Money and Banking Exam 2 Ch 12

deposit rate ceilings

restriction on the maximum interest rate payable on deposits

commercial paper

short term debt security issued by large banks and corporations. commercial paper market has undergone tremendous growth since 1970 when $33 billion was outstanding, to over $1 trillion outstanding at the end of 2010.

financial engineering

the process of researching and developing new financial products and services that would meet customer needs and prove profitable

automated banking machine

(ABM) which combines in one location an ATM, an Internet Connection to the bank's website, and a telephone link to customer service

automated teller machine

(ATM) form of e-banking an electronic machine that allows customers to get cash, make deposits, transfer funds from one account to another, and check balances.

Federal Home Loan Bank System

(FHLBS) establish in 1932, was styled after the Federal Reserve System. -has 12 district federal home loan banks, which are supervised by the Office of Thrift Supervision

International Banking Facilities

(IBF) banking establishments in the US that can accept time deposits from foreigners but are not subject to either reserve requirements or restrictions on interest payments -Fed Reserve approved creation in 1981

growth in international banking

-growth is attributed to 3 factors 1. rapid growth in international trade and multinational corporations that has occurred since 1960. 2. american banks have been able to earn substantial profits by being very active in global investment banking, in which they underwrite foreign securities. 3. american banks have wanted to tap into the large pool of dollar denominated deposits in foreign countries known as Eurodollars.

difference in American and Japanese banking systems

-major difference between American and Japanese banking systems is that Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas american banks cannot. -most american banks use a bank holding company structure, but bank holding companies are illegal in Japan.

2. restrictions on interest paid on deposits

-until 1980 legislations prohibited banks in most states from paying interest on checking account deposits, through regulation Q, Fed set up maximum interest rate that could be paid on time deposits

Structure of U.S. banking overseas

U.S. Banks have most of their foreign branches in Latin America, The Far East, the Caribbean, and London. -largest volume of assets is held by branches in London, because it is a major international financial center and the central location for Eurodollars. -Latin American and Far East; importance of US trade with these regions. -Caribbeans; tax havens, minimal taxation and few restriction regulations.

dual banking system

US has dual banking system in which banks are supervised by the federal government and banks supervised by the state government operate side by side

virtual bank

a bank that has no physical location but rather exists only in cyberspace

central bank

a government institution that has responsibility for the amount of money and credit supplied in the economy as a whole. did not reappear until the Fed was created in 1913

branches

additional offices for the conduct of banking operations

super regional banks

bank holding companies that have begun to rival the money center banks in size but whose headquarters are not in one of the money center cities (New York, Chicago, and San Fran)

shell operations

branches in Bahamas and Cayman Islands are "shell operations" because they function primarily as bookkeeping centers and don't provide normal banking services

Savings and Loans associations

can be chartered by either federal government or by the states. most S&L's are members of the Federal Home Loan Bank System (FHLBS) -federal deposit insurance up to $250,000 per account for S&L's is provided by the FDIC

bank holding companies

companies that own one or more banks

Eurodollars

created when deposits in accounts in the United States are transferred to a bank outside the country and are kept in the form of dollars.

home banking

electronic banking facility in which the customer is linked up with the banks computer to carry out personal transactions

British style universal banking system

engages in securities underwriting, but it differs from German-style bank in 3 ways. 1.seperate legal subsidiaries are more common 2. bank equity holdings of the commercial firms are less common 3. combinations of banking and insurance are less common (features some legal separation of banking and other financial service industries) -found in UK and countries with close ties to it (Canada and Australia, and now the US)

national banks

federally chartered banks, supervised by the Office of the Controller of the Currency (Dept, US Treasury)

1. reserve requirements

for each dollar of deposits, reserve requirements therefore imposed a cost on the bank equal to the interest rate, i, that could be earned if the reserves could be lent out times the fraction of deposits required as reserves, r. -the cost of i x r imposed on the bank was just like a tax on bank deposits of i x r per dollar of deposits -until 2008 Fed did not pay interest on reserves

futures contracts

in which the seller agrees to provide a certain standardized commodity to the buyer on a specific future date at an agreed on price

sweep account

innovation that enables banks to avoid the "tax" from reserve requirements is the sweep account. in this arrangement, any balances above a certain amount in a corporations checking account at the end of a business day are "swept out" of the account and invested in overnight securities that pay interest. -"swept out" funds are no longer classified as checkable deposits, they are not subject to reserve requirements (not taxed)

financial derivatives

instruments that have payoffs that are linked to previously issued securities, used as risk reduction tools

disintermediation

loss of deposits from the banking system restricted the amount of funds that banks could lend (called disintermediation) and thus limited bank profits

universal banking

provides no separation at all between the banking and securities industry. in a universal banking system, commercial banks provide a full range of banking, securities, real estate, and insurance services, all within a single legal entity. banks can own sizable equity shares in commercial firms -found in Germany, Netherlands, and Switzerland

capital controls

regulations such as reserve requirements or restrictions

mutual savings banks

similar to S&L's but are jointly owned by the depositors, about half are chartered by the states. primarily regulated by the states in which they're located, majority have their deposits insured by the FDIC

community bank

small banks with local roots

credit Unions

small cooperative lending institutions organized around a particular group of individuals with a common bond. - only depository institutions that are tax exempt and can be chartered either by the states or by the federal government (more than 1/2 are federal chartered) -typically hold less than $10 million of assets

shadow banking system

some business has been replaced by the shadow banking system, in which bank lending has been replaced by lending via the securities market

fallen angels

some firms that had fallen on bad times, known as fallen angels, had previously issued long-term corporate bonds with ratings that had now fallen below Baa, bonds that were pejoratively dubbed "junk bonds"

Edge Act Corporation

special subsidiary of a US bank engaged primarily in international banking.

state banks

state chartered banks,

economies of scope

the ability to use one resource to provide many different products and services

securitization

the process of transforming otherwise illiquid financial assets (such as residential mortgages, auto loans, and credit card receivables) which have typically been the bread and butter of banking institutions, into marketable capital market securities.

hedge

to protect oneself against risk

information technology

two effects 1. it has lowered the cost of processing financial transactions, making it profitable for the financial institutions to create new financial products and services for the public 2. made it easier for investors to acquire information, thereby making it easier for firms to issue securities

regulations to restrict banks to make profits

two sets of regulations that have seriously restricted banks abilities to make profits. 1.reserve requirements that force banks to keep certain fraction of their deposits as reserves (vault cash and deposits in the federal reserve system) and 2. restrictions on the interest rates that can be paid on deposits