401 terms

Example of C F P B oversight

in September 2016 Wells Fargo Bank was ordered o pay $185 million in fines and penalties to settle "the widespread illegal practice of secretly opening unauthorized deposit and credit card accounts".

Mortgages

include all loans secured by liens on any type of real estate.

INT

= annual interest payment = par value * coupon rate

Ib

= before-tax rate of return on a taxable bond

CF1

= cash flow in period t (t = 1, ..., n)

CFt

= cash flow received at end of period t

D

= constant dividend paid at end of every year

D0

= current dividend per share

Dt

= dividend per share at time t = 1

E(ir1)

= expected one-year rates for years, i = 1 to N

ij*

= f(IP, RFR, DRPj, LRPj, SCPj, MPj)Inflation (IP).

FVt

= future value of cash flow (lump sum) received in periods

RFR

= i − Expected (IP)

Ia

= ib(1 - t)

DRPj

= ijt − iTt

-

= indicates the projected cash flow is uncertain

R

= interest rate earned per period on investment

iTt

= interest rate on security issued by the U.S. Treasury of maturity m at t.

Rb

= interest rate used to discount cash flows on the bond

Lt

= liquidity premium for period t L2 < L3 < ...LN

T

= marginal total income tax rate of the bond holder

R

= monthly interest rate on the mortgage

PMT

= monthly mortgage payment

t

= number of compounding periods in investment horizon

T

= number of months over the life of the mortgage

N

= number of periods in the investment horizon

PMT

= periodic annuity payment T

PV

= present value of cash flow

PVt

= present value of cash flow received at end of period t

Vb

= present value of the bond

P V

= principal amount borrowed

Rncb

= rcb − opcb

rs

= required return on the stock

Rcvb

= rncvb − opcvb

N

= term to maturity

g

= the constant dividend growth rate

Pf

= the face value of the security

Rs

= the interest rate used to discount future cash flows

N

= the number of days until maturity

N

= the number of days until the repo matures

M

= the number of times per year interest is paid

N

= the number of years to maturity

N

= the number of years until the bond matures

M

= the par (i.e., face) value of the bond

P0

= the purchase price of the security

Pf

= the repurchase price of the security

P0

= the selling price of the security

Pt

= the stock's price at the end of year t

Opcvb

= value of the conversion option to the bond holder

Opcb

= value of the issuer's option to call the debt early

Rcb

= yield on a callable bond

Rcvb

= yield on a convertible bond

Rncb

= yield on a noncallable bond

Rncvb

= yield on a nonconvertible bond

R

= yield to maturity or current required rate of return

IP

=Real risk-free interest rate (RFR) and the Fisher effect.

foreign direct investment

A 1997 agreement between 100 countries (under the World Trade Organization (WTO)) began dismantling barriers inhibiting ______ into emerging countries.

long

A ___ position is the purchase of a futures contract.

Short

A ___ position is the sale of a futures contract.

OBS activities

include issuing various types of guarantees (such as letters of credit), which often have a strong insurance underwriting element, and making future commitments to lend. Both services generate additional fee income for banks. Off-balance-sheet activities also involve engaging in derivative transactions—futures, forwards, options, and swaps.

Intrastate

By 1994, only one state (Iowa) had not deregulated _____ banking

short-term financial assets

By accepting deposits and making loans, depository institutions allow savers with predominantly small, ____ to benefit from investments in larger, longer-term assets.

90%

By the early 2000s, over ____ of depository institutions paid the statutory minimum premium, and the average assessment rate was less than 0.1 cent per $100 of deposits.

secondary market

C Ds are bearer instruments and thus are salable in the____ ____.

Tax

CBs often view required reserves as similar to a ___ and as a positive cost of undertaking financial intermediation.

Community Reinvestment Act (C R A) of 19 77

CRA ratings range from outstanding to substantial noncompliance, and examinations for compliance have become increasingly rigorous.

Community Reinvestment Act (CRA) of 1977

CRA ratings range from outstanding to substantial noncompliance, and examinations for compliance have become increasingly rigorous.

primary role of the SEC

includes administration of securities laws, review and evaluation of registrations of new securities offerings (ensuring that all relevant information is revealed to potential investors), review and evaluation of annual and semiannual reports summarizing the financial status of all publicly held corporations, and the prohibition of any form of security market manipulation.

expense ratio

includes the commission and other expenses for P&C.

credit union profits

are distributed back to members in the form of better rates on deposits and loans as well as lower and fewer fees on services. It is these services that have justified credit unions' tax exempt status.

FIs

are encouraged to sell loans for economic and regulatory reasons.

Discount points

are fees or payments made when a mortgage loan is issued (at closing).

Corporate credit unions

are financial institutions that are cooperatively owned by their member credit unions.

Sovereign bonds

are government-issued debt.

Mutual organizations

are institutions in which the liability holders are also the owners. In a mutual savings bank, depositors also own the bank. (No stock is issued.)

Treasury notes and bonds (T-notes and T-bonds)

are issued by the U.S. Treasury to finance the national debt and other government expenditures.

Finance companies

are likely to have substantial industry and product expertise.

Wholesale loans

are loan agreements between parties other than the companies' consumers

Mortgages

are loans to individuals or businesses to purchase homes, land, or other real property.

Foreign bonds

are long-term bonds issued outside of the issuer's home country and usually denominated in the currency of the country in which they are issued. E.g., Japanese company issues a dollar-denominated public bond rather than a yen-denominated bond in the U.S.

Eurobonds

are long-term bonds issued outside the country of the currency in which they are denominated. E.g., dollar-denominated bonds issued in Europe or Asia.

Capital markets

are markets for equity and debt instruments with original issue maturities of more than one year.

Bond markets

are markets in which bonds are issued and traded.

Negotiable CDs and fed funds

are money market securities that pay interest only at maturity. These use single-payment yields (isp).

Finance companies

are more willing to take on risky customers.

Collateralized mortgage obligations (CMOs)

are mortgage-backed bonds with multiple bond holder classes or tranches.

Jumbo mortgages

are mortgages for loan amounts that exceed the maximum 'conforming' limits allowed by the mortgage agencies Fannie Mae and Freddie Mac ($417,000 in 2016, with some exceptions).

property insurance

insurance coverage related to the loss of real and personal property

Federal Deposit Insurance Corporation (FDIC)

insures the deposits of commercial banks. In so doing, it levies insurance premiums on banks, manages the deposit insurance fund (which is generated from those premiums and their reinvestment), and conducts bank examinations.

Simple interest

interest earned on an investment is not reinvested.

Compound interest

interest earned on an investment is reinvested, most common.

Realized rate of return (r)

interest rate actually earned on investments.

The FDICIA of 1991

introduced risk-based deposit insurance premiums (starting in 1993) in an attempt to limit excessive risk taking by savings institution managers. It also introduced a prompt corrective action (PCA) policy, enabling regulators to close thrifts and banks faster.

Credit unions

invest heavily in investment securities (22.0 percent of total assets in 2016).

Money markets

involve debt instruments with original maturities of one year or less.

"Alternative A-papers"

are mortgages that are riskier than prime, but not as risky as subprime.

Subprime mortgages

are mortgages where the borrowers do not qualify for a 'prime' credit rating because of a low credit score arising from prior credit problems such as delinquencies and defaults. Or, they may simply lack sufficient credit history or have insufficient income.

Credit unions (CUs)

are nonprofit depository institutions mutually organized and owned by their members (depositors). They were established in the United States in the early 1900s as self-help organizations.

annuities

involve different methods of liquidating a fund over a long period of time, such as paying out a fund's proceeds to the beneficiary.

Total return swaps

involve swapping an obligation to pay interest at a specified fixed or floating rate for payments representing the total return on a loan (interest and principal value changes) of a specified amount.

Derivatives

involve the buying and selling, or transference, of risk.

International bond markets

involve unregistered bonds that are internationally syndicated, offered simultaneously to investors in several countries, and issued outside of the jurisdiction of any single country.

Issuers of privately placed securities

are not required to register with the SEC since the placements (sales of securities) are made only to large, sophisticated investors.

Finance companies

are not subject to regulations that restrict the types of products and services they can offer.

CUs

are prohibited from serving the general public.

CBs

are regulated at the federal (and sometimes state) level.

State-chartered commercial banks

are regulated by state agencies. State authorities perform similar functions as the OCC performs for national banks.

Savings institutions

are regulated by the Office of the Comptroller of the Currency (OCC), the FDIC, and state agencies (for state chartered savings institutions).

Commercial loans

are relatively more important for the larger banks

Second mortgages

are secured by a piece of real estate already used to secure a first mortgage.

Municipal bonds

are securities issued by state and local governments and are repaid using tax receipts or revenues generated from a project.

Fed fund transactions

are short-term (mostly overnight) unsecured loans.

Repos

are short-term collateralized loans (typical collateral is U.S. Treasury securities).

T-Bills

are short-term debt obligations issued by the U.S. government.

Group policies

are similar to ordinary life insurance policies except that they cover a large number of insured persons under a single policy, providing cost economies in evaluating, screening, selling, and servicing the policies.

Revenue bonds

are sold to finance specific revenue-generating projects and are backed by the cash flows from that project.

Discount rate changes

are strong signals of the Federal Reserves intentions.

Open market operations

are the main policy tool used to achieve monetary targets:

Reserve requirements

are the reserve assets depository institutions must keep to "back" transaction deposits.

Goldman Sachs and Salomon Brothers/Smith Barney

national full-line firms that specialize more in corporate business with customers and are highly active in trading securities.

FSMA of 1999

now allows bank holding companies to open insurance underwriting affiliates and also allows insurance companies to open banks.

