lecture 2

Question 1

what is the invitability of instability?

Answer 1

the financial system is very fragile system where many things can go wrong . the system is risky and there is now way to change this

Question 2

problems with indirect financing

Answer 2

liquidity risk : when deposits are much higher than loans

credit risk: risk of banks not being able to collect money they lend

interest rate risk: when interest rates go up a bank might have to pay a lot more on its deposits while interest rates on loans is fixed

Question 3

why regolations?

Answer 3

_avoid monopolies
_protect consumers and investors
_internalize externalities

Question 4

does concentrated banking sector cause instability?

Answer 4

not true because in canada and australia it didnt have an impact.

while in Belgium it had an impact

Question 5

implications of financial crisis

Answer 5

drop prices of real estates
drop price of stocks
increase in unemployment
drop in production
increase in gevernment debt

Question 6

problems with regulations

Answer 6

_facts precede rules: already too late ( after crisi)
_financial innovafion : design of new products to avoid regulation
_regulation is costly : to bank and society
_strict rules

Question 7

what happen when a bank doesnt comply to the rules?

Answer 7

there has to be a punishment

but punishement may decrease trust in bank which would cause more instability

Question 8

financial safety net?

Answer 8

causes of crisis are diverse while consequences are similar.
so we need rules that minimize the consequences
so we need a financial safety net: it has 4 components:
1. rules about founding and dissolving banks ( not everybody can just start a bank)
2. central bank as a lender of last resort
3.deposit insurance ( before 2009=20000/after 2009= 100000)
4.financial oversight ( micro and macro prudential)

Question 9

how to improve capital requirement?

Answer 9

offer new share
avoid capital leaving the bank
convert debit into equity
decrease risk weighted assets

Question 10

three pillars of basel capital requirements

Answer 10

1. minimum capital requirements
2. supervisory review
3. marker discipline

Question 11

misconception : capital vs liquidity

Answer 11

capital is on the right hand side of balance sheet ( liabilities) and cash is on the left ( asset)

capital requirements deal with how the firm finance itseld
liquidity requirements deal with the type of assets a firm has

Question 12

missconception : return on equity

Answer 12

decrease in ROE is not necessarily a bad thing

ROE is a measure that does not take risk into account

higher capital requirements will lead to lower ROE

using ROE as a measure of profitability is wrong

Question 13

banks invest mainly in ?

Answer 13

long term assets

Question 14

banks liability are mainly?

Answer 14

short term liabilities

Question 15

rules and regulations that deal with banks capital are commonly reffered to ?

Answer 15

basel regulations

Question 16

interbank loans can be found on banks balancesheet under ?

Answer 16

both assets and liabilities

Question 17

advantage of price stability ?

Answer 17

reduced inflation risk premium
prevent arbitrary wealth redistribution
improve consumption, savings and investment decisions

Question 18

depository financial institutions include ?

Answer 18

saving banks
credit unions
commercial banks

Question 19

when a house buyer borrows money from bank , what happen to his assets and liabilities?

Answer 19

both assets and liabilities increase

Question 20

when does the money supply in economy increase?

Answer 20

when commercial bank buys government bond

Question 21

QE by buying government bonds from pension funds .. what does increase ?

Answer 21

the total amount of ECB reserves and bank deposits

Question 22

how QE stimulate the economy ?

Answer 22

decreasing interest rates

Question 23

how can we reduce the risk of bank runs?

Answer 23

by enfourcing high reserve ratios

Question 24

what happend because of the border problems?

Answer 24

money flowed to non regulated sectors during economic booms

Question 25

what are components of financial safety net?

Answer 25

central bank
deposit insurance
financial oversight

Question 26

capital requirements cannot be improved by

Answer 26

increasing RISK WEIGHTED ASSETS RWA

Question 27

how expected losses are covered by ?

Answer 27

provisions

Question 28

how are unexpected losses covered by?

Answer 28

equity

Question 29

what does the formula for credit risk RWA under basel 1 and 2 assume ?

Answer 29

assume a portfolio in which no borrower is significant

Question 30

what does a high RAROC means

Answer 30

the risk adjusted amount of capital is relatively low

Question 31

where do most commercial bank profit comes from ?

Answer 31

net interest income