Big Question #9

T-account

A balance sheet with two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column headings for "Assets" and "Liabilities"

Asset-liability time mismatch

A bank's liabilities can be withdrawn in the short term while its assets are repaid in the long term

Bond

A financial contract through which a borrower like a corporation, a city or state, or the federal government agrees to repay the amount that was borrowed and also a rate of interest over a period of time in the future

Balance sheet

An accounting tool that lists assets and liabilities

Financial intermediary

An institution that operates between a saver with financial assets to invest and an entity who will receive those assets and pay a rate of return

Assets

Items of value owned by a firm or an individual

Reserves

Funds that a bank keeps on hand that are not loaned out or invested in bonds

Diversify

Making loans or investments with a variety of firms, to reduce the risk of being adversely affected by events at one or a few firms

Credit Easing (CE)

Shifts the composition of the Fed's balance sheet away from risk-free assets and toward risky assets to reduce the risk on commercial banks' balance sheets

Moral hazard

The incentive for borrowers to use loan proceeds in a different and more risky manner, problem occurs after a loan is granted

Target federal funds rate

The interest rate at which commercial banks make overnight loans to each other

Discount rate

The interest rate the Fed charges on loans it makes to commercial banks, establishes a ceiling on the market federal funds rate

Deposit rate

The interest rate the Fed pays on excess reserves of commercial banks, establishes a floor for the market federal funds rate

Adverse selection

The most undesirable potential borrowers are most likely to seek loans, problem occurs before a loan is granted

Money multiplier

Total money in the economy divided by the original quantity of money, or change in the total money in the economy divided by a change in the original quantity of money

Liabilities

Any amounts or debts owed by a firm or an individual

Open-market operations

The buying and selling of U.S. Treasury bonds by the Federal Reserve

Reserve ratio

The proportion of deposits that the bank holds in the form of reserves

Reserve requirement

The ratio of balances a commercial bank must hold as either vault cash or on deposit at a Federal Reserve bank

Net worth

Total assets minus total liabilities; What you own minus what you owe

Policy Duration Commitment

When the Fed commits to keep interest rates low for a sustained period into the future

Quantitative Easing (QE)

When the Fed expands the supply of reserves to the banking system beyond the level needed to maintain its policy target federal funds rate. This increases the size of the Fed balance sheet

Asymetric information

Where borrowers have more information than lenders