Securitization

occurs when securities are packaged and sold as assets backing a publicly traded or privately held debt instrument.

The current market price (P)

of a security is determined using the expected rate of return, or E(r), as the discount rate.

The fair present value (PV)

of a security is determined using the required rate of return (r) as the discount rate.

Security firms

offer clearing and settlement services, research and information services, and other brokerage services on a fee basis.

Pure arbitrageurs

often attempt to profit from price discrepancies that may exist between the spot, or cash, price of a security and its corresponding futures price.

Regional securities firms

often subdivided into large, medium, and small categories and concentrate on servicing customers in a particular region, e.g., New York or California (such as Raymond James Financial).

less frequently

older issued T-bonds and T-notes trade ________ than newly issued T-bonds and T-notes

Expansionary monetary policy

open market purchases of securities by the Fed.

Contractionary monetary policy

open market sales of securities by the Fed.

The Chicago Board of Options Exchange (CBOE)

opened in 1973 as the first exchange devoted solely to the trading of stock options.

The Federal Home Loan Mortgage Corporation (FHLMC

or Freddie Mac), was formed in the 1960s to facilitate financing of conventional mortgages.

FDIC DIF

oversees the deposit insurance fund for savings institutions.

sell parts of their loans (i.e.

participations), Large banks often _________ to smaller banks

McFadden Act

passed in 1927 and amended in 1933.

Interest Only payment

pay interest only at an adjustable rate for first 5 to 10 years of loan, payments will increase substantially when IO term expires.

European mortgage securitization

peaked in 2008 before falling dramatically in 2009 as a result of the financial crisis.

money center banks

perform intermediation services on a global scale.

Coupon rate

periodic cash flow a bond issuer contractually promises to pay a bond holder.

Floor brokers

place trades for the public.

Venture capital firms

pool money from individual investors and other FIs (e.g., hedge funds, pension funds, and insurance companies) to fund relatively small and new businesses (e.g., in biotechnology).

Higher

premiums for high-severity low-frequency lines will be charged ___ premiums than low-severity high-frequency lines.

Profit

pressures for derivatives exchanges to merge.

active secondary market 23

primary dealers "make" a market in T-bills by buying the majority sold at auction and by creating an ____ _____ ____.

SBICs

privately organized venture capital firms licensed by the SBA that make equity investments (as well as loans) to entrepreneurs for start-up activities and expansions.

Securities Investor Protection Corporation (SIPC)

protects investors against losses up to $500,000 when those losses have been caused by the failure of securities firms.

Credit unions

provide a public service by offering loans to those who might not otherwise have access to credit through commercial banks and savings institutions: low- and moderate-income individuals within a specific group—the credit union's common bond.

Reinsurance

provides a means for primary insurers to pool their risk by transferring some of the risk and premium to a reinsurer.

NCUA

provides deposit insurance guarantees of up to $250,000 for insured state and federal credit unions.

NSMIA

provides that states may still require securities firms to pay fees and file documents submitted to the SEC, but most of the regulatory burden imposed by states has been removed.

Regional or superregional banks

range in size from several billion dollars to several hundred billion dollars in assets. The banks normally are headquartered in larger regional cities and often have offices and branches in locations throughout large portions of the United States. They engage in a more complete array of wholesale commercial banking activities, encompassing consumer and residential lending as well as commercial and industrial lending (C&I loans), both regionally and nationally.

Expected rate of return or E(r)

rates participants expect to earn by buying securities at current market prices p .

Required rate of return (r)

rates used by individual market participants to calculate fair present values (PV).

The National Securities Markets Improvement Act (NSMIA) of 1996

reaffirmed the significance of the SEC as the primary regulator of securities firms.

mid-1980s

real estate and land prices in Texas and the Southwest collapsed. This was followed by economic downturns in the Northeast and Western states of the United States. Many borrowers with mortgage loans issued by savings institutions in these areas defaulted. In other words, the risks incurred by many of these institutions did not pay off.

Sold mortgages

reduce the cost of reserve and capital requirements.

Investment banking

refers to activities related to underwriting and distributing new issues of debt and equity securities. New issues can be either first time issues of companies' debt or equity securities or the new (or seasoned) issues of firms whose debt or equity is already trading.

LAE

relate to the costs surrounding the loss settlement process. For example, many P&C insurers employ adjusters who determine the liability of an insurer and the size of an adjustment or settlement to make.

The Financial Services Modernization Act (FSMA) of 1999

repealed Glass-Steagall.

Annuities

represent the reverse of life insurance principles.

public offering

represents the sale of a security to the public at large.

Balloon payment mortgages

require fixed monthly interest payments for 3 to 5 years, at which point full payment of the mortgage principal is due.

Expansionary monetary policy

reserve requirement ratio decreases.

Contractionary monetary policy

reserve requirement ratio increases.

The financial crisis

reshaped much of the securities firms and investment banking industry.

The Overseas Direct Investment Control Act of 1964

restricted U.S. banks' ability to lend to U.S. corporations to make foreign investment.

Mortgage prepayments

retire only one tranche at a time, so all other trances are sequentially prepayment protected.

securities firms and investment banks

serve as brokers intermediating between fund suppliers and users.

The U.S. Central Credit Union

serves as a "corporate's corporate"—providing investment and liquidity services to corporate credit unions. The Central Credit Union acts as the main provider of liquidity for corporate credit unions. It invests their surplus funds and provides financial services and operational support.

national full-line firms

service both retail customers (especially in acting as broker-dealers, thus assisting in the trading of existing securities) and corporate customers (such as underwriting, thus assisting in the issue of new securities).

The 2010 Wall Street Reform and Consumer Protection Act

set forth many changes in the way securities firms and investment banks are regulated.

FOMC

sets ranges for growth of monetary aggregates and the fed funds rate, and also directs operations in FX markets.

derivative trading

should not adversely affect the economic system because it allows individuals who want to bear risk to take more risk, while allowing individuals who want to avoid risk to transfer that risk elsewhere.

Regulation Q

specified maximum interest rates on deposits and prevented competition on deposit rates

Competitive bids

specify the amount of par value of bills desired and the discount yield, rather than the price.

According to the NSMIA

states are not allowed to require federally registered securities firms to be registered in a state as well. States are also prohibited from requiring registrations of securities firms' transactions and from imposing substantive requirements on private placements.

Competitive bidders

submit bid yields, highest bid accepted is call the 'stop out yield'.

Position traders

take a position in the futures market based on their expectations about the future direction of the prices of the underlying assets, and trade for their own account.

Day traders

take a position within a day and liquidate it before day's end.

Scalpers

take positions for very short periods of time, sometimes only minutes, in an attempt to profit from active trading.

securities firms' liabilities

tend to be extremely short term (see the balance sheet in Table 16-7). Unlike other types of FIs,

Money center banks

tend to be located in the major cities and are also net borrowers of funds in the interbank market.

Regional banks

tend to concentrate more on domestic business than do money center banks. They are often market makers for smaller commercial banks in their regions (correspondent banks), providing them with intermediation and information services. They also service the large domestic corporations operating in their area.

Industrial corporations

tend to obtain a greater proportion of their funds from stockholders, bondholders, and other types of creditors.

large banks

tend to pay higher salaries and invest more in buildings and premises than small banks do. They also tend to diversify their operations and services more than small banks do.

Small or community banks

tend to specialize in retail or consumer banking, such as providing residential mortgages and consumer loans and accessing the local deposit base.

Credit unions

the bottom tier at the local level.

law of large numbers

the expected loss potential of such lines—the frequency of loss times the extent of the damage (severity of loss)—may be estimable within quite small probability bounds. Other lines, such as earthquake, hurricane, and financial guarantee insurance, tend to insure very low-probability (frequency) events.

best-efforts public offerings

the firm acts as the agent and receives a fee based on the success of the offering. The firm serves as a principal by actually takes ownership of the securities in a firm commitment underwriting. Thus, the risk of loss is higher. Finally, the firm may perform similar functions in the government markets and the asset-backed derivative markets. In all cases, the investment bank receives fees related to the difficulty and risk in placing the issue.

higher the yield on the IC's investments

the greater is the difference between the premium income stream and the policy payouts (except in the case of variable life insurance) and the greater is the insurance company's profitability.

Nominal interest rates

the interest rates actually observed in financial markets. Used to determine fair present value and prices of securities.

private offering

the investment bank receives a fee for acting as the agent in the transaction.

life insurers

have no access to a federal guarantee fund (although, as mentioned above, during the financial crisis the federal government took the unprecedented step of bailing out several major insurance companies).

Finance Companies

have no bank-type regulators monitoring their behavior.

Primary mortgages

have no set size or denomination.

T-notes

have original maturities from over 1 to 10 years.

T-bonds

have original maturities from over 10 years.

savings institutions

hold the vast majority of their assets in the form of mortgages and mortgage backed securities.

The Glass-Steagall Act of 1933

imposed a rigid separation between commercial and investment banks.

firm commitment underwriting

the investment banker acts as a principal purchasing the securities from the companies at one price and seeking to place them with public investors at a slightly higher price.

best efforts underwriting

the investment banker acts as an agent of the company and receives a fee based on the number of securities sold.

best efforts basis

the investment banker may agree to buy the shares at a rather low price compared to what the company thinks it could get by working with the investment banker on a ____.

firm commitment underwriting

the issuing company would prefer ____ since this assures from the company's perspective that all of the shares are sold.

demand and time deposits

the liabilities of savings institutions consist primarily of_____.

Corporate credit unions

the middle tier at the state or regional level

inflation-indexed bonds

the semiannual coupon payments and the final principal payment of _______ are based on the inflation-adjusted principal value of the security.

