The Basics: How Central Banks Originated and Their Role Today
... • The central bank can control the availability of
money and credit in a country's economy.
• Most central banks go about this by adjusting
short-term interest rates: monetary policy.
• They use it to stabilize economic growth and
• Central banks generally do not control fiscal policy.
Chapter 3 Interbank Lending Interbank lending forms a critical
... Uncertainty about their own needs combined with concerns about potential
borrowers prompted banks to be unwilling to lend for more than a few days, and
even then only at very high interest rates. The rising cost and reduced availability of
interbank loans created a vicious circle of increased cau ...
open market operations
... The Federal Reserve does not decree this interest rate, but
they use bonds to add or take from this pool of money. This
causes interest rates in the fund to go up or down.
In this way they have the power to change the FFR at any
This is the most basic interest rate, and ALL others are
GLOSSARY OF KEY TERMS DISCUSSED IN
... • A linked option for the borrower (exercisable only if the Lender’s option is
exercised) either to pay the revised interest rate, or else to redeem the bond.
This is the Borrower’s option.
Money Market Fund (MMF)
A well rated, highly diversified pooled investment vehicle whose assets mainly compris ...
Economic crisis: How did we get into it?
... Q: How does this translate to problems on Main Street?
A: Commercial banks take a cue from the Fed funds rate when
they set the prime rate, which is the interest they charge on loans
to customers with the best credit. The prime rate is usually 3 percentage points higher than the Fed funds rate, but ...
... For next week
• Come to the board meeting
• We will be deciding how to split up the sectors
Great Depression II (averted)
... Credit flowed into “sub-prime” mortgages. Why?
• Banks: up-front fee, low risk with rising home prices
• Buyers: greedy, ignorant, or calculating
Balancing LOLR Assistance with Avoidance of Moral Hazard
... • Specific paper money, the concept of liquidity, and
the need for banks, all derive from the fact that
default can never be ruled out completely.
• So a liquidity need almost always, absent physical
problems, implies an underlying solvency concern.
"quantitative" easing. Like lowering interest rates, QE is supposed to
... the European Central Bank may soon launch its own QE programme to boost the euroarea economy, where high unemployment is contributing to deflation. But what exactly
is quantitative easing, and how is it supposed to work?
Central banks are responsible for keeping inflation in check. Before the financ ...
Fed/ECB/BOJ Monetary Policy In Shambles. How To Play It?
... purchases in October, instead of halting them as scheduled. Andy Haldane, Bank of England chief economist,
indicated he was "minded" to keep interest rates “lower for longer” to ensure the BoE did not damage the recovery. Of
course, as recently as June, Mark Carney, Bank of England governor, had led ...
... Corporation’s Ease of Doing Business rankings in the span of five short years, Saudi Arabia is
committed to becoming one of the world’s most competitive economies for the attraction of FDI
(Foreign Direct Investment).
Federal Reserve System
... business bankruptcies that severely disrupted
• There were many runs on banks during these
▫ Short-term credit an important source of
liquidity was lacking
2/27 - David Youngberg
... Profit making
a. Banks make money by turning their liabilities into assets, such
as lending out a deposit (a process called asset transformation).
b. Reserve requirements refer to a regulation requiring the bank to
hold a certain percent of deposits (typically 10%).
c. Required reserves are those de ...
REAL ESTATE ECONOMICS - Chapter Quizzes
... Real Estate Economics – 5th Edition - by Huber, Messick, and Pivar
Chapter 3 Quiz
Copyright January 2011, Educational Textbook Company
1. A demand deposit that must be paid by the depositor’s bank to the payee upon
presentation is known as:
c. money order.
d. all of the above.
... A. Euronotes and Euro-Commercial Paper
Commercial paper may not be economical for big companies
... commercial paper (CP) market have belied expectations that they would be a cheaper route to
short-term funding for large corporations.
Yield on the three-month commercial paper for the highest rated firms is 6.75%, marginally below
the base rate, or the minimum rate at which a bank can give loans. T ...
The Great Depression Objective:
... __________________________ –__________________stock prices (way too
fast) plummeted to ____________________– ____________ stock prices
business community with big profits
investors tried to sell their stocks before prices fell any
lower too many selling
stock market collapsed!
Dropped $30 billion ...
Chapter 3 – Outline
... b. Spot Markets – assets that are bought and sold at current prices for immediate delivery
c. Future Markets – assets that are bought and sold at a specified price to be delivered at a
d. Money Markets – assets that mature in a short period of time – typically less than one
e. Ca ...
Practice Free Response Solved
... iv) Monetarists believe money is neutral => an increase in MS
Will have no effect on real GDP. Only nominal GDP would rise
Interbank lending market
The interbank lending market is a market in which banks extend loans to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate (also called the overnight rate if the term of the loan is overnight). Low transaction volume in this market was a major contributing factor to the financial crisis of 2007.Banks are required to hold an adequate amount of liquid assets, such as cash, to manage any potential bank runs by clients. If a bank cannot meet these liquidity requirements, it will need to borrow money in the interbank market to cover the shortfall. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity requirements. These banks will lend money in the interbank market, receiving interest on the assets.The interbank rate is the rate of interest charged on short-term loans between banks. Banks borrow and lend money in the interbank lending market in order to manage liquidity and satisfy regulations such as reserve requirements. The interest rate charged depends on the availability of money in the market, on prevailing rates and on the specific terms of the contract, such as term length. There is a wide range of published interbank rates, including the federal funds rate (USA), the LIBOR (UK) and the Euribor (Eurozone).