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Mbb25
The document provides an overview of several lectures on money, banking, and financial intermediaries. It discusses topics like financial intermediaries and the risks they face, innovations in financial instruments, and regulation of the banking system. Slides cover money market instruments, risks faced by financial institutions, and the roles of various financial intermediaries and regulatory agencies.
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Mbb25
- 2. Money, Banking, and Business Lecture25 Exam 3 Review
- 3.
- 4. Money, Banking, and Business Lecture15 Financial Intermediaries Chapter 8
- 5. Financial Innovation New waysto create financial capital
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- 9. FI Risks Credit Risk InterestRate Risk Liquidity Risk Exchange Rate
- 10. FI Risks Assume losses Profitswill cover
- 11. Credit Risk default asymmetric information adverseselection moral hazard
- 12. Interest Rate Risks BorrowShort Loan Long Rate Changes Upside down
- 13. Interest Rate Time Interest Rate Risk 110 3% 6% 7% Calls Adjustable Rate
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- 16. Exchange Rate Currency ExchangeRates 2,443 to 1 Mongolian Tughrik MNT ₮ U.S. Dollar USD $
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- 19. Dispositories Credit Unions Savings &Loan Commercial Banks
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- 21. Contractural liabilities defined bya contract contingent regular payments premiums
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- 24. Pension Funds Largest classof stock market investors
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- 26. Property and Casualty Insurance LessPredictable More liquidity
- 27. Property and Casualty Insurance LessPredictable More liquidity
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- 29. Finance Companies Risky Loans Raisemoney by issuing commercial paper and bonds
- 30. FINANCIAL INTERMEDIARY SOURCE USE Commercial BanksDeposits Loans, Mortgages, Securities Savings and Loans Mutual Savings Banks Deposits Mortgages Credit Unions Deposits Consumer Loans Mortgages Life Insurance Premiums Corporate Bonds Pension Funds Employee & Employer Stocks, Bonds, Mortgages Property & Casulty Premiums Municipals, Bonds, Government Mutual Funds Shares Stocks and Bonds Money Market Fund Shares Money Market Instruments Finance Companies Bonds and Commercial Paper Consumer, Business, Mortgages
- 31. Financial Intermediary 2017% Banks $15,208 23.5% Credit Unions $1,320 2.0% Life Insurance $7,141 11.0% P & C Insurance $2,018 3.1% Pension Funds $19,549 30.2% Mutual Funds $15,346 23.7% Money Market $2,747 4.2% Finance Companies $1,487 2.3% Summary $64,816 100.0% Source: FED Z.1 Report 3Q 2017
- 32. Money, Banking, and Business Lecture16 Commercial Banking Chapter 9
- 33. Commercial Banking Great Depression 1930s 8,000banks failed
- 34. 381 Sept 1929 41July 1932 90% decline DJIA GDP falls by 50% Unemployment 3% to 25%
- 35. Restore Trust Federal Deposit InsuranceCorporation
- 36. Restore Trust Limit RiskyActivity Charters Dual System
- 39. Banks 1984 - 14,400 2017 - 4,888 Top 5 hold 50%
- 40. Money, Banking, and Business Lecture17 Financial Innovation Chapter 10
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- 43. Interstate Banking and BranchingEfficiency Act 1997 Nationwide branching
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- 46. Financial Holding Companies FHCs BankHolding Plus
- 47. Financial Holding Companies Securities Insurance Merchant Banking FedFinancial Fed Non-financial
- 48. Large number of smallbanks or Small number of large banks
- 49. Sarbanes -Oxley Act 2002 Dodd-Frank Act 2010
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- 51. Foreign Banks ATM 20% ofbank assets Terrorism
- 52. Bank Management credit, interest, liquidity,exchange Finding borrowers Finding depositors
- 53. Interest Rate Risk Hedge AdjustableRate Loan Preserve Spread
- 54. Bank Stock Index NASDAQBank Index
- 55. Financial Innovation New waysto cooperate Faster Cheaper spend, save, borrow
- 56. Money, Banking, and Business Lecture18 Financial Innovation Chapter 10