U.S. Central Credit Union

the top tier at the national level

Disintermediation

the withdrawal of deposits from depository institutions and their reinvestment elsewhere.

Eurex

the world's largest derivatives exchange, launched a fully electronic exchange in the U.S. in 2004

Adjustable-rate mortgages (ARMs)

tie the borrower's interest rate to some market interest rate or interest rate index.

Municipal bonds

to finance long-term capital outlays.

Municipal bonds

to fund imbalances between expenditures and receipts.

The primary objective of credit unions

to satisfy the depository and borrowing needs of their members.

Professional traders

trade for their own accounts.

Primary dealers

trade for themselves and for customers.

Credit life

typically is term life sold in conjunction with some debt contract. Their cost per unit of coverage is usually much higher than other methods of covering these liabilities in the event of unexpected death. Thus, they are a rarely used type of life insurance..

Secondary issues of seasoned firms

typically will generate lower fees than an IPO.

long-term assets

typically yield a higher rate of return than short-term assets.

PC insurance companies

use premium payments to provide assurance against certain types of risk for customers.

FRS member banks

"own" the 12 Federal Reserve Banks

Pass-through securities

"pass through" promised principal and interest payments to investors.

Business and consumer loans

(called accounts receivable) are major assets held by finance companies; in 2016 they represented 71.3 percent of total assets.

CU member deposits

(called shares, representing ownership stakes in the CU) are used to provide loans to other members in need of funds. Earnings from these loans are used to pay interest on member deposits. Because credit unions are nonprofit organizations, their earnings are not taxed.

Other fees

(e.g., VA or FHA loan guarantees and PMI).

Discount yields

(id) use a 360-day year.

$250

00, The FDIC initial insurance limit was $2,500; this amount was periodically increased to $100,000, where it remained until the financial crisis of 2007 to 2008, when it was increased to______.

$1

000, Minimum denomination on publicly traded corporate bonds is

Weekly

13- and 26-week T-bills are auctioned ____ , other maturities available.

Interest Only payment

15-year or 30-year fully amortizing payment

Douglas Amendment to the Bank Holding Company Act

1956.

Monthly

2-, 3-, 5-, and 7-year notes are auctioned ______.

T

= 1 to T, the period in which a cash flow is received

D

= Duration measured in years

C

= N(d )S - E(e-rT )N(d

FVt I(1+ r)t

= PV

1RN

= actual N-period rate today

1R1

= actual current one-year rate today

Ia

= after-tax rate of return on a taxable corporate bond

digital default option

A ________ pays a stated amount in the event of a loan default.

less than the stop out

All noncompetitive bidders and competitive bidders who bid ___________ receive their full allotment.

Riegle-Neal Act of 1994

Allowed U.S. and foreign banks to branch interstate by consolidating out-of-state bank subsidiaries into a branch network and/or by acquiring banks of individual branches of banks through acquisitions or merger.

10-year period

BHCA of 1956 required BHC s to divest themselves of nonbank-related subsidiaries over a _______ and effectively restricted acquisitions of banks by commercial firms.

Interstate

By 1994, all states but Hawaii had passed some form of _____ banking law or pact.

Collateral

A down payment is a portion of the purchase price of the property a financial institution requires the mortgage borrower to pay up front.

mortgage assets

A group of ______ is pledged as collateral against a MBB issue, but there is no direct link between the cash flows of the mortgages and the cash flows on the MBB.

Small banks; large banks

A large part of correspondent banking involves ______ making loans that are too big for them to hold on their balance sheets and selling parts of these loans to _______ with whom they have had a long-term deposit and lending correspondent relationship

made with recourse

A loan sale is ______ if the loan buyer can sell the loan back to the originator, should it go bad.

financial leverage

A major similarity between depository institutions and insurance firms is the high degree of ___ incurred by both groups of firms.

Financial leverage

A major similarity between securities firms and all other types of FIs is a high degree of ___. They all solicit funds that are used to finance an asset portfolio consisting of financial securities.

fixed-interest; floating-interest

A plain vanilla interest rate swap is an exchange of _______ payments for _______ payments by two counterparties.

Profit line losses

A ratio greater than 100 implies that the premiums earned did not cover ____.

issuing firm

A type of commercial paper that is backed by assets of the___.

Increase

ARMs can _____ default risk.

GNMA

Act as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments from the FI or mortgage servicer to the bond holder.

shadow banking

Activities of nonfinancial service firms that perform banking service have been termed _________.

Opportunity cost

Adjustments for individual security characteristics. Additional purchasing power required to forego current consumption.

Single price auction

Adopted by the U.S. Treasury in 1998. All Treasury security bidders pay the same price for the Treasury security.

Countercyclical capital buffer

Aims to protect the banking system and reduce systemic exposures to economic downturns.

Convex

All fixed-income securities are _______.

Information/Monitoring Costs

Although global expansions allow an FI the potential to better diversify its geographic risk, the absolute level of exposure in certain areas such as lending can be high, especially if the FI fails to diversify in an optimal fashion. For example, the FI may fail to choose a loan portfolio combination on the efficient portfolio frontier. For example, Japanese and German accounting standards differ significantly from the generally accepted accounting principles that U.S. firms use. In addition, language, legal, and cultural issues can impose additional transaction costs on international activities

Type; quantity

Amount of the margin varies according to the ___ of contract traded and the ____ of futures contracts traded.

Innovations

An FI can generate extra returns from new product _____ if it can sell such services internationally rather than just domestically. For example, consider complex financial innovations, such as securitization, caps, floors, and options, that FIs have innovated in the United States and sold to new foreign markets with few domestic competitors until recently.

fixed monthly payments

An amortization schedule shows how the ______ are split between principal and interest

FRB

An independent central bank-its decisions do not have to be ratified by the President or Congress.

Pure arbitrage

An investor would try to buy gold in London at $1,018 and sell it in New York for $1,025 yielding a riskless profit of $7 per ounce. The success of the transaction may be undermined by transactions costs, the bid-ask spread, and how quickly the investor can execute the transaction before others try the same actions and move the two prices together before a profit can be made.

off-balance-sheet asset

An item or activity is an _____if, when a contingent event occurs, the item or activity moves onto the asset side of the balance sheet or an income item is realized on the income statement.

2 percentage points less

An often-cited rule of thumb is that the new interest rate should be __________ than the refinanced mortgage rate.

Conservatorship

As a first step in its effort to resolve the crisis, in March 2009 the NCUA placed two corporates, U.S. Central and WesCorp, into____ .

Nonconstant

As interest rates change, bond prices change at a ____ rate

National Credit Union Administration (NCUA)

As of 2016: 62.5 percent of the 6,105 credit unions were federally chartered and subject to ____ regulation.

toxic assets

As of the third quarter 2010, the NCUA held roughly 70 percent of the assets of the corporate credit union system, which included $50 billion in___ .

Risk Diversification

As with domestic geographic expansions, an FI's international activities potentially enhance its opportunity to diversify the risk of its earning flows. Often domestic earnings flows from financial services are strongly linked to the state of that economy..

Municipal bonds

Attractive to household investors because interest is exempt from federal and most local income taxes.

Financial Services Regulatory Relief Act of 2006

Authorized Federal Reserve to pay interest on reserve balances held by depository institutions.

Insurance companies; full-service banks

Bank Holding Company Act (BHCA) of 1956 and the Garn-St. Germain Depository Institutions Act of 1982 restricted __________ from owning or being affiliated with ___________.

bearer instruments

Banker's acceptances are ____ and thus are salable in secondary markets.

toxic mortgages

Banks in Ireland, Spain, and the United Kingdom were especially hard hit as they had large investments in ______ and mortgaged-backed securities, both U.S. and domestic.

Reserves

Banks must hold minimum levels of _____ against net transaction accounts.

Lend ; borrow

Banks with excess reserves ___ fed funds, while banks with deficient reserves ____ fed funds.

net regulatory burden

Barriers to entry and regulations pertaining to the scope of permitted activities affect a CB's charter value and the size of its __________.

Depositors Insurance Fund (DIF)

Because of problems in the thrift industry and the insolvency of the savings association insurance fund (FSLIC) in 1989, the FDIC now manages the insurance fund for both commercial banks and savings associations; the fund is called the ___.

prorata share

Bidders at the stop out yield may receive a ______ of their allotment.

T-bills

Bids are submitted by government securities dealers, financial and nonfinancial corporations, and individuals.

long-term debt obligations

Bonds are ______ issued by corporations and government units.

default risk

Bonds are rated by perceived _____.

ARM

Borrowers assume interest rate risk with an____.

costs (fees) of refinancing

Borrowers must balance the savings of a lower monthly payment with the__________.

Speculation

Buying or selling a derivative contract in order to earn a leveraged rate of return.

limited investment banking

By 1987, commercial banks were allowed to engage in _______ activity through Section 20 affiliates.

Forward contracts

Can be based on a specified interest rate (Example: LIBOR) rather than a specified asset.

Credit default swaps (CDS)

Can be used to hedge credit exposure, but contain an element of interest rate risk as well as credit risk.

bond indexes

Changes in values of ______ can be used by bond traders to evaluate changes in the investment attractiveness of bonds of different types and maturities.

Funds Source

International expansion allows an FI to search for the cheapest and most available ______. This is extremely important with the very thin profit margins in domestic and international wholesale banking. It also reduces the risk of fund shortages (credit rationing) in any one market.

Customer Relationships

International expansions also allow an FI to maintain contact with and service the needs of domestic multinational corporations. Indeed, one of the fundamental factors determining the growth of FIs in foreign countries has been the parallel growth of foreign direct investment and foreign trade by globally oriented multinational corporations from the FI's home country.

