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Lecture 9: Bank Management, Recent Crisis, and Policy Interventions
Terms in this set (33)
Most Liquid Bank Liabilities
Less Liquid Bank Liabilities
Most Liquid Bank Assets
Less Liquid Bank Assets
Checkable Deposits, Demand Deposits, NOW Accounts, and MMDAs
Non-Transaction Deposits, Savings Deposits, Small Denomination CDs, Large Denomination CDs
Reserves and Cash Items, Deposits at FED and Vault Cash, Cash Items in Process of Collections, Deposits at Other Banks
1. Securities, US Treasury Securities, US Government Agency Securities, State and Local Government Securities, Other Securities
2. Loans, Commercial and Industrial Loans, Real Estate Loans, Consumer Loans, Federal Funds/other Interbank Loans, Other Loans
4 Ways that the bank can use to eliminate the shortfall in reserves
1. Borrow on interbank or commercial paper markets
2. Sell securities
3. Borrow from the FED
4. Sell off loans
When the problem is bad loans/bad assets, what is the best way to handle?
Strengthen bank capital through recapitalization/nationalization/FED investing in banks to buy bad assets instead of financing MMMFs and other money market investors to purchase CDs and CPs sold by banks (liquidity provision).
Bear Sterns in March 2008 as well as reasons why it is difficult to stay solvent during crisis time.
No other bank or corporation was willing to lend to a liquidity constrained bank.
Borrowing from the FED at a cost higher than the federal funds rate sent a bad signal to market participants about the bank's balance sheet.
The bank was only able to sell its holdings of securities at a discount, due to fire sale/predatory trading in times of distress.
Other banks agreed to purchase the bank's loans only at a discount.
Policy Interventions in the Early Stage of the Crisis Focused on...
December 12, 2007
(DW1) Term Auction Facility - Expanded discount window to a broader range of depository institutions and collateral
January 22, 2008
(FFR) FED made it easier to borrow from the FFM. Used open market operations by cutting FFR by 0.75 points to 3.5%. First emergency cut since 1982.
March 11, 2008
(Bonds Swap) `Term Securities Lending Facility - Allowed primary dealers/investment banks to sway agency and mortgage-related bonds for T-bonds (that was directly triggered by the Bear Stearns' crisis)
Slowly, the FED's Treasury securities declined and it's possession of other assets increased (mirror images).
March 16, 2008
(DW2) Opened discount window to primary dealers/investment banks
Policy interventions continued to stress this provision as the crisis further developed
September 19, 2008
(MMMFs) Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility - Loans to depository institutions in financing their purchases of asset-backed commercial papers from Money Market Mutual Funds so as to help the funds meet demands for redemption (which has surged following the crises at Lehman Brothers, Merrill Lynch, AIG)
This should help restore liquidity in the Asset-Backed Commercial Paper (short term lending) markets to prevent the ABCPs' prices from dropping and rates from rising
September 19, 2008 2
Treasury's Temporary Guarantee Program for Money Market Mutual Funds
October 21, 2008
(Safety transferred) Money Market Investor Funding Facility - Finance MMMFs and other money market investors to purchase CDs and CPs sold by highly rated US financial institutions
October 27, 2008
(Empower safe lending) Commercial Paper Funding Facility - Finance SPVs to purchase unsecured and ABCPs from US issuers
Liquidity Provision Doesn't Necessarily Help Secure...