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- 58. Financial Innovation New Instruments InformationTechnology Evading Regulation
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- 60. Financial Innovation Innovation moves fasterthan Regulation
- 61. Fungible easy to convertone thing to another thing
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- 63. Make Deposits into Non-deposits Reserverequirement Interest caps Sweep
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- 67. Options pays for theoption markets individual contracts real estate
- 68. Options The right butnot the obligation Put - Sell Call - Buy
- 69. Money, Banking, and Business Lecture19 Financial Innovation Chapter 10
- 70. Hedging Risks Credit Risk InterestRate Risk Liquidity Risk Currency Risk
- 71. Credit Risk Credit DefaultSwap CDS
- 72. Credit Risk In theevent of a default, will someone else pay the loan? Free money if no default
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- 74. Credit Risk What ifeveryone defaults? The defaults default
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- 76. Interest Rate Risk InterestRate Swap Trade positions to match inflows and outflows
- 77. Adjustable vs. Fixed Loanrate and the deposit rate don’t provide a reliable spread Interest Rate Risk
- 78. Loan Rate Fixed DepositRateVariable 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Year 1 Year 2 Year 3 Loan Rate Deposit Rate
- 79. Loan RateVariable Deposit RateFixed 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Year 1 Year 2 Year 3 Loan Rate Deposit Rate
- 80. Loan Rate Fixed DepositRate Fixed 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Year 1 Year 2 Year 3 Loan Rate Deposit Rate
- 81. Loan RateVariable Deposit RateVariable 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Year1 Year 2 Year 3 Loan Rate Deposit Rate
- 82. Liquidity Risk Convert illiquidlong- term loans into short-term liquid securities
- 83. Collateralized Debt Obligations Combine andslice into small bites Make liquid
- 84. Individual Mortgages Package as a Security Share in the Security $200,000$200,000 $200,000 $200,000 $200,000 $1,000,000 $20,000 Each 50 $1,000,000 8.0% 7.0% $80,000 $70,000 Potential Profit $10,000 Only $64,000 Short $6,000
- 85. Money, Banking, and Business Lecture20 Financial Innovation Chapter 10
- 86. Individual Mortgages Package as a Security Share in the Security $200,000$200,000 $200,000 $200,000 $200,000 $1,000,000 $20,000 Each 50 $1,000,000 8.0% 7.0% $80,000 $70,000 Potential Profit $10,000 Only $64,000 Short $6,000
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- 89. CDO Derivatives Betting onDefaults Free money if no default Catastrophe
- 90. CDO Derivatives You don’thave to play to game to make money not the game.
- 91. $5.1 Billion no individualbankers have been charged with wrong doing. $13.0 Billion $16.6 Billion $7.0 Billion $3.2 Billion Department of Justice - Settlements
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- 97. Currency Risk Forward Agreement Lockthe exchange rate today for a future date
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- 99. Exchange Rates Change ? TodayTomorrow Lock the future rate
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- 102. Lost 25% in twoyears What expect in next two years? Will someone take that risk for me?
- 103. Hedging Not eliminating risk Tradingrisk New ways every day
- 104. Hedging - TradingRisks Credit Risk Interest Rate Risk Liquidity Risk Currency Risk
- 105. Hedging - TradingRisks Do you want to take the risk or sell the risk?
- 106. Loan Rate Pricing Addup all the risk factors Minimum
- 107. Money, Banking, and Business Lecture21 Financial Instability Chapter 11
- 108. Schemes Buy for $8million Appraisal $10 million Sell 1,000 shares at $10,000 Promise 7% return Vacancy loss $103 billion Bankrupt
- 109. House Loans $100,000 DownRate Payment $20,000 20% 8.0% $670 $1,000 1% 4% $600
- 110. House Loans House valueschange Payments don’t
- 111. House Loans Everybody had mortgageloans in their portfolios
- 112. Risk Cannot be eliminated Canonly be shared differently
- 114. Moral Hazard Keep theprofits Shift the losses Bailouts Too big to fail
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- 117.