Investment Banking

Investment banks specialize in underwriting and distributing new issues of debt and equity securities.

Households; firms

Commercial banks provide many unique services.(Information services,Liquidity services,Price-risk reduction services).Failure to provide these services or a breakdown in their efficient provision can be costly to both the ultimate providers _____ and users ____ of funds.

Foreign exchange intervention

Commitments between countries about the institutional aspects of their intervention in the foreign exchange markets.

Common equity Tier I RBC ratio (Basel III)

Common equity Tier I capital / Credit risk-adjusted assets.

Mortgage

Comparatively little information exists on ____ borrowers.

FIRREA

Congress further enacted the Federal Deposit Insurance Corporation Improvement Act (FDICIA).

Investor protection regulation

Considerable number of laws protect investors who use commercial banks directly to purchase securities and/or indirectly to access securities markets through investing in mutual or pension funds managed by CBs.

not federally insured

Conventional mortgages are mortgages that are __________. Amortized mortgages have fixed principal and interest payments that fully pay off the mortgage by its maturity date.

error in duration

Convexity diminishes the ______ as an investment criterion.

Desirable

Convexity is

long-term obligations

Corporate bonds are ________ issued by corporations.

Consumer Financial Protection Agency (C F P B)

Created as part of the financial services overhaul bill passed in 2010 to protect consumers from unfair, deceptive and abusive practices

Consumer Financial Protection Agency (CFPB)

Created as part of the financial services overhaul bill passed in 2010 to protect consumers from unfair, deceptive and abusive practices

STRIPS

Created by the U.S. Treasury in response to the separate trading of Treasury security principal and interest that had been developed by securities firms

on-balance-sheet; off-balance-sheet

Credit risk-adjusted assets include: Credit risk-adjusted _______ assets + Credit risk-adjusted _____ assets.

Unsecured

Debentures and subordinated debentures.

Treasury notes and bonds

Default risk free: backed by the full faith and credit of the U.S. government.

C Ds

Denominations range from $100,000 to $10 million; $1 million being the most common.

leveraged instruments

Derivatives are _______ where participants put up a small amount of money and obtain the gain or loss on a much larger position.

Capital conservation buffer

Designed to ensure that Dis build up a capital surplus, or buffer, outside period of financial stress that can be drawn down as losses are incurred during period of financial stress.

Discriminating auctions

Different successful bidders paid different prices (their bid prices).

current interest rates

Discount future payments using ______ to find the present value (PV)

Safety and soundness

Due to a lack of diversification in asset portfolios. Regulators control and implement monetary policy by requiring minimum levels of cash reserves to be held against commercial bank deposits.

present value weights

Due to the fact that the larger the coupon or promised interest payment, the more quickly investors receive cash flows on a bond and the higher are the _________ of those cash flows in the duration calculation.

Decreases; increases

Duration ____ as the rate of return on the bond _____.

Increases; decreases

Duration ____ with maturity, but at a ____ rate

Volatility

Duration captures the coupon and maturity effects on _____.

Foreign currency future

In response to the introduction of floating exchange rates between currencies of different countries (result of the Smithsonian Agreements of 1971 and 1973).

Prime; subprime

Interest rates on Alt-A loans are usually between ____ and ____ rates.

small interest rate changes

Duration measures the sensitivity (or elasticity) of a fixed-income security's price to_______.

coupon

Each bond holder class has a different guaranteed

Principal; interest

Each fixed monthly payment consists partly of repayment of the ____ and partly of the _____ on the outstanding mortgage balance.

1 percent

Each point costs the borrower ____ of the principal value.

Reserve requirements

Ensures that banks can meet required payments on liability claims, such as deposit withdrawals.

Hedging

Entering into a derivatives contract to reduce the risk associated with positions or commitments in their line of business.

Home Mortgage Disclosure Act (H M D A) of 19 75

Especially concerned about discrimination on the basis of age, race, sec, or income.

Home Mortgage Disclosure Act (HMDA) of 1975

Especially concerned about discrimination on the basis of age, race, sec, or income.

insurance premium

Insurance companies deal with the adverse selection problem by establishing different pools of the population based on health and related characteristics (such as income). By altering the pool used to determine the probability of losses to a particular customer's health characteristics, the insurance company can more accurately determine the probability of having to pay out on a policy and can adjust the ___ accordingly.

Policy Payments

Insurance companies earn profits by taking in more premium income than they pay out in _____.

Federal Savings and Loan Insurance Corporation (FSLIC)

Insured savings institutions from 1934 to 1989.

Single payment yields (isp)

Interest rate is quoted on an annual basis assuming a 360 day year as a percent of purchase price.

Discount yields (id)

Interest rate is quoted on an annual basis assuming a 360 day year as a percent of redemption price or face value.

Federal Insurance Office (FIO)

an entity that reports to Congress and the President on the insurance industry.

CFPB

Example of ____oversight occurred in September 2016 when Wells Fargo Bank was ordered o pay $185 million in fines and penalties to settle "the widespread illegal practice of secretly opening unauthorized deposit and credit card accounts".

Safety and soundness regulation

Exists to protect depositors and borrowers against the risk of C B failure.

Responses by major central banks to the financial crisis

Expansion of retail deposit insurance. Direct injections of capital to improve lender's balance sheets. Debt guarantees. Asset purchases or asset guarantees. Stress tests of banks.

QTL test

FIRREA also strengthened the capital requirements of savings institutions and constrained their nonmortgage-related asset investment powers under a revised qualified thrift lender test, or _____. Following

Advantages of securitization

FIs can reduce the liquidity risk, interest rate risk, and credit risk of their loan portfolios. FIs generate income from origination and service fees.

secondary market

FIs pool recently originated mortgages together and selling them in the_________.

12

FOMC consists of __ members

financial services holding companies

FSMA of 1999 changed restrictions on ownership limits imposed on ___________.

Ginnie Mae

Fannie Mae, and Freddie Mac, Three agencies are directly involved in the creation of mortgage-backed pass-through securities.

single-payment yields

Fed funds are single-payment loans and thus use _______-.

foreign banks

Fed must approve new subsidiary, branch, agency, or representative offices of ______ in the U.S.

Board of Governors

Federal Reserve Banks operate under the general supervision of the ______ of the Federal Reserve

Quantity; interest rate

Federal Reserve can take one of two basic approaches to affect the market for banks' excess reserves. Target ___ of reserves. Target ____ on those reserves.

Hedge

Financial institutions use options on interest rates to ____ interest rate risk.

Mortgage buyers

Investment banks, vulture funds, domestic and foreign banks, insurance companies and pension funds, closed-end bank loan mutual funds, and nonfinancial corporations.

private offering

an investment bank acts as a private placement agent for a fee, placing the securities with one or a few large institutional investors such as life insurance companies.

Lenders

Fixed-rate mortgages required monthly payments are fixed over the life of the mortgage and ____ assume interest rate risk.

Federal Reserve

Foreign banks are subject to ________ examinations.

payment guarantors

Foreign exporters prefer that banks act as ____ ____ before sending goods to importers.

FRB

Founded by Congress under the Federal Reserve Act in 1913.

open- outcry auction

Futures contract trading occurs in trading "pits" using an ____ among exchange members.

secondary trading

Most ________ occurs directly through brokers and dealers.

merger wave (and increased consolidation) in U.S. banking

Relaxation of the branching restrictions, along with recognition of the potential cost, revenue, and risk benefits from geographic expansions, are major reasons for the recent _____________.

C P

Generally sold in large denominations (e.g., $100,000 to $1 million) with maturities between 1 and 270 days.

Option ARMs ("Pick-a-Payment")

Give homebuyers an initial choice of payment options.

borrow heavily

Governments _____ in the markets for loanable funds.

C P

Grew very rapidly prior to the financial crisis peaking at $2.16 trillion, much of it was backed by mortgage investments.The market collapsed during the financial crisis.

complexities in international bond investing

Higher risk; political risks higher and potential for capital flight in lesser developed markets. Greek crisis in Europe is an example. Lower recourse in the event of non-repayment.Foreign exchange rate movements can significantly impact returns.

national banks

Historically state chartered banks have been subject to fewer regulations and restrictions on their activities than___.

Tax Reform Act of 1986

Home equity loans have become very profitable for finance companies since the ___ was passed, disallowing the tax deductibility of consumers' interest payments other than those made on home mortgages. Also, the bad debt expense and administrative costs of home equity loans are lower than on other finance company loans, and as a result they have become a very attractive product to finance companies.

Discount bond

If INT < r, then Vb < Par.

Par bond

If INT = r, then Vb = Par.

Premium bond

If INT > r; then Vb > Par.

short sell

If an investor observes two similar assets trading at different prices in different exchanges, he/she should¬___ the more expensive stock and use the proceeds to purchase the cheaper stock to lock in a given spread. This would be an example of a pure arbitrage rather than risk arbitrage. We are assuming that transactions costs are negligible.

Haircut

If collateralized by risky assets, the repo may involve a ____.

deposit additional funds

If losses occur such that margin account funds fall below the maintenance margin, the customer is required to _______ in the margin account to keep the position open.

5%

If you wish to earn a 3% real return and prices are expected to increase by 2%, what rate must you charge?

BIF

In 1996, the safest institutions insured by the ___ paid no deposit insurance premiums.

SAIF

In 1997, the safest institutions insured by the ___ paid no deposit insurance premiums.

Aggressive

In January 2007, the FDIC began a more ______ risk- based system.

