q

What does it mean when a bank calls in loans?

A

The bank stops allowing high quality customers from using lines of revolving credit (pre-approved, on demand loans)

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13
Q

What is the cost to banks when they sell loans to meet the reserve requirement?

A

Loans must be sold at less than face value (due to default risk) which must be made-up in loss of bank equity capital

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