Chapter 11 Study Guide

the federal reserve is not included in

"nonbank" financial institutions

the use of deductables and coinsurance are examples of attempts by insurance companies to deal with the problem of?

moral Hazard

the shadow banking system refers to?

nonbank financial institutions such as investment banks and hedge funds

forms of short term loans in the shadow banking system

repurchase agreements commercial paper money market mutual fund shares

what was the primary reason that congress initiated deposit insurance in the 1930's?

to protect the deposits of individual savers

new rules affecting the shadow banking system as a result of the Dodd-Frank Act

- some trading of derivatives are required to take place on exchanges - large hedge funds are required to register with the SEC - firms selling mortgaged-backed securities and similar assets are required to hold 5% of the credit risk NOT - securitized loans must be insured now

2 main rationale for exempting nonbanks from restrictions on assets and degrees of leverage

1. policy makers did not see these firms as being as important to the financial system as were commercial banks, and regulators did not believe the failure of these firms would damage the financial system 2. the firms deal primarily with other financial firms, institutional investors, or wealthy private investors. rather than with unsophisticated private investors

bank deposits is ___ a form of a short term loan in the shadow banking system

bank deposits are not a form of a short term loan in the shadow banking system

as a result of the financial crisis of 2007-2009, the sie of the shadow banking system declined

but remained larger than the commercial banking system

the FDIC__________ short term borrowing by shadow banks, and shadow banks are normally __________ to recieve loans from the Fed when they suffer liquidity problems

does not insure, not eligible

main reason for increased counterparty risk in the shadow banking system prior to the financial crisis of 07-09

increased leverage

"nonbank" financial institutions include

investment banks hedge funds mutual funds

Regulatory change

push more trading of derivatives on to exchanges, Congress approved in 2010 to reduce counter party risk in the shadow banking system.

living will

the resolution plans for an investment bank that " must describe the companys strategy for rapid and orderly resolution, in the event of material financial distress or failure of the company"

reasons that a firm in the shadow banking system were more vulnerable than commercial banks during the financial crisis of 07-09

they could invest in riskier assets investors had no insurance against loss of principal they made investments that would lose value if housing prices declined NOT a reason - they were more heavily regulated

Moral hazard is likely to be more of a problem after the introduction of?

Deposit insurance

what government agency regulates futures market?

Commodity Futures Trading Commission

shadow banks __________ borrow short-term funds that are not federally insured and use them for long_term investments, and therefore, __________ to runs similar to those that occurred during the financial crisis

Continue to, are vulnerable.

in the 1930's, congress created what government agency to reduce information costs in financial markets

Securities and Exchange Commission

Deductible

a specified amount of a claim that the insurance company does NOT need to pay