Bank Capital Position
Basel Accord 1&2 Require that...
all banks satisfy the capital adequacy requirement
2008 Q4 Banking System Losses
Net Income Loss: $26.2bn
(2/3 small banks actually made profits)
Net Worth Loss: $69.3bn
Estimates of total: $2.8 trillion
February 23, 2009
AIG 2008 Q4
Government's preferred stocks in AIG to be converted into common stocks
Net Income Loss: $60bn
Net Worth down: $7.1bn for the year
Government aids in 9/08 and 11/08 summed to $150 bn with 2/09 adding $20bn
February 27, 2009
Citi Group 2008 Q4
Net Income Loss: $10bn ($32.1 for the year)
Common Stock: $29.7bn
Government Share: 36% ($25bn preferred stocks to be converted into common stocks)
November 16, 2009
Fannie Mae 2008
2008 Q3 Net Income Loss: $29.1bn
2009 Q2 Net Income Loss: $14.8bn
2009 Q3 Net Income Loss: $18.9bn
More than $60bn total loss
Government aids already exceeded $45bn, with $15bn more to add
Government aids to both Fannie Mae and Freddie Mac added will exceed $111bn by year end
Policy Interventions Later Paid Attention to Improving...
Banks' Capital Positions
October 14, 2008
(Bank Capital Intensive - [preferred stocks, safe bank debt issued, safe demand deposits) Troubled Asset Relief Program - Treasury's capital purchase program was set to purchase $250bn of preferred stocks of US financial institutions
FDIC's Temporary Liquidity Guarantee Program was set to guarantee newly issued debt of banks, thrifts, and bank holding companies, and to provide full coverage of demand deposits
Bank Capital Ratio after government investment in equity (recapitalization and nationalization):
The target ratio:
Target Ratio: 15%
before ratio is reached, banks may not regain complete confidence in making loans
Commercial and Mortgage Loans Trends in Q4 2008
The top 20 banks that received government's funds actually reduced their commercial and mortgage loans by 1% in 2008: Q4
How many banks does the FDIC insure?
Bankruptcy of banks
8500 banks insured by FDIC
2008: 25 bankrupt (12 in Q4)
2009: 14 more (100 expected)
2008 Q4: #distressed banks = 252 (171 in Q3)
Total Troubled bank assets: $159bn
FDIC funds lower than required by law
April 1, 2009
Regular premium would rise from 0.12-0.14% to 0.14-0.16%
June 30, 2009
Emergency premium would rise from 0.063% to 0.2%
Eventually, policy interventions confronted...
November 25, 2008
(helped out loans for mortgages and others) FED announced its plan to buy $100bn GSEs' bonds and $500bn agency-guaranteed MBS
Established Term Asset-Backed Securities Loan Facility - to finance $200bn the issuers/investors of ABS collateralized by newly and recently originated student loans, auto loans, credit card loans, and small business loans
February 10, 2009
(could use MBS as collateral and funded MBS's) Increased Term Asset-Backed Securities Loan Facility to $1tr - broadened collateral to include newly issued commercial and residential mortgage-backed securities, and other ABS
Established a Public-Private Investment Fund sized $500bn-$1tr - to purchase troubled MBS from the balance sheets of financial institutions to reduce their credit risks. This should support new lending and help improve overall market functioning
March 18, 2009
FED promised to
-double its purchase of GSEs' bonds, from $100bn to $200bn
-Increase its purchase of agency MBS, from $500bn to $1.25tr
-Purchase up to $300bn longer-term Treasury bonds over the next six months
Insurances and guarantees totaled about $4.3tr by fall 2009
Financial Services Regulatory Relief Act of 2006
FED let go of Treasury securities and received a lot of other assets since October 2008. However, after financial institutions obtained the securities/loan funds, they have deposited them back into the FED because the FED exercised the Relief Act in October 2008 and paid interest on reserves deposited by banks.
This is why banks did not lend much to anyone.
FED's more recent policy actions of lending directly/indirectly to households, firms, and financial institutions (because banks wouldn't) have put its balance sheet in a great danger.
Big-picture: how will FED exit the situation without causing "a great inflation" going forward?
THIS SET IS OFTEN IN FOLDERS WITH...
Lecture 2: Overview of the Financial System
Lecture 3: Money and the Economy
Lecture 6: Bond Market Equilibrium
Lecture 7: The Risk and Term Structure of Interest…
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