Lecture 13 - Regulations Flashcards
What is asymmetric information
-The friction between the borrower and the lender
-Borrowers and Lenders do not have the same level of information
-Lenders need reliable information to see how risk it is to lend money
What is the concept of credit rationing
-Banks have the power because they are the ones that are giving away the credit
-They can deny, limit or charge higher fees for specifc people/Insitutions that they deem risky
- Redlining is a tactic used to justify rationing
-The Community reinvestment act attempts to mitigate the impact on risy communites
Why is it more risky for a bank to fail than other businesses
Because there is usually an effect on the entire economy and reduces the amount of credit which disrupts commerce
What are the 2 most common reasons banks fail
Insolvency and Illiquidity
Explain what is insolvency
When the companies assets do not cover all its liabilities
Explain Illiquidity
When a bank is not able to disburse cash as promissed. It probably has too many illiquid assets that they cannot convert to cash
How did SVB fail in terms of illiquidity
Heavily ivnested in long term gouverms bonds and MBS
- High concentration of uninsured deposits
-Too many diposirots withdrew at once
How did SVB fail in terms of insolvency
- Insufficient Capital to absorb losses
-When intrest rates rose, the maret alue of these securitites fell
What is the FDIC
-Government agency in which helps protect people moneu in banks
-Ensure people wont lose their money and insures up to 250k per account
What is the Emergency Economic Stabilization Act of 2008
Provide relif for the US by allowing the goueverment to increase the supply of credit in the economy to stabilize it
What are bonds clawbacks
Feature which allows to buy back part of the bond early
What is the order of claims for liquidation
Expenses of receiver, Depositors, General Creditors, subordinated Creditors, Shareholders
What are the 2 ways new ownership for institutions can happen
Clean bank, Whole Bank
What is the Clean Bank situation
Clean Bank - Buyer can put troubled assets back to the FDIC
What is Whole Bank
Buyer assums entire bank holding (aka Balance Sheet)
What is the Moral Hazard scenario
Banks or people know they are insurred so they take on more risk
How do insurance agencies act as policy in terms of deposit insurance
Depositors are no longer worried because they are inssured. So the Agencies try to protech the public because its their balance sheet that is at risk. Regular examination of their comapny occurs because of this
How do stakeholders and creditors act as police in terms of deposits
There are no insurance for them. So if the bank is taking on increased risk, they would demand a higehr premium which balanes it
Explain Basel III
As a result of the financial crisis, there was increased capital and liquidyt requirements for banks. In general the vasal act tried to address capital adequacy of banks
WHat does each aconym is CAMELS stand for
Capital Adequacy, Asset Quality, Managment Compenty, Earnings, Liquidity, Sensitivity to Market Risk
