Quiz #3 Flashcards
What are 2 ways to add equity capital to the balance sheet?
- Cut dividends
- Sell Assets
What are 3 ways to reduce equity capital to the balance sheet?
- Losses
- Buy Assets
- Issue Dividends
Preferred equity is considered a hybrid security. Give one attribute of a preferred equity that is similar to a common equity and one attribute similar to a bond.
Common Equity = maintain a stake in the company
Bond = receive dividend
What happens to the profits made at the Federal Reserve? Name 2 ways the profits of the federal reserve are distributed.
- Sent to the Treasury
- Dividend is paid to member banks
In 2007, it was nearly impossible for the Federal Reserve to lose money. Given the balance we analyzed from 2007, briefly but specifically explain why profits were inevitable.
Fed bought securities (at higher interest rate) to provide liquidity to the market which then dropped the interest rates = High NIM
What are 3 extraordinary actions that the FDIC took during the 2008 financial crisis to help the economy?
- Limited insurance to $250,000
- Guaranteed all non-interest-bearing deposits
- Special assignment to banks to recapitalize the depleting DIF
How did the monitoring of a bank’s financial condition change with the advent of deposit insurance? Which regime is more likely to have optimal level of monitoring?
Glass-Steagall Act required banks that took FDIC insurance to be regulated by the Fed.
Centralized monitoring system
What are three interest rates that are set by the Federal Reserve?
- Target Fed Funds Rate
- The discount rate
- Rate on Excess Reserves
Why do Fannie and Freddie’s mortgage securitizations only have one class of debtors in contrast to private subprime mortgage securitization, which may have more than one?
F+F historically securitized prime, confounding loads that meet specific underwriting and eligibility criteria. They are considered low risk and their cash flow is predictable.
Private subprime mortgage securitizations loans with varying credit and risk characteristics.
What did Glass-Steagall do to banks and what was the rationale for its implementation? What is the rationale among some politicians who call for Glass-Steagall to be reinstated today?
GS restricted commercial banks from engaging in investment banking activities. The rationale is that IBs are greedy and risky. They also did not want CB to loan to their own IB and create defaults on purpose.
Some politicians call for this back because banks have become extremely large and there are more SIFIs that if fail could extremely hurt the economy
What is Regulation Q? How did Regulation Q help limit competition for banks and help from the MMMF industry?
Regulation Q put a cap on how much interest banks were allowed to pay depositors.
Allowed MMMFs to compete with banks.
What is the Volcker Rule and what specifically does it prohibit banks from doing?
The Volcker Rule is part of the Dodd-Frank Act that restricts banks from engaging in proprietary trading. This means that banks cannot buy and sell securities with private capital to benefit their own account instead of their depositors.