Deposit Insurance Fund (DIF)

In March 2006, the BIF and the SAIF were merged into the

pure credit swap

In a _________ , the financial institution lender will send (each swap period) a fixed fee or payment (like an insurance premium) to the counterparty, but if the FI lender's loan or loans do not default, it receives nothing back from the counterparty.

noninterest bearing reserve requirements

In addition to being concerned with the conduct of monetary policy, the Federal Reserve, as this country's central bank, also has regulatory power over some banks and, where relevant, their holding company parents. Since 1980, all banks have had to meet the same __________whether they are members of the FRS or not.

NAIC

In addition to chartering, state insurance commissions supervise and examine insurance companies using a coordinated examination system developed by the _______. Regulations cover areas such as insurance premiums, insurer licensing, sales practices, commission charges, and the types of assets in which insurers may invest.

Severity versus frequency

In general, loss rates are more predictable on low-severity, high-frequency lines than they are on high-severity, low-frequency lines.

Property versus liability

In general, maximum levels of losses are more predictable for property lines than for liability lines.

Interest rate derivative securities

In response to increases in the volatility of interest rates in the late 1970s and after, as the Federal Reserve started to target nonborrowed reserves rather than interest rates.

Federally insured mortgages

Repayment is guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA).

cost of entry

Increasing/decreasing the _____ into a financial sector affects the profitability of firms already competing in that industry.

Maturity

Individual investors and FIs have specific ___ preferences.

FDIC Reform Act of 2005

Instituted a deposit insurance premium scheme, effective January 1, 2007 (and subsequently revised) that combined examination ratings and financial ratios.

Adjustable-rate mortgages (ARMs)

Required monthly payments can change over the life of the mortgage, although they may initially be fixed for a set time period.

adequately compensated

Investors and borrowers deviate from their preferred maturity segment only when ____ to do so.

Forward contracts

Involve underlying assets that are nonstandardized, because the terms to each contract are negotiated individually between the buyer and seller

expected inflation

Irving Fisher first postulated that interest rates contain a premium for_______.

Money market instruments

Issued by high-quality (i.e., low default risk) economic units that require short-term funds.

Accrued Interest

It is the portion of the coupon payment accrued between the last coupon payment and the settlement day .

vault cash and deposits

Reserve assets include _________ at Federal Reserve Banks.

federally or state chartered

Like commercial banks and savings institutions, credit unions can be ___.

FRB

Reserve maintenance period is the period over which deposits at the ___ must meet or exceed the required reserve target.

Bank Insurance Fund (BIF)

Restructured bank insurance fund was renamed the____________.

Savings Association Insurance Fund (SAIF)

Restructured savings association fund was renamed the ___________.

Interstate

Result of Riegle-Neal Act of 1994 is that full _____ banking is a reality in the U.S.

Accrued interest

must be paid by the buyer of a bond to the seller of a bond if the bond is purchased between interest payment dates.

Money market instruments

Little or no chance of principal loss.

net suppliers or demanders of funds

Loanable Funds Theory: Categorizes financial market participants - e.g., consumers, businesses, governments, and foreign participants - as ___________.

Increase

Long-term interest rates are geometric averages of current and expected future short-term interest rates plus liquidity risk premiums that _____ with maturity.

unexpected increases in inflation

Loss rates on all P&C property policies are adversely affected by_____.

Treasury notes and bonds

Low returns: low interest rates (yields to maturity) reflect low default risk.

Highly liquid

Many investment securities held by banks are ___ , have low default risk, and can usually be traded in secondary markets.

Securitized

Many mortgages are ____.

$417,000

Maximum mortgage under the GNMA securitization program had a cap of ____ for a single-family home in 2016 (with exceptions).

Countercyclical capital buffer

May be declared by any country experiencing excess aggregate credit growth.

quarterly (Feb

May, Aug, and Nov) ,10-year notes and 30-year bonds are auctioned _______.

Exchange

Minimum margin levels are set by each ____.

Option ARMs ("Pick-a-Payment")

Minimum payment: 1% interest rate for 12 months, then variable rate, capitalization of unpaid interest, growing loan balance.

bond price elasticity

Modified duration (DurMod) is a more direct measure of ___________.

Mortgage sellers

Money center banks, smaller banks, foreign banks, investment banks, hedge funds, and the U.S. government.

Reverse-annuity mortgages (RAMs)

Retirees or homeowners with a substantial amount of equity in their home can sell the equity back to a bank over time. Various payment options are available. Costs and servicing fees are high

off-balance-sheet liability

an item or activity is an ____ if, when a contingent event occurs, the item or activity moves onto the liability side of the balance sheet or an expense item is realized on the income statement.

Loans

and investment securities continue to be the primary assets of the banking industry.

Secured

Mortgage bonds are _____ debt issues.

outside buyer

Mortgage sales occur when an FI originates a mortgage and sells it to an ______.

Higher

Mortgages are most often refinanced when an existing mortgage has a ____ interest rate than current rates.

lack of information

Municipals trade infrequently on secondary markets due mainly to a _______ on bond issuers

three major bond rating agencies

are Moody's, Standard & Poor's (S&P), and Fitch Ratings.

Eurodollar Certificates of Deposit

are U.S. dollar-denominated CDs held in foreign banks.

additional borrowing

National debt (and interest payments on the national debt) have to be financed in large part by_______.

C Ds

Often purchased by money market mutual funds with pools of funds from individual investors.

housing and farming

Regulations support the C B's lending to socially important sectors, such as _______.

insurance companies

are allowed to invest in equity instruments, which currently are prohibited for depository institutions.

GNMA

Only supports those pools of mortgage loans whose default or credit risk is insured by one of four government agencies, all of which target groups that might otherwise be disadvantaged in the housing market. E.g., Low-income families, young families, and veterans.

Federal Reserve Board Trading Desk

Open market operations Policy directive of the FOMC is forwarded to the __________________ at the Federal Reserve Bank of New York.

futures contracts

Options on ____ began trading in 1982.

Europe; Asia

Parts of _____ and ____ real estate markets were not as affected by the mortgage crisis because they lacked substantial subprime lending.

Motivations for international bond investing

Potentially higher returns.Better diversification

subsidize certain sectors

Regulators may require a C B to hold a minimum amount of assets in one particular sector of the economy or to set maximum interest rates, prices, or fees to _______.

nonbank financial service

Relative to the barriers separating banking and either securities, insurance, or commercial sector activities, the barriers among _________ firms and banking are generally much weaker.

Loss rates

are also affected by product inflation and social inflation.

futures contracts

Price volatility and trading interest determines which ______ are offered.

single investor

Primary mortgages generally involve a _________.

Treasury notes and bonds

Principal value used to determine the coupon on inflation-indexed bonds is adjusted to reflect inflation (measured by the CPI).

Issuers

Private mortgage pass-through ____ create pass- throughs from nonconforming mortgages. E.g., commercial banks, thrifts, and private conduits.

subprime market

Problems in the _____ spilled over to the broader mortgage markets and helped fuel nationwide declines in home prices, which put many homeowners underwater and led to the bankruptcies of many major financial institutions.

regulatory forbearance

Problems were exacerbated by a policy of _________ —that is a policy of not closing economically insolvent depository institutions, but allowing their continued operation.

Money market instruments

Purchased by economic units that have excess short-term funds.

ARMs

Rates or payment changes are usually 'capped' . For example, the cap on a 5/1 ___ may be stated as '5/2/5'.

Financial Institutions Reform

Recovery, and Enforcement Act (FIRREA) of 1989, Dissolved the FSLIC and transferred management to the FDIC.

Financial Institutions Reform

Recovery, and Enforcement Act (FIRREA) of 1989, This legislation abolished the FSLIC and created a new Savings Association Insurance Fund (SAIF) under the management of the FDIC (with the help of a $100 billion infusion of funds by the U.S. government).

discriminating unfairly in lending

Regulations are imposed to prevent the C B from _____________.

Consumer protection regulation

Regulations are imposed to prevent the CB from discriminating unfairly in lending.

insolvent FSLIC

Savings institutions failures in the 1980s led to an ______ by 1989.

Investor protection regulation

Securities Act of 1933 and 1934. Investment Company Act of 1940. Wall Street Reform and Consumer Protection Act of 2010

Agents ; fees

Securities firms act as ___ for individuals with funds to invest by establishing and managing mutual funds and by managing pension funds. The securities firms generate ___ that affect directly the revenue stream of the companies.

Principals

Securities firms can manage such funds either as agents for other investors or as ____ for themselves and their stockholders.

inventory positions

Security firms also take _______ in assets in an effort to profit on the price movements of the securities. These principal positions can be profitable if prices increase, but they can also create downside risk in volatile markets.

Market Making

Security firms assist in the function by acting as brokers to assist customers in the purchase or sale of an asset. In this capacity, the firms are providing agency transactions for a fee.

Mortgages

are backed by a specific piece of real property.

NOW accounts

Since their introduction in 1980, _______ have dominated the transaction accounts of banks.

fee income

Sold mortgages can still generate ______ for the bank.

Long Tail versus Short Tail

Some liability lines suffer from a long-tail risk exposure phenomenon that makes estimation of expected losses difficult. This long-tail loss arises in policies for which the insured event occurs during a coverage period but a claim is not filed or made until many years later. The delay in the filing of a claim is in accordance with the terms of

Charles Schwab

Specialized discount brokers that effect trades for customers on- or offline without offering investment advice or tips

E*trade

Specialized electronic trading securities firms that provide a platform for customers to trade without the use of a broker. Rather, trades are enacted on a computer via the Internet.

GNMA

Sponsoring mortgage-backed securities programs of financial institutions such as banks, thrifts, and mortgage bankers.

FRB

Subject to oversight by Congress under its authority to create money.

