Big Question #9
T-account
A balance sheet with two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column headings for "Assets" and "Liabilities"
Asset-liability time mismatch
A bank's liabilities can be withdrawn in the short term while its assets are repaid in the long term
Bond
A financial contract through which a borrower like a corporation, a city or state, or the federal government agrees to repay the amount that was borrowed and also a rate of interest over a period of time in the future
Balance sheet
An accounting tool that lists assets and liabilities
Financial intermediary
An institution that operates between a saver with financial assets to invest and an entity who will receive those assets and pay a rate of return
Assets
Items of value owned by a firm or an individual
Reserves
Funds that a bank keeps on hand that are not loaned out or invested in bonds
Diversify
Making loans or investments with a variety of firms, to reduce the risk of being adversely affected by events at one or a few firms
Credit Easing (CE)
Shifts the composition of the Fed's balance sheet away from risk-free assets and toward risky assets to reduce the risk on commercial banks' balance sheets
Moral hazard
The incentive for borrowers to use loan proceeds in a different and more risky manner, problem occurs after a loan is granted
Target federal funds rate
The interest rate at which commercial banks make overnight loans to each other
Discount rate
The interest rate the Fed charges on loans it makes to commercial banks, establishes a ceiling on the market federal funds rate
Deposit rate
The interest rate the Fed pays on excess reserves of commercial banks, establishes a floor for the market federal funds rate
Adverse selection
The most undesirable potential borrowers are most likely to seek loans, problem occurs before a loan is granted
Money multiplier
Total money in the economy divided by the original quantity of money, or change in the total money in the economy divided by a change in the original quantity of money
Liabilities
Any amounts or debts owed by a firm or an individual
Open-market operations
The buying and selling of U.S. Treasury bonds by the Federal Reserve
Reserve ratio
The proportion of deposits that the bank holds in the form of reserves
Reserve requirement
The ratio of balances a commercial bank must hold as either vault cash or on deposit at a Federal Reserve bank
Net worth
Total assets minus total liabilities; What you own minus what you owe
Policy Duration Commitment
When the Fed commits to keep interest rates low for a sustained period into the future
Quantitative Easing (QE)
When the Fed expands the supply of reserves to the banking system beyond the level needed to maintain its policy target federal funds rate. This increases the size of the Fed balance sheet
Asymetric information
Where borrowers have more information than lenders