Chapter 5 3244

investment banks

involves, among other activities, underwriting new security issues and providing advice on mergers and acquisitions

commercial banks

primarily involves taking deposits and making loans

Leverage

the financing of investments by borrowing rather than using capital

repurchase agreement

the selling of securities under the condition that the seller is to buy back the securities at a slightly higher price within a short period of time (typically, the next day or within a few days.)

commercial banks

they are financial intermediaries that raise funds and invest them in loans and securities.

Repo financing

way of borrowing funds through the use of repurchase agreements; short-term loans with the securities serving as collateral

Why have runs on commercial banks become rare while multiple shadow banking firms experienced runs during the financial crisis

A run on a financial firm is the attempt by investors to get their money out before the firm fails. Commercial banks do not typically have bank runs because their deposits are insured by the Federal Deposit Insurance Corporation (FDIC) which reduces the risk to depositors. The shadow banking industry, however, is not covered by the FDIC because their short-term borrowing is not in the form of deposits

what ways are insurance companies financial intermediaries

Insurance companies are financial intermediaries in that they obtain funds by charging premiums to policyholders and then use these funds to make investments

what ways does the shadow banking system differ from the commercial banking system

The shadow banking system is a Collection of nonbank financial institutions that channel money from savers to borrowers. Shadow banking firms are Less regulated than commercial banks and so can invest in more risky assets and become more highly leveraged than commercial banks. Unlike commercial banks, there is No federal deposit insurance for the investors who provide funds to the shadow banking system.

contractual savings

Unlike commercial banks, however, contractual savings institutions do not raise funds through deposits but rather, receive payments from individuals as a result of a contract. They also have access to a wider range of assets than commercial banks.

investment institutions

Unlike commercial banks, investment institutions do not raise funds through deposits and they have access to a wider variety of investment assets than commercial banks.

During the 2000s, why did investment banks become more reliant on repo financing and also, more highly leveraged

converted from partnerships to publicly traded companies. As proprietary trading became a more important source of profits, investment banks increasingly borrowed to finance investments in securities and direct loans to firms.

What became of the large, standalone investment banks during the financial crisis of 2007-2009

either went bankrupt, were taken over, or converted to bank holding companies to obtain access to Federal Reserve lending to survive the financial meltdown