Standardized

Swaps are not ______ contracts.

Bank reserves; interest rates

System worked extremely well until 1979; from October 1979 to October 1982, the Fed changed its monetary policy strategy by targeting _____ rather than _____ in an attempt to lower the underlying rate of inflation

discount basis

T-Bills are sold on a _____.

stop yield

T-Note or Bond coupon rate is rounded down from _______.

Book-entry; Fedwire

T-bill purchases and sales are ____ transactions conducted over ____.

Treasury securities (including T-bills

T-notes, and T- bonds), Foreign investors and financial firms are the major suppliers of funds for ________.

Shadow banks

The 2010 Wall Street Reform and Consumer Protection Act calls for regulators to be given broad authority to monitor and regulate _________ that pose risks to the financial system.

deposit insurance premiums

The FDIC introduced risk-based ________ in January of 1993.

fluctuate freely

The Federal Reserve generally allows foreign exchange rates to _______.

discount rate

The Federal Reserve rarely uses the ______ as a policy tool.

Total RBC ratio (Basel III)

Total capital (Tier I + Tier II) / credit risk-adjusted assets.

Institutional venture capital firms

are business entities whose sole purpose is to find and fund the most promising new firms.

Money Market Participants

The U.S. Treasury.The Federal Reserve.Commercial banks.Money market mutual funds.Brokers and dealers.Corporations.Other financial institutions.Individuals.

Government-sponsored enterprises (GSEs)

The U.S. government established the Federal National Mortgage Association (FNMA, or Fannie Mae) in 1938 to buy mortgages from depository institutions so they could lend to other mortgage borrowers.

systemic risk

The Wall Street Reform and Consumer Protection Act of July 2010 requires the Fed to supervise complex financial institutions that could generate _____ to the economy.

Treasury securities

The asset side of a depository institution's balance sheet is comprised primarily

more diversified

The assets of commercial banks are ____ than those of savings institutions.

points paid

The lender reduces the interest rate used to determine the payments on the mortgage in exchange for_____.

Secondary markets

The exchange market (e.g., NYSE Bonds). The over-the-counter (OTC) market

currency exchange rate

The exchanges can be at a fixed or a variable rate of interest as negotiated in the contract, but the exchanges occur at a known __________.

SEC

The primary regulator of the securities industry

B A

Used in international trade transactions to finance trade in goods that have yet to be shipped from a foreign exporter (seller) to a domestic importer (buyer).

Currency swap

Used to hedge exchange rate risk from mismatched currencies of assets and liabilities.

Futures contract

are characterized by significantly less default risk. employ margin requirements and daily marking to market.

foreign currency futures

The first wave of modern derivatives were ______.

accrued interest

The full (or dirty) price of a T-note or T-bond is the sum of the clean price (Vb) and the _______ .

FVt = PV(1+ r)t

The future value (FV) of a lump sum received at the beginning of the investment horizon

Convexity

The greater the _____ of a security or portfolio, the more insurance or interest rate protection an investor or FI manager has against rate increases and the greater the potential gains after interest rate falls.

Shorter

The higher the coupon or promised interest payment on the bond, the ___ its duration.

liability lines

The inflation risk of _____ may be subject to the changing values or social risk of the society (e.g., juries' willingness to award punitive and other damages at rates far above the underlying rate of inflation). Such social inflation and has been directly attributed by some analysts to faults in the U.S. civil litigation system.

property lines

The inflation risk of ______ is likely to reflect the underlying inflation of the economy

Rise

The investment bank fears that interests will ___ thus lowering the value of the bonds.

debt market

The major issuers of _____securities are federal, state and local governments, as well as corporations.

capital market

The major purchasers of _____ securities are households, businesses, government units, and foreign investors.

credit derivatives

The third wave of modern derivatives occurred in the 1990s and 2000s with ________. Example: credit forwards, credit risk options, and credit swaps.

funds management

The objective in ____ is to choose asset allocations to beat some return risk performance benchmark.

last day of equal intervals

The present value of a finite series of equal cash flows received on the ¬_____ throughout the investment horizon.

Pt

The present value of a stock (Pt) assuming zero growth in dividends can be written as:

Dirty; clean

The price of the T-bond or T-note with accrued interest is called the full price or the __ price, while the price without accounting for accrued interest is the ___ price

adverse events

The primary function of an insurance company is to protect policyholders (both individuals and corporations) from ___ .

Treasury auctions

The primary market of T-notes and T-bonds is similar to that of T-bills; the U.S. Treasury sells T-notes and T-bonds through competitive and noncompetitive________.

London Interbank Offered Rate (L I B O R)

The rate offered for sale on Eurodollar funds is the ______.

London banks

The role of _______ in the mortgage-backed securitization market is now in question after the U.K.'s 2016 referendum (aka "Brexit).

interest rate

The second wave of modern derivatives were _____ derivative securities.

T-bills

The secondary market for ___ is the largest of any U.S. money market instrument.

Buyer

The swap ____ makes the fixed-rate payments in an interest rate swap transaction.

Seller

The swap ____ makes the floating-rate payments in an interest rate swap transaction.

Options

The trading process for ___ is similar to that for futures contracts.

futures option

The underlying asset on a _____ is a futures contract.

stock option

The underlying asset on a _____ is the stock of a publicly traded company.

stock index option

The underlying asset on a ______ is the value of a major stock market index (Example: DJIA or S&P 500).

credit spread call option

The value of a _______ increases as the default (risk) premium or yield spread on a specified benchmark bond of the borrower increases above some exercise spread.

360-day

The yield on repurchase agreements (iRA) uses a ___ year, like the discount rate, but uses the current price in the denominator, like the bond equivalent yield.

Transaction accounts

are checkable deposits that are either demand deposits or NOW accounts (negotiable order of withdrawal accounts).

Guarantee

There is no ____ that banks will borrow, nor that they will lend.

Lazard Ltd. and Greenhill & Co.

These firms maintain more limited branch networks concentrated in major cities operating with predominantly institutional client bases.

Nationalization/Expropriation

To the extent that an FI expands by establishing a local presence through investing in fixed assets such as branches or subsidiaries, it faces the political risk that a change in government may lead to the nationalization of those fixed assets

Regulatory Avoidance

To the extent that domestic regulations such as activity restrictions and reserve requirements impose constraints or taxes on the operations of an FI, seeking low regulatory tax countries can allow an FI to lower its net regulatory burden and to increase its potential net profitability.

Interest rates

are determined by distinct supply and demand conditions within many maturity segments.

Higher lower

This tax-exempt status allows CUs to offer ___ rates on deposits and charge ___ rates on some types of loans compared to banks and savings institutions, whose earnings are taxable.

Tier I RBC ratio (Basel III)

Tier I capital (common equity Tier I capital + additional Tier I capital) / credit risk-adjusted assets.

Tier I leverage ratio (Basel III)

Tier I capital / total exposure.

tax exempt status

credit unions have become more like banks, but with___.

U.S. Treasury securities

Trading Desk manager buys or sells ______________ in the over-the-counter (OTC) market, which keeps the fed funds rate near its desired target.

discount yields

Treasury bills and commercial paper rates are quoted as____.

STRIPS

Treasury security in which the periodic interest payment is separated from the final principal payment, effectively creating two sets of securities - one set for each semiannual interest payment and one for the final principal payment

$25; $10

Typical denominations on repos of one week or less are __ million and longer term repos usually have __ million denominations.

commercial banks

U.S. _______ may be subject to the supervision and regulations of as many as four separate regulators. Federal Deposit Insurance Corporation (FDIC) Office of the Comptroller of the Currency (OCC) Federal Reserve (FR) State bank regulators.

vault cash; cash deposit

U.S. bank regulation concentrates on a bank's management of its cash reserves, defined as _____ and _____ held by the bank at the Federal Reserve.

Eurodollar market

U.S. dollars held outside the U.S. are tracked among multinational banks in the______.

insolvent

Ultimately, five of the largest corporate credit unions (Constitution Corporate, Members of United Corporate, Western Corporate, Southwest Corporate, and U.S. Central Corporate) in the United States were declared ___ .

swap markets

Unlike futures and options markets, ______ were historically governed by very little regulation.

Loanable funds theory

Views level of interest rates as resulting from factors that affect the supply of and demand for loanable funds

Mortgage Refinancing

When a borrower takes out a new mortgage and uses the proceeds to pay off an existing mortgage.

cost of loanable funds

When the __________ is high, businesses finance internally.

C P

Yields are quoted on a discount basis (like T-bills).

Fixed Costs

a U.S. FI seeking an organizational presence in the Tokyo banking market faces real estate prices some five to six times higher than in New York. Such relative costs can be even higher if an FI chooses to enter by buying an existing Japanese bank rather than establishing a new operation, because of the considerable cost of acquiring Japanese FI equities measured by price earnings ratios

Option

a contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a prespecified price for a specified time period.

Knight Capital Group

a leading firm in off-exchange trading of U.S. equities

Lump sum

a life insurance policy (whole life or universal life) requires regular premium payments that entitle the beneficiary to the receipt of a single ___ payment.

Best efforts offering

a public offering in which the investment bank does not guarantee a firm price and acts more as a placing or distribution agent (for a fee).

Firm commitment underwriting

a public offering of municipals made through an investment bank, where the investment bank guarantees a price for the newly issued bonds by buying the entire issue and then reselling it to the public.

currency swap

a swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities.

reserve computation period

always begins on a Tuesday and ends on a Monday 14 days later.

Economies of Scale

an FI can potentially lower its average operating costs by expanding its activities beyond domestic boundaries.

