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Money & Banking Ch 8

STUDY
PLAY
adverse selection
the problem that people or firms that are worse than average risks are more likely to seek out loans than borrowers that are better than average risks
asymmetric information
a situation in which one party in a transaction knows more than another
bank
a financial intermediary that accepts deposits from savers and makes loans to borrowers; includes commercial banks, savings banks, savings-and-loan associations, and credit unions
collateral
an asset that a borrower promises to give to the bank if that borrower is unable to repay the bank's loan
covenant
a part of a loan contract that requires the borrower to act in a certain way or to use the borrowed funds for a particular purpose
credit crunch
a situation in which banks do not lend money as they ordinarily would but rather have much higher requirements for borrowers to qualify for loans than normal
default risk
the possibility that a bank's loan customers might not repay their loans as specified in the loan agreement or that the issuer of securities (other than loans) the bank owns will not pay interest or principal when due; also called credit risk
discount rate
the interest rate a bank pays on a loan from the Fed's discount window
discount window
the place where banks can request loans from the Federal Reserve
excess reserves
a bank's total reserves minus its required reserves
federal funds market
the market in which banks with excess reserves lend them to banks that desire additional reserves
federal funds rate
the interest rate in the market for bank reserves (the federal funds market) which applies to overnight loans of reserves between banks
interest-rate risk
the risk of a change in the price of a security in the secondary market because of a change in the market interest rate
moral hazard
the situation in which the existence of a contract changes the behavior of a party to the contract; for example, if a firm receiving a bank loan behaves different because it has the loan that if it didn't have the loan, in a way that harms the bank.
securitization
the process by which financial intermediaries that own assets (such as mortgage loans) sell them off to another company, which in turn sells bonds to investors; the interest payments on those bonds are paid from the interest payments on the original assets (such as mortgage payments)
reserves
a bank's vault cash plus its deposits at its Federal Reserve bank
spread
the difference between the average interest rate on a bank's assets and the average interest rate on its liabilities