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m&B > Important > Flashcards

Important Flashcards

1
Q

describe 2 kinds of bank liabilities

A
  1. checkable deposits

2. nontransactional deposits (saving accounts, money market deposits, CD)

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2
Q

2 kinds of bank borrowings

A
  1. federal funds market

2 .discount loans

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3
Q

Repo vs. Reverse Repo

A
  1. when a bank sells security for increase in cash and promises to buy the asset back overnight
  2. the Fed sells securities to banks
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4
Q

banks assets

  1. the most liquid asset by the bank ()
  2. vault cash (cash on hand, at other banks, or with the Fed) = () + ()
  3. cash in process of collection
  4. marketable securities
  5. loans (2/3 of all assets)
A
  1. reserves

2. excess reserve + required reserve `

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5
Q

If interest rate on reserves increase, no bank will lend on higher rate, the iff will () without an OMO

  1. interest rate serves as a () for the federal fund’s rate
A
  1. increase

2. floor

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6
Q
  1. disadvantages of loans (2)

2. 3 types of loans

A
  1. highly illiquid + default risk
  2. to consumers and industries, C&I
  3. real estate = mortgage
  4. consumer loans
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7
Q

net worth = asset - liabilities

bank failure?

A

the bank cannot repay its depositors in full with enough reserves left to meet its reserve requirement

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8
Q

ROA

1. calculation + definition

A

savers care about this

the value of a bank’s profit to the value of its assets

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9
Q

ROE

2. calculation + def

A

shareholders care about this

managers want to increase ROE –> that encourages the bank to make more loans

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10
Q

leverage

high leverage can magnify both wins and losses

A

a measure f how much debt an investor assumes in making an investment

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11
Q

leverage

high leverage can magnify both wins and losses; increases both default risk and interest rate risk

A

a measure f how much debt an investor assumes in making an investment

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12
Q

savers are subject to MH in 2 ways
1. explain 2 ways

2solution

A
  1. bank managers are compensated on high ROE to shareholders –> more investments on risky assets –> more risks
  2. FDIC discourages deposits to check bank activities with their loans
  3. savers prefer high net workth
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13
Q

3 types of risks the bank faces & solutions

  1. liquidity risk
  2. credit risk
  3. interest rate risk
A
  1. asset management + liability management + reverse repo agreements (the bank buys asset from other banks and agree to sell the securities to the other bank later –> temporarily increase asset)
  2. credit-risk analysis + collateral & compensating balance + credit rationing
  3. evalute IR Risk using gap and duration analysis
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14
Q

Gap analysis

1.1. calculates vulnerability of bank’s profit to changes in market interest rates

A
  1. most banks have negative gaps + reduce gap reduces interest rate risk
  2. rise in interest rate lowers PV of the loan that will be paid in the future and thereby decreasing bank’s net worth/capital
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15
Q

duration analysis
1. how sensitive a bank’s capital is to changes in market interest rates.

  1. if a bank has a positive duration gap
A
  1. increase in IR causes decreases in PV in assets greater than the change in PV of liabilities –> decrease in bank capital
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16
Q

duration analysis
1. how sensitive a bank’s capital is to changes in market interest rates.

  1. if a bank has a positive duration gap
A
  1. increase in IR causes decreases in PV in assets greater than the change in PV of liabilities –> decrease in bank capital
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17
Q

4 components of federal reserve system

()federal reserve banks in the nation

() board of directors in each district bank

A
  1. board of governors
  2. federal reserve banks
  3. FOMC
  4. Member banks (hold stocks in FDB because this policy influences member banks to participate in monetary policy)

-6

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18
Q

IR () during a recession and () in inflation because …

A
  1. higher IR = higher opportunity cost to holding reserves

?