Separate Trading of Registered Interest and Principal Securities (STRIPS)

a.k.a. "Treasury zero bonds" or "Treasury zero-coupon bonds".

Insurance companies

accept premium payments in exchange for compensation in the event that certain pre-specified, but undesirable, events occur.

Receivables from other broker-dealers

accounted for 32.38 percent of assets in 2015, proving to be the largest single asset of securities firms.

venture capital limited partnerships (that are established by professional venture capital firms

acting as general partners in the firm: organizing and managing the firm and eventually liquidating their equity investment), financial venture capital firms (subsidiaries of investment or commercial banks), and corporate venture capital firms (subsidiaries of nonfinancial corporations which generally specialize in making start-up investments in high-tech firms).

off-balance-sheet

activity is a transaction, contract, or commitment that a bank enters into but is not directly accounted for on the bank's balance sheet.

FRBNY

acts through the Trading Desk to implement policy directives each business day. May use repurchase agreements for temporary increases or decreases in excess reserves.

Monetary policy

affects the macroeconomy by influencing the supply and demand for excess bank reserves.

Mortgage sales

allow FIs to manage credit risk, achieve better asset diversification, and improve their liquidity and interest rate risk positions.

Mortgage-backed bonds (MBBs)

allow FIs to raise long-term low-cost funds without removing mortgages from their balance sheets.

Home equity loans

allow customers to borrow on a line of credit secured with a second mortgage on their home.

Credit default swaps (CDS)

allow financial institutions to hedge credit risk.

Mortgage-backed securities

allow mortgage issuers to separate the credit risk exposure from the lending process.

FIRREA

also replaced the Federal Home Loan Bank Board with the Office of Thrift Supervision (OTS) as the main regulator of federally chartered savings institutions. In addition, the act created the Resolution Trust Corporation (RTC) to close and liquidate the most insolvent savings institutions.

Agency transactions

are two-way transactions made on behalf of customers —for example, acting as a stockbroker or dealer for a fee or commission. In this case the investment banker is acting as a stockbroker. In a principal transaction, the market maker seeks to profit on the price movements of securities and takes either long or short inventory positions for its own account. In this case, the profit is made from the differences in the prices that the company pays for the security and the price at which they are sold. In the first case, the company bears no risk. In the second case, the company is risking its own capital.

Farm mortgages

are used to finance the purchase of farms.

Commercial mortgages

are used to finance the purchase of real estate for business purposes.

Multifamily dwelling mortgages

are used to purchase apartment complexes, townhouses, and condominiums.

Home mortgages

are used to purchase one- to four-family dwellings (called "single-family mortgages").

Fully amortized mortgage maturities

are usually either 15 or 30 years.

T-bills

are virtually default risk free, are highly liquid, and have little interest rate risk.

angel venture capitalists

are wealthy individuals who make equity investments. have invested much more in new and small firms than institutional venture capital firms.

Venture capital firms

are willing to invest in high-risk new and small firms. However, they require high levels of returns (sometimes as high as 700 percent within five to seven years) to take on these risks. The second is an easy exit. They want a quick and easy exit opportunity when it comes time to sell. Basically, these firms provide equity funds to new, unproven, and young firms. This separates these firms from commercial banks and investment firms, which prefer to invest in existing, financially secure businesses.

long-tail loss

arises in policies for which the insured event occurs during a coverage period but a claim is not filed or made until many years later. The delay in the filing of a claim is in accordance with the terms of the insurance contract and often occurs because the detrimental consequences of the event are not known for a period of time after the event actually occurs

shadow banks

as of 2016 remain unregulated by the federal government.

Securities Firms

assist in finding merger partners, underwrite any new securities to be issued by the merged firms, assess the value of target firms, recommend terms of the merger agreement, and even assist target firms in preventing a merger (for example, writing restrictive provisions into a potential target firm's securities contracts).

Financial firms (e.g.

banks, insurance companies, and mutual funds) are the major suppliers of funds for municipal and corporate bonds.

T-notes and T-bonds

because of their long maturity, ___________ experience wider price fluctuations than money market securities when interest rates change.

General obligation (GO)

bonds are backed by the full faith and credit of the issuer.

Private placement

bonds are sold on a semi-private basis to qualified investors (generally FIs).

Pure arbitrage

buying an asset in one market at one price and selling it immediately in another market at a higher price.

The Federal Reserve

buys and sells T-bills to implement monetary policy.

securitizing mortgages

by issuing securities backed by newly originated mortgages

The 2010 Wall Street Reform and Consumer Protection Act

called for regulators to be given broad authority to monitor and regulate nonbank financial firms that pose risks to the financial system.

Trading activities

can be conducted on behalf of a customer or the firm.

American option

can be exercised at any time before (and on) the expiration date.

European option

can be exercised only on the expiration date.

Newly issued shares

can be placed either privately or publicly and can represent either a first issued (IPO) or a secondary issue.

Securities underwriting

can be undertaken through either public or private offerings.

The Office of the Comptroller of the Currency (OCC)

charters national banks, which are members of the Federal Reserve System (FRS).

Cash Management

checking accounts that earn interest and may be covered by FDIC insurance. The accounts have been beneficial in providing full-service financial products to customers, especially at the retail level.

McCarran-Ferguson Act of 1945

confirms the primacy of state over federal regulation of insurance companies. Thus, unlike the depository institutions, which can be chartered at either the federal or state levels, a life insurer is chartered entirely at the state level.

Investment securities

consist of items such as interest-bearing deposits purchased from other FIs, federal funds sold to other banks, repurchase agreements, U.S. Treasury and agency securities, municipal securities issued by states and political subdivisions, mortgage-backed securities, and other debt and equity securities.

small banks

consumer; small business loans; and residential mortgages are more important for ___.

CME Group

contains CME Globex, CBOT, NYMEX, and COMEX.

Risk Category II

contains all institutions in Supervisory Groups A and B (generally those with CAMELS ratings of 1, 2, or 3) except those in Risk Category I and undercapitalized institutions.

Risk Category III

contains all undercapitalized institutions in Supervisory Groups A and B and institutions in Supervisory Group C

Risk Category I

contains all well-capitalized institutions in Supervisory Group A (generally those with CAMELS ratings of 1 or 2).

liability insurance

coverage that offers protection against legal liability exposures

NCUSIF

covers 98 percent of all credit union deposits.

The International Banking Act (IBA) of 1978

declared foreign banks are to be regulated the same as national domestic banks.

Credit unions

did not suffer the same fate as the savings institutions because their portfolios were much more conservative than those of savings associations and savings banks; they specialize in making short-term consumer loans and tend to hold more government securities and less long-term residential mortgages.

Finance companies

differ from commercial banks in that they rely on short- and long-term borrowings, such as commercial paper and bonds, instead of deposits. Their assets consist mainly of business and consumer loans, usually short term. They are less regulated and, as a result, also tend to hold more equity to assets to signal their solvency because they are heavy borrowers in the credit markets.

Expansionary monetary policy

discount rate decreases.

Contractionary monetary policy

discount rate increases.

Limited partner venture capital firms

dominate the industry. In addition to these private sector institutional venture capital firms, the federal government, through the SBA, operates Small Business Investment Companies (SBICs).

Life insurance companies

have long-term liabilities because of the life insurance products that they sell. As a result, the asset side of the balance sheet predominantly includes long-term government and corporate bonds, corporate equities, and a declining amount of mortgage products.

finance companies

have lower overhead than banks.

NSMIA

effectively gives the SEC the exclusive regulatory jurisdiction over securities firms.

The North American Free Trade Agreement (NAFTA) of 1994

enabled U.S. banks to expand to Mexico and Canada.

large banks

engage in both retail and wholesale banking and often concentrate on the wholesale side of the business

ib = ia/(1 − t)

equivalent rates of return:

consumer finance areas

especially motor vehicle loans and real estate loans have been the fastest growing areas of business for finance companies.

OCC

examines national banks and has the power to approve or disapprove their merger applications. Instead of seeking a national charter, however, banks can seek to be chartered by 1 of 50 individual state bank regulatory agencies.

Loanable funds theory

explains interest rates and interest rate movements

Federal Reserve

extended much of its authority over the insurance industry through the designation of three of the largest insurers (American International Group, Prudential Financial, and MetLife) as "systemically important financial institutions."

T-Bill prices can be calculated from quotes (e.g.

from The Wall Street Journal) by rearranging the discount yield equation.

Average weekly lending

from the Fed grew from about $59 million in 2006 to almost $850 billion per week in late 2008.

The Foreign Bank Supervision Enhancement Act (FBSEA) of 1991

gave additional powers to the Federal Reserve.

Finance companies

generally charge higher rates for consumer loans because they generally attract riskier customers than commercial banks

Small banks

generally concentrate on the retail side of the business - lending and issuing deposits to consumers and small businesses.

Inflation

generally has an adverse effect on the cost of providing benefits that have been purchased by the insured, particularly if the policy is written in terms of the replacement cost of the asset and the premiums are not adjusted for

small banks

generally hold fewer off balance sheet assets and liabilities than large banks.

Investment securities

generate interest income for the bank and are also used for trading and liquidity management purposes.

Noncompetitive bidders

get preferential allocation and agree to pay the lowest price of the winning competitive bids.

Stock warrants

give bond holders the opportunity to purchase common stock at a prespecified price

premium bond

has a coupon rate (INT) greater than the required rate of return (r) and the fair present value of the bond (Vb) is greater than the face or par value (Par).

Securitization

has declined due to the crisis, but will continue in the future.

Fed

has the authority to close foreign banks operating in the U.S

FIO

has the authority to monitor the insurance industry, identify regulatory gaps or systemic risk, deal with international insurance matters and monitor the extent to which underserved communities have access to affordable insurance products.

