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Economies of Scope they can lower the cost of info production for each service by applying one information resource to many different services. Sarbanes-Oxley Made it illegal for a public account firm to provide an non audit service, Beefed up criminal charges for White collar crimes, Made CEO and CFO approve of accounting acts Global Legal Settlement NY attorney versus 10 largest investment banks, He won, IB server link between research and securities underwriting, Required them to make analysts recommendations public, In a 5 year period they need to see at least 3 independent research firms. 1.6 billion in fines for accused ) Conflicts of Interest Moral hazard problem that arise when a person or institution has multiple objectives and as a result has conflicts between those objectives. Underwriting and Research in Investment Banking Research banks might make up info to make their bank look good for both the securities part and the selling to the public. Auditing and consulting in accounting firms accountants might skew their judgements and opinions to win business from the firms. Auditing and consulting in Credit rating firms- A firm might rate a security high(Ex. Aaa,Bbb securities) so that the firm will have a high rating so people will buy it. The Bank Balance Sheet, Liabilities 1.Checkable Deposits- Makes them able to write check to third parties 2. Non transaction deposits- primary source of funds, Savings accounts and Certificate of deposits- 100,000 or more and can be sold like bonds. 3.borrowing-can borrow from the FED and is called discount loans. 4. Bank capital- the banks net worth. selling of stocks or retained earnings The Bank Balance Sheet, Assets Reserves- Money held at the FED to meet requirements by FED and excess just in case people with draw money Securities- Gov bonds- most liquid bc they have low transaction costs and easily traded and converted into cash. Loans- Give out money and are paid back interest until repaid, not as liquid bc you dont get ur money back until maturity. Liquidity Management must keep enough cash on hand to meet depositors wants.(borrowing- borrows money to meet requirements but at an interest rate payment., securities sale- sells securities to meet requirements, fed- borrow from fed also has interest, reduce loans- most costly way, take loans back from people. Asset Management must pursue low level of risk by acquiring assets with low default and high interest rates and by diversifying asset holdings and make a return for profit (Return, risk, and liquidity- must have liquid assets to make reserve requiremtns, the importance of diversification) Capital Adequacy Management make decisions about amount of capital they need to hold so banks wont fail, return for equity holders and enough capital to be a bank.(how capital prevents failure, trade-off, capital requirements) Insolvency- bank unable to pay back depositors, not enough assets to pay of liabilities. Interest-Rate Risk if a bank has more rate sensitive liabilities than assets a rise in interest rates will reduce bank profits and a decline in interest rates will raise bank profits. Off-Balance Sheet Activities 1.Loan sales-sells all or part of cash stream from a loan and thereby removes the loan from the banks balance sheet 2.Generation of Fee income- fees the bank gets for helping out the customer- ex. Atm machine, making foregin exchange trades on customers behalf 3.Trading activities and risk management techniques- trading in over seas banks Alt-A mortgages for borrowers with higher expected default rates than prime but have a better credit record ( FICO) , Subprime mortgages for people with less than stellar credit records, Mortgage Backed Securities securities that cheaply bundle and quantify the default risk of the underlying high risk mortgages, collateralized debt obligation paid out cash flows from sub prime mortgage backed securities in different tranches with higher rated tranch paying first, Securitization lowering transaction costs computer technology enabled the bundling together of smaller loans into standard debt securities Housing Price Bubble recession was over and liquidity from china and india made the subprime mortgage market take off and people were refinancing their homes bc the real estate market was so good so they took out big loans and if they defaulted they could just sell there house.