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19
Q

() board of governors

  • determines and administers monetary policy through OMO, RR, discount lending
  • determines RR, discount rate
  • financial regulation (margin requirements for security purchases)
A
  1. 7
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20
Q

() members in FOMC

  • gives direction to OMO
  • green book
  • bluebook
  • beige book
  1. sets targets for iff
    (adjust reserves by buying/selling treasury securities through trading desks)
A

12

  1. green = national economic forecast
  2. blue = projections for monetary aggregates
  3. beige = local economic summaries
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21
Q

() members in FOMC

  • gives direction to OMO
  • green book
  • bluebook
  • beige book
  1. sets targets for iff
    (adjust reserves by buying/selling treasury securities through trading desks)
A

12

  1. green = national economic forecast
  2. blue = projections for monetary aggregates
  3. beige = local economic summaries
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22
Q

Fed’s earnings come from …

A
  1. interest on securities
  2. interest on discount loans
  3. fees for check-clearing process
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23
Q

ch14

  1. money supply equation
  2. what factor is bank determined and what factor is not
A

M = B * m

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24
Q

what is the base comprised of = principal liabilities

  1. are coins in circulation the liability of the Fed
A

all currency in circulation and reserves held by banks

  1. no
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25
Q

what is currency in circulation = currency outstanding, () vault cash

what is vault cash

A
  1. excluding

2. currency held by depository financial institutions and is counted as part of reserves)

26
Q

reserves = () + ()

*Fed has no control over excess reserves

A
  1. deposits by commercial banks and savings institutions with the Fend
  2. vault cash
27
Q

what are Fed’s principal assets?

  1. what does the Fed determine in terms of discount loans
A
  1. securities and discount loans

2. discount rate

28
Q

how does the Fed increase monetary base?

2 ways?

A
  1. OMO

2. discount loans

29
Q

Monetary base change method 1: OMO
1. a buy of securities is an () policy; why?

  1. how does the balance sheet change (both Fed & banks)
A
  1. expansionary; from a bond perspective, an increase in the demand for bonds leads to an increase in price of bonds –> lower yields –> lower interest rate –> more borrowing
  2. Fed: reserves +1m; securities + 1m
    bank: reserves + 1m; securities -1m
    total +1m
30
Q

Monetary base change method 1: discount loans

1. if a bank obtains a loan from the Fed

A
  1. Fed: reserves +1m(L); loans + 1m
    bank: reserves +1m; discount loans + 1m(L)
  2. as R increases, the monetary base increases
31
Q

Monetary base change method 1: discount loans

1. if a bank obtains a loan from the Fed

A
  1. Fed: reserves +1m(L); loans + 1m
    bank: reserves +1m; discount loans + 1m(L)
  2. as R increases, the monetary base increases
32
Q
  1. what are the + for OMO/ - for discount loans
A
  1. more control on OMO

2. flexibility

33
Q

explain equation:
monetary Base= Bnon + BR

  1. currency is (); reserves can be ()
A
  1. Bnon = nonborrowed
  2. Br = borrowed （discount loans)
  3. nonborrowed, both
34
Q

Bank bahavior

1.holding excess reserves by banks are () related to the market interest rate

A

holding excess reserves by banks are inversely related to the market interest rate because opportunity cost of holding increases as interest rate increases)

35
Q

Bank behavior

1.holding excess reserves by banks are () related to the market interest rate

A

holding excess reserves by banks are inversely related to the market interest rate because the opportunity cost of holding increases as interest rate increases)

36
Q

when the spread between the rates on 3-month T-bills and discount loans increases

A

the volume of discount lending increases

37
Q

the monetary base consists of the non-borrowed base, determined primarily by the Fed through()

Borrowed part through (discount lending )

A
  1. OMO)
38
Q
  1. if C/D = 0 and ER/D = 0 (simplifying assumptions) , the money multiplier = ()
A
  1. simple deposit multiplier
39
Q

