Exam 2 Flashcards
Asset Transformation
Taking short-term deposits and making long-term loans
Non-Transaction Deposits
Money markets and CDs
Liquidity Management
Banks must keep a certain fraction of deposits as required reserves
3 Drivers of Bank Capital Levels
Bank failure prevention, return on equity, regulatory requirement
Actions to increase ROE
Buy back stock, pay out higher dividends, acquire new funds but keep capital constant
Actions if capital is insufficent
Issue equity, reduce dividend payout, reduce assets
Asset Management
Seek highest possible return on all assets subject to minimizing risks while making adequate provisions for ample liquidity
Contagion Effect
One bank run can lead to a run on another
Payoff Method
Banks are allowed to fail, depositors receive up to $250k in deposits
Purchase & Assumption Method
100% insured and uninsured payout
Three Components of Thrift Banking System
Savings & Loans, Mutual Savings, Credit Unions
National Banking Act of 1863
Dual banking system of state and mutual banks operating side by side
Federal Reserve Act of 1913
Created Federal Reserve System
McFadden Act of 1927
Gave individual states the authority to govern bank branches located within the state
Glass-Steagall Act of 1933
Created FDIC, separated banking and securities industries
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
Overturned McFadden Act, allowed interstate banking and branching
International Banking Act of 1978
Put foreign and domestic banks on equal operating footing by eroding foreign bank advantages
Gramm-Leach-Bliley Act of 1999
Repealed Glass-Steagall, gave rise to full service commercial banks
Dodd-Frank Act of 2010
Consumer protection, annual stress tests, resolution authority, regulatory oversight
Volcker Rules
Require routine derivatives to be cleared through central clearinghouses and exchanges
Securitization
Transforming illiquid financial assets into marketable securities
Sweep Accounts
Earn interest on deposits by offshoring to other countries overnight and getting funds back in morning
Regulatory Agency for National Banks
Comptroller of the Currency
Regulatory Agency for Bank Holding Companies
Federal Reserve System
Regulatory Agency for Federally Chartered Savings and Loans Associations
Office of Thrift Supervision
Three Phases of Financial Crisis
Initial, banking crisis, debt deflation
Four Balance Sheet Concerns
Liquidity, Capital Adequacy Risk Management, Asset Management Risk, Credit Risk Management
Attempts to Standardize International Banking Practices
Basel Accord III
Negotiable CDs
Traded in secondary markets after primary issuance
Methods of Interest Rate Risk
Gap analysis, duration analysis
Originate-To-Distribute
Originator of a loan sells to various third parties
Elements of Dual Banking System
National, State
Elements of Shadow Banking
Originators, bundlers, servicers, distributors
