48 terms

M&B Test 2

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Terms in this set (...)

Liquidity
a company's ability to meet its short-term obligations
Solvency
The ability of a company to meet its long-term financial obligations
Bank Runs
when a large number of bank or other financial institution's customers withdraw their deposits simultaneously due to concerns about the bank's solvency
Financial Contagion
- the spread of market changes or disturbances from one regional market to others.
- can refer to the diffusion of either economic booms or economic crises throughout a geographic region.
Glass-Steagall Act
- prohibited commercial banks from participating in the investment banking business.
- passed as an emergency measure to counter the failure of almost 5,000 banks during the Great Depression
Gramm-Leach_Bliley Act
requires financial institutions to explain their information-sharing practices to their customers and to safeguard sensitive data.
FDIC and deposit insurance
The Deposit Insurance Fund (DIF) is set aside to pay back the money lost due to the failure of a financial institution.
Equity Capital requirements
The standardized requirements in place for banks and other depository institutions, which determines how much liquidity is required to be held for a certain level of assets through regulatory agencies (FDIC)
Bank holding company
-A company that owns or controls two or more banks
-governed by the Bank Holding Company Act of 1956 and its amendments. The Act was designed to check the expansion of banks and to ensure that they had separate banking and non-banking functions.
Too big to fail
-a business has become so large and ingrained in the economy that a government will provide assistance to prevent its failure.
-the belief that if an enormous company fails, it will have a disastrous ripple effect throughout the economy.
Reserve Requirements
Requirements regarding the amount of funds that banks must hold in reserve against deposits made by their customers. This money must be in the bank's vaults or at the closest Federal Reserve bank.
Community Reinvestment Act
An act of Congress enacted in 1977 with the intention of encouraging depository institutions to help meet the credit needs of surrounding communities (particularly low and moderate income neighborhoods)
Basel Accords
ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
Stress Test
An analysis conducted under unfavorable economic scenarios which is designed to determine whether a bank has enough capital to withstand the impact of adverse developments.
Political Business Cycle
Around 9 months before an election there will be a spike in GDP because of an increase in government spending
Marxists Business Cycle
thought the business cycle proved the inherent instability of capitalism
Keynesian Business Cycle
Believe in curing problems by using
1) Tax Cuts
2) Government Spending
3) Increasing the money supply
Monetarist Business Cycle
Believe cycles are the result of unexpected changes in the money supply (interventionist Keynes policies)
Austrian Business Cycle
Believe cycles are the result of mal-investment due to false signals imparted by interventionist policies
Dual Mandate of the Fed
Manage unemployment and inflation
Lender of Last Resort
the Federal Reserve acts as the lender of last resort to institutions that do not have any other means of borrowing and whose failure to obtain credit would dramatically affect the economy
Federal Open Market Committee
The branch of the Federal Reserve Board that determines the direction of monetary policy.

The FOMC is composed of the board of governors, which has seven members, and five reserve bank presidents.

The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other reserve banks rotate their service of one-year terms.
Monetary Base
The total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves.
Primary Tools of the Fed
1) Changing reserve requirements
2) Changing the discount rate
3) Open market operations
4) Interest of excess reserves
5) quantitative easing (the purchase of varying financial assets from commercial banks)
Expansionary Policy
Economic stimulus
Contractionary Policy
Used if the economy is growing too fast
Stabilization
Fine tuning to keep things on an even keel
Recognition Lag
The time lag between when an actual economic shock, such as sudden boom or bust occurs, and when it is recognized by economists, central bankers and the government.
Implementation Lag
The time lag between when a macroeconomic shock or other adverse condition is recognized by central banks and the government, and when a corrective action is put into place.
Equation of Exchange
The equation of exchange is comprised of the money stock, M, multiplied by the velocity of money, V. The velocity of money is the number of times money turns over (spent as part of a final good or service) during the year.

P represents the price level, and Q represents the quantity of goods and services produced.

M × V= P × Q = Total Spending or GDP
Phillips Curve
The Phillips curve depicts an inverse relationship between inflation and the rate of unemployment. In other words, higher rates of inflation imply lower rates of unemployment.

That inverse relationship held true during the 1960s. During the 1970s, however, the U.S. economy experienced "stagflation" - high unemployment and high inflation.
NINJA Loans
a loan extended to a borrower with "no income, no job and no assets".
interest only loan
only required to pay off the interest that arises from the principal that is borrowed.
Liar Loan
A category of mortgages known as low-documentation or no-documentation mortgages that have been abused to the point where the loans are sometimes referred to as liar loans
Mortgage backed securities
a repackaging of loans and their income streams, to investors.
Tranch
A piece, portion or slice of a deal or structured financing. This portion is one of several related securities that are offered at the same time but have different risks, rewards and/or maturities.
Credit Default Swap
designed to transfer the credit exposure of fixed income products between two or more parties. In a credit default swap, the buyer of the swap makes payments to the swap's seller up until the maturity date of a contract. In return, the seller agrees that, in the event that the debt issuer defaults or experiences another credit event, the seller will pay the buyer the security's premium as well all interest payments that would have been paid between that time and the security's maturity date.
TARP
A group of programs created and run by the U.S. Treasury to stabilize the country's financial system, restore economic growth and prevent foreclosures in the wake of the 2008 financial crisis through purchasing troubled companies' assets and equity. The Troubled Asset Relief Program initially gave the Treasury purchasing power of $700 billion to buy illiquid mortgage-backed securities and other assets from key institutions in an attempt to restore liquidity to the money markets. The fund was created on October 3, 2008 with the passage of the Emergency Economic Stabilization Act. The Dodd-Frank Act later reduced the $700 billion authorization to $475 billion.
Fair value accounting
Marks all assets and liabilities to market at the end of the reporting period

This was tried in the 1930's but was stopped because it was thought to have been contributing to the great depression
FASB
Statement that requires all publicly-traded companies in the U.S. to classify their assets based on the certainty with which fair values can be calculated.
GAAP
The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.
SEC (securities and exchange commission)
A government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S.

SandP moody and fitch
Shadow Banking
Non-banking institutions that perform some of the duties that a bank would
Derivatives
Options and futures that are derived from other instruments
Counterparty risk
The risk to each party of a contract that the counterparty will not live up to its contractual obligations.
Panic
asset prices reverse course and descend as rapidly as they had ascended. Investors and speculators, faced with margin calls and plunging values of their holdings, now want to liquidate them at any price.
Fractional Reserve Banking
A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal.
Credit Default Swap
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