3 traditional monetary policy tools

A
  1. OMO 2. discount lending 3. RRR
40
Q

dynamic vs defensive OMO

A
  1. dynamic = OMO intended to change monetary policy (outright purchase & sales)
  2. defensive = offsetting temporary fluctuations in the monetary base (Federal Repo)
41
Q

define federal repo

A
  1. the Fed buys securities from a dealer and the dealer agrees to buy them back at a give price
42
Q

define federal repo

A
  1. the Fed buys securities from a dealer and the dealer agrees to buy them back at a give price
43
Q

open market sales

A
  1. matched sale-purchase transactions ( reverse repo) –> the bank sells securities to dealers who agree to sell them back to the Fed in the future
44
Q

operation twist

no increase in the monetary base

A
  1. sells short-term bonds; buys long-term bonds –> increase in short-term interest rates and decrease long-term interest rates
45
Q

what happens when there is an increase in discount rate? (policy wise)

A
  1. higher id, less borrowing from the Fed –> reduces monetary base –> (decrease in Demand leads to lower Price of loans) increase interest rates –> upward pressure on interest rates
46
Q

the reserve requirement is the () preferred method

A
  1. least because it has multiple effects and major shifts in bank portfolios and can be disruptive unless done gradually in small steps
47
Q

open market purchase () / () the () of the reserve system; it shifts the () in the federal funds market

  1. what happens when there is an open market purchase
A
  1. increases or decreases the nonborrowed part of the reserve –> increase in total reserves –> shifting the supply of reserves.
48
Q

the inverse relationship between iff and liquidity causes the demand in the federal funds market to be () related

A
  1. inversely
  2. when iff is high, banks will offer more reserves and hold less liquid/idle cash
  3. when iff falls, banks would want to hold more vault cash
49
Q

does the increase in discount rate shift the entire supply curve?

A
  1. no, it only moves the horizontal part of supply curve
  2. the increase in discount rate has an impact only if banks have borrowed reserves –> only if and curve cuts the horizontal of the supply curve
50
Q

does the increase in discount rate shift the entire supply curve?

A
  1. no, it only moves the horizontal part of supply curve
  2. the increase in discount rate has an impact only if banks have borrowed reserves –> only if and curve cuts the horizontal of the supply curve
51
Q

a change in required reserve ration changes the () in federal funds market;

A
  1. demand in the federal fund’s rate
  2. if RRR increases –> more people want to hold reserves –> increase in demand shifts demand out –> to offset the change the fed can operate an open market purchase to shift out supply, thereby increasing reserves without changing iff
52
Q

why did banks abandon the traditional aproach of finding a target and address it with OMO

A
  1. Reserves used to be scarce. This is no longer true because the Fed’s increase in assets of the balance sheet –> more reserves. Draining these large quantities of reserves using OMO is disruptive
53
Q

what is the target range

A
  1. Irb - ion rrp
54
Q

examples of tradeoffs between monetary targeting and monetary policy

  1. OMO VS. inflation
  2. Lower federal funds rate cause interest rates to fall through omo purchase –> increase in money supply can lead to inflation
A
  1. omo sales decrease money supply + locks inflation but reduces the supply of loanable funds, which pushes up the interest rate and dampens investment and economic growth.
55
Q

2 lags and concerns

A

impact lag & information lag

56
Q

2 lags and concerns

A

impact lag & information lag

57
Q

4 monetary policy tool

A
  1. OMO
  2. RRR
  3. Discount lending
  4. interest on reverse
58
Q

policy instruments 2

A
  1. reserves

2. iff

59
Q

intermediate targets (2)

A
  1. financial variables (M1 & SR IR) that the fed believes will directly help it to achieve its goals

monetary aggregates and interest rates

60
Q

operating targets

A
  1. fed can directly influence with monetary policy tools and that are closely related to intermediate targets
61
Q

() and () provides feedback to policy

A
  1. policy instruments + intermediate targets
62
Q

what criteria does the fed ues to select target variable 3

  1. the fed must choose one intermediate targets
A
  1. measurable; controllable, predictable

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