Unit 10 Flashcards
What is the federal reserve system
Banks only hold a fraction of their deposits in reserve as cash and lend out the rest
What are advantages of the federal reserve system
It allows banks to use money that would otherwise be unused
It can help the economy grow - money multiplier effect
Banks collect fees and interests on loans
What are disadvantages of the federal reserve system
Banks run risk - if too many depositors withdraw their money simultaneously
Insufficient reserves could lead to an overstimulated economy
Excessive risk taking
What is a retail bank
Accept deposits and serve primarily individual customers and small businesses
E.g checking account, saving account, credit cards, loans
What is a commercial bank
Accept deposits and serve primarily medium and large businesses
E.g. business loans, L/C (cross border transactions), foreign exchange services and hedging
What are investment banks
Investment banks earn a fee for the services it provides. Provides advisory services to large corporations, institutional investors and government entities
Issuing shares of stock through initial public offering (IPO), mergers and acquisitions, divestitures
What are banks roles
making loans, creating money, transmitting monetary policy
What are bank vulnerabilities
Maturity mismatch : short-term funding are used to finance longer term loans
Low ratio of cash to assets : not having enough liquid assets to meet its short-term obligations
Low capital adequacy : the operations are funded by the banks own capital instead of borrowed funds
What are bank regulations
deposit insurance : a guarantee that a banks depositors will be paid even if the bank can’t come up with the funds
Capital requirements: banks hold substantially more assets than the value of bank deposits
reserve requirement
What is a bank run
a phenomenon in which many of a bank’s depositors try to withdraw their funds because they fear a bank failure
