General Flashcards
This regulation prohibits banks from conducting certain investment activities with their own account and limits their dealings with hedge and private equity funds.
Volcker Rule
Why do banks dislike equity and view it as expensive?
This became evident in 2008: if an important bank gets into trouble and comes close to defaulting on its debt, there is a good chance that the government or the central bank will support it to prevent default. If a company can count on being bailed out by the government when it cannot pay its debts, creditors will be happy to lend to the company, thereby making borrowing cheap.
Why Risk of Borrowing for Businesses is Higher than for Individuals
- Business income is often more uncertain than income from unemployment
- For businesses, the costs of defensive strategies against risks may be larger than for individuals. When people borrow for personal consumption, consuming less is often a realistic alternative. For business however, it will harm its operations directly.
This is a 1933 law that separated investment banking from retail banking
Glass-Steagall Act
______ ____ happen when a large number of people start making withdrawals at the same time.
Bank runs
Explain the traditional 3-6-3 business model of banks.
Explain the traditional 3-6-3 business model of banks.
This is a procedure that allows commercial banks and savings banks to sell their loans and mortgages to other investors.
Securitization
What is the problem with securitization?
When the banks that originate the mortgage loans know that they will sell the loans for securitization, their incentives to carefully assess the borrowers’ credit worthiness may be quite weak.
What are the 3 effects that seem to have been responsible for the vast reach of the 2007-2009 financial crisis?
First, the mortage-backed securities that lost much of their value were held by financial institutions all over the world.
Second, because these financial institutions had very little equity to begin with, solvency concerns arose quickly.
Third, much of the borrowing of banks was in the form of short-term debt. This source of funding is especially susceptible to contagion and runs because neither the money market funds nor their investors are officially covered by deposit insurance.
What is the flaw in the argument when bankers complain that banking regulation is expensive?
They do not take into account the costs and externalities of their harming the rest of the financial system and the overall economy with the risks that they take.
What are the ways to control risks from the banks’ investments?
- Find a way to break up the bank into smaller more manageable and less complex entities.
- Adjust the reserve requirement
- Require them to increase their capital and not just debt.
Why is equity deemed more expensive?
Equity investors take more risk and therefore require higher returns.
What is financial intelligence quotient?
It is the ability to make sound decisions and actions in managing one’s personal finances.
Response to exposing our kids to make money early will make them materialistic
Money is neither good nor bad. Money is just money. It is neutral. It is an enabler and an exaggerator. If you are a kind and happy person chances are, you will use your money in positive endeavors that can benefit others.
What is the true purpose of money in our lives?
To fulfill our core values