- 118. Hyman Minsky Stability leadsto instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits
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- 120. Money, Banking, and Business Lecture22 Regulation Chapter 12
- 121. Chapter 12 Regulation ofthe Banking System and the Financial Services Industry
- 122. Regulation Competition regulates markets withwell defined property rights and no government bailouts. Skin in the Game
- 125. Regulation Someone else paysfor your mistakes. Confidence in the system Higher Returns Higher Risk
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- 127. Money, Banking, and Business Lecture23 Regulation Chapter 12
- 128. Chapter 12 Regulation ofthe Banking System and the Financial Services Industry
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- 131. Regulators Banks Office of theComptroller of the Currency FDIC Federal Reserve Bank (FED) Bank Holding Companies Financial Holding Companies FED Securities and Exchange Commission (SEC) State Insurance Commissions Savings and Loan Associations (S&Ls) Office of Thrift Supervision (OTS) FDIC Credit Unions Non-profit, tax-exempt National Credit Union Administration Finance Companies State Regulators, Federal Trade Commission (FTC) Financial Futures Commodity Futures Trading Commission, National Futures Association Financial Options SEC, Options Clearing Corporation Mutual Funds SEC Insurance Companies State Insurance Commissions Pension Funds Department of Labor, Pension Benefit Guaranty Corporation Stocks and Bonds SEC, FED margin requirements Securities Firms SEC, NYSE, Other Exchanges, NASD, Securities Investor Protection Corporation Government Sponsored Enterprises Other Agencies
- 132. Regulators Too Big toFail Segment Keep Small Combine Go Big
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- 134. Basel Accords I,II, III Bank of International Settlements Banking Standards 13 Countries Capital Requirements Supervision Internal Assessment Publish Performance
- 135. Core Capital HistoricalValue ofStock plus Retained Earnings Total Capital Core Capital plus loan-loss reserves plus subordinated debt
- 136. Stock Issued $500,000 RetainedEarnings $275,000 = Core Capital $775,000 Loan-Loss Reserves $260,000 Subordinated Debt $500,000 = Total Capital $1,535,000 Bank Capital
- 137. Total Assets Valued atFaceValue Risk-adjusted Assets Valued based on FaceValue x Risk Factors
- 138. Total Assets Factor Risk-Adjusted Assets Loans$14,000,000 100% $14,000,000 Mortgages $3,500,000 50% $1,750,000 Interbank Deposits $2,000,000 20% $400,000 Government Securities $3,000,000 0% $0 Reserves $1,800,000 0% $0 Letters of Credit $3,000,000 100% $3,000,000 Totals $27,300,000 $19,150,000 Bank Assets
- 139. Core Capital $775,000 TotalCapital $1,535,000 Total Assets $24,300,000 Risk-Adjusted Assets $19,150,000 Core Capital 4% of Risk- Adjusted Assets $766,000 4.00% 4.05% Total Capital 8% of Risk- Adjusted Assets $1,532,000 8.00% 8.02% Core Capital 3% of Total Assets $729,000 3.00% 3.19% Requirements
- 140. Money, Banking, and Business Lecture24 Regulation Chapter 12
- 141. Financial Institutions Reform, Recovery,and Enforcement Act of 1989 FIRREA
- 142. FIRREA 1989 S&L Crisis FSLIC- Agencies Blow Up SAIF - New Agencies are Created Office of Thrift Supervision OTS Resolution Trust Corporation RTC Government bailed out bank insurance 1.25% of Deposits Type of Loan Requirements Capital Requirements
- 143. Community Reinvestment Act 1977 CRA RedliningDiscrimination Prove not discriminating Income and race Defaults
- 144. 1913 Federal ReserveAct - FED 1927 McFadden Act - No Interstate Banking 1933 Glass-Stengall Act - FDIC, Sepration, Rate Ceilings 1980 DIDMCA - Deregulations 1982 Garn-St.Germain Act - Deregulations 1989 FIRREA - Bailout S&Ls, RTC 1991 FDICIA - More power to FDIC 1994 IBBEA - Allow Interstate Banking 1999 Gramm-Leach-Bliley Act - Affiliate, BHC, FHC 2005 FDIC Reform Act - More power to FDIC 2008 Emergency Stabilization Act - $700 Billion Bailout 2010 Dodd-Frank Act - Re-regulation of Financial Industry Legislation
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- 147. Senator Dodd 1981- 2011 Dodd was the number one recipient in Congress of campaign funds from Fannie Mae and Freddie Mac Congressman Frank 1981 - 2013 Frank lowered mortgage lending standards. Financial Institutions “captured” the politicians and the regulators.
- 148. Dodd-Frank 2010 2,300 pages 243new rules 11 federal agencies Consumer Financial Protection Bureau CFPB Skin-in-the-game Regulate Derivatives SEC Office of Credit Ratings Whistleblowers OTS
- 149.