Bank size

has traditionally affected the types of activities and financial performance of commercial banks. Small banks generally concentrate on the retail side of the business—making loans and issuing deposits to consumers and small businesses. In contrast, large banks engage in both retail and wholesale banking and often concentrate on the wholesale side of the business.

Credit unions

have historically focused on consumer loans funded with member deposits.

Risk arbitrage

involves buying securities in anticipation of some information release—such as a merger or takeover announcement or a Federal Reserve interest rate announcement. It is termed ____ because if the event does not actually occur—for example, if a merger does not take place or the Federal Reserve does not change interest rates—the trader stands to lose money.

Commercial banking

involves deposit taking and lending.

life insurance

involves different contractual methods to build up a fund and the eventual payout of a lump sum to the beneficiary

Risk arbitrage

involves establishing positions prior to some anticipated information release or event.

Investing

involves managing pools of assets such as closed and open end mutual funds (in competition with commercial banks, life insurance companies, and pension funds).

Program trading

involves positioning with the aid of computers and futures contracts to benefit from small market movements. In each case, the potential risk involves the movements of the asset prices, and the benefits are aided by the lack of most transaction costs and the immediate information that is available to investment banks.

Pure arbitrage

involves the purchase and simultaneous sale of an asset in different markets because of different prices in the two markets.

Position trading

involves the purchase of large blocks of stock to facilitate the smooth functioning of the market.

Investment banking

involves underwriting, issuing, and distributing securities

A negotiable certificate of deposit (C D)

is a bank-issued, fixed maturity, interest-bearing time deposit that specifies the interest rate and the maturity date.

Cap

is a call option on interest rates, often with multiple exercise dates.

initial margin

is a deposit required on futures trades to ensure that the terms of the contracts will be met.

depository institution

is a financial intermediary that obtains a significant proportion of its funds from customer deposits.

Derivative

is a financial security whose payoff is linked to another, previously issued security.

The Black-Scholes option pricing model (the model most commonly used to price and value options)

is a function of : the spot price of the underlying asset the exercise price on the option the option's exercise date the price volatility of the underlying asset the risk-free rate of interest The intrinsic value of an option is the difference between an option's exercise price and the underlying asset price the intrinsic value of a call option = max{S − X, 0}. the intrinsic value of a put option = max{X − S, 0}.

margin requirement

is a performance bond posted by a buyer and a seller of a futures contract.

Collar

is a position taken simultaneously in a cap and a floor (usually buying a cap and selling a floor).

Venture capital

is a professionally managed pool of money used to finance new and often high-risk firms.

Venture capital

is a professionally managed pool of money used to finance new and often high-risk firms. Generally provided to back an untried company and its managers in return for an equity investment in the firm..

Floor

is a put option on interest rates, often with multiple exercise dates.

sinking fund provision

is a requirement that the issuer retire a certain amount of the bond issue early over a number of years, especially as the bond approaches maturity.

A banker's acceptance (B A)

is a time draft payable to a seller of goods, with payment guaranteed by a bank.

Swap

is an agreement between two parties to exchange a series of cash flows for a specific period of time at a specified interval.

forward contract

is an agreement to transact involving the future exchange of a set amount of assets at a set price.

futures contract

is an agreement to transact involving the future exchange of a set amount of assets for a price that is settled daily.

spot contract

is an agreement to transact involving the immediate exchange of assets and funds.

The International Swaps and Derivatives Association (ISDA)

is an association among 56 countries that sets codes of standards for swap documentation.

forward rate (f)

is an expected rate on a short-term security that is to be originated at some point in the future.

call option

is an option that gives the purchaser the right, but not the obligation, to buy the underlying security from the writer of the option at a prespecified price on or before a prespecified date.

put option

is an option that gives the purchaser the right, but not the obligation, to sell the underlying security to the writer of the option at a prespecified price on or before a prespecified date

time value of money

is based on the notion that a dollar received today is worth more than a dollar received at some future date.

Electronic trading

is becoming more popular for derivative trading.

primary advantage of FRS membership

is direct access to the federal funds wire transfer network for nationwide interbank borrowing and lending of reserves.

combined ratio

is equal to the loss ratio plus the expense ratio. It is a measure of the overall underwriting

Private mortgage insurance (PMI)

is generally required when the loan-to- value ratio is more than 80% (i.e., the borrower makes a down payment of less than 20%).

Loss risk

is influenced by whether the product lines are property or liability (with the latter being less predictable), whether they are low-severity, high- frequency lines or high-severity, low-frequency lines (with the latter being more difficult to estimate), and whether they are long-tail or short-tail lines (with the former being more difficult to estimate).

Financial Industry Regulatory Authority (FINRA)

is involved in the day-to-day regulation of trading practices. In contrast to the SEC, which is a government run regulator

Eurocommercial paper (Euro-C P)

is issued in Europe and can be in local currencies or U.S. dollars.

Debt

is less risky than equity, so there is less risk of an adverse price movement with ___ compared to equity. Further, ____ is more likely to be bought in larger blocks by fewer investors, a transaction characteristic that makes the selling process less costly.

pure credit swap

is similar to buying credit insurance and/or a multiperiod credit option.

Ordinary life

is sold on an individual basis and represents the largest segment (77.8% in 2015) of the life insurance market.

Liability insurance

is sold separately for coverages such as malpractice or product liability hazards.

LIBOR

is the base rate on trillions of dollars of derivatives and is the base rate for many loans.

Convexity (CX)

is the degree of curvature of the price- interest rate curve around some interest rate level.

bond indenture

is the legal contract that specifies the rights and obligations of the bond issuer and the bond holders.

maintenance margin

is the margin a futures trader must maintain once a futures position is taken.

The Office of the Comptroller of the Currency (OCC)

is the oldest U.S. bank regulatory agency. Its primary function is to charter so called national banks as well as to close them.

Adverse selection

is the problem that customers who apply for insurance policies are more likely to be those most in need of insurance (i.e., someone with chronic health problems is more likely to purchase a life insurance policy than someone in perfect health).

reverse repurchase agreement

is the purchase of a security with an agreement to sell it back in the future.

discount rate

is the rate Federal Reserve Banks charge on loans to financial institutions in their district.

The London Interbank Offer Rate (L I B O R)

is the rate on interbank loans between British banks.

repurchase agreement (repo or RP)

is the sale of a security with an agreement to buy the security back at a set price in the future.

national debt (ND)

is the sum of historical annual federal deficits:

federal funds (fed funds) rate

is the target rate in the conduct of monetary policy.

Open interest

is the total number of the futures or option contracts outstanding at the beginning of the day.

Clearinghouse

is the unit that oversees trading on the exchange and guarantees all trades made by the exchange traders.

Duration

is the weighted-average time to maturity (measured in years) on a financial security.

Europe

is the world's second-largest and most developed securitization market.

primary function of depository institutions

is to provide financial intermediation for individual and corporate savers.

Commercial Paper (C P)

is unsecured short-term corporate debt issued to raise short-term funds (e.g., for working capital).

C P

is usually held by investors until maturity and has no active secondary market.

C P

is usually sold to investors indirectly through brokers and dealers.

Swap dealers (usually financial institutions)

keep markets liquid by matching counterparties or by taking positions themselves.

Protect investors against abuses such as insider trading

lack of disclosure, outright malfeasance, and breach of fiduciary responsibilities.

Collateral

lenders place liens against properties that remain in place until the loan is fully paid off.

Home equity loans

let customers borrow on a line of credit secured with a second mortgage on their homes.

Guaranteed investment contracts (GICs) and separate account categories

likely would increase, depending on the type of pension plans provided to the customers. The premiums and contributions would be invested in the normal asset categories of the insurance company, except in cases where the pension fund requires aggressive investment strategies. In this case, the funds may be invested in specific equity mutual funds.

Fixed-rate mortgages

lock in the borrower's interest rate.

Bonds

may be either investment or speculative (i.e., junk) grade

STRIPS

may be used to immunize against interest rate risk

NOW accounts

may only be held by individuals, sole proprietorships, nonprofit organizations, governmental units, and pension funds.

loss ratio

measures the actual losses incurred on a line of insurance relative to the premiums earned on the line.

expense ratio

measures the expenses incurred relative to premiums written.

Prior to NSMIA

most securities firms were subject to regulation from the SEC and each state in which they operated.

Regional and superregional banks

utilize retail deposit bases for funding, but also develop relationships with large corporate customers and international money centers. These banks have access to the markets for purchased funds, such as the interbank or federal funds market, to finance their lending and investment activities.

FDIC

was created in 1933 during the Depression to restore public confidence in the banking system.

The U.S. Senate Permanent Subcommittee on Investigations

was created with the broad mandate to determine whether any changes are required in U.S. law to better protect the public.

Financial Services Oversight Council of financial regulators

was given oversight of the industry in its charge to identify emerging systemic risks; also gave new authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability and called for stronger capital and other prudential standards for all financial firms, and even higher standards for large interconnected firms; and gave authority to the government to resolve nonbank financial institutions whose failure could have serious systemic effects and revised the Federal Reserve's emergency lending authority to improve accountability.

securities sold under repurchase agreements

were the major source of funds, accounting for 35.59 percent of total liabilities and equity for securities firms in 2015.

FDIC

when an insured bank is closed, the ___acts as the receiver and liquidator, although the closure decision itself is technically made by the bank's chartering or licensing agency.

Financial Stability Oversight Council (FSOC)

which is charged with designating any financial institution (including insurance companies) that presents a systemic risk to the economy and subjecting them to greater regulation.