Balance Sheets
Severely Adverse stress test
-7.5% GDP growth, 10% unemployment, 30% drop in housing prices, 65% drop in stock market
CP Backup line of credit
Agreement where a bank will lend money to the issuer if they need to redeem a commercial paper at maturity
Calculating interest on a borrow
Interest rate * borrowed amount / 360
Upward spike
Not enough reserves, buy securities
Tightening
Reducing the size of the balance sheet by selling securities
Asset Backed Securities
Securities where cash flows come from loans, student loans, auto loans, etc.
Stress tests
Tests given to D-SIB banks to ensure their stability
Pair Trading
Unknown term
CP/Commercial Paper facility
Unsecured notes that mature before 9 months/270 days
Easing
Fed enlarges their balance sheet/money supply by buying securities
Raising interest rates
Fed pays interest on reserve balances at the Fed
Investments
Financial claims including bonds, securities, treasuries
Loans
Financial claims that are riskier/less liquid
M1
Focuses on immediately spendable money
M2
Includes M1 plus assets that can be converted to liquid assets within a few days
Cash drains
Increased cash holdings by the public, decreasing reserves
Fed funds rate
Interest rate set by the Fed in the fed funds market
SubPrime mortgages
Lending to people with a FICO credit score of less than 640
Monetary vs. Fiscal Policy
Monetary: actions of the central bank, Fiscal: tax and spending policies of the government
Goals of Monetary Policy
Price stability, full employment, economic growth, interest rate stability, financial system stability, foreign exchange stability
Repurchase agreements
Securities sold to the Fed can be rebought by the bank
Teaser rates
System where after 2 years, rates reset to pay less per month
Money supply
Total amount of money in the economy
Velocity of money
Velocity * Money supply = GDP
Bank insolvency
When a bank's liabilities exceed its assets
Adverse stress test
-2.25% GDP growth, 7% unemployment, 12% drop in housing prices, 30% drop in stock market
Illiquidity
Assets a bank owns are illiquid
Technical factors
Factors beyond the control of the Fed that affect the banking system
Other borrowings
Include repurchase agreements and long-term debt
Downward spike
Too many securities, sell securities
Capital Adequacy
Banks must satisfy capital adequacy ratios, e.g., Tier 1 leverage ratio
Domestic systemically important banks (D-SIB's)
Banks that would cause a financial crisis if they fail
Keynesian Economics
Belief that interest rate is the key variable
Monetarist Economics
Belief that money supply is a key explanatory variable
Tier 1 leverage ratio
Capital/Total assets must be greater than 5%-8%
Treasury deposit
Corps pay a lot of taxes, drastically reducing depository balances
Monetary base
Currency + depository institution balances at the Fed
Pick-a-pay
Customer decides how much they want to pay
Bank shutdown
When a bank gets shut down by regulators
