Input: 1. position traders 2. day traders 3. scalpers

Output: Professional traders can be:

Central banks influence their country's rates


Input: take their positions for more than a day, basing their trades on their expectations about the future direction of prices

Output: Position Traders

Central banks influence their country's rates


Input: take their positions for a day and liquidate them by the day's end

Output: Day traders

Central banks influence their country's rates


Input: take positions for short durations, sometimes only minutes - scalpers increase the liquidity of the market - Futures holders take either long positions (looking to buy) or short positions (looking to sell) - The exchanges clearinghouse guarantees all trades by bying all futures sales ans lessing all futures purchases

Output: scalpers

Central banks influence their country's rates


Input: a contract that gives the holder the right but not hte obligation to buy or to sell an underlying asset at a specified price withing a specified time period.

Output: An Option

Central banks influence their country's rates


Input: lets the holder buy or seel at any time before or on the expiration dated

Output: An American Option

Central banks influence their country's rates


Input: lets the holder buy or sell only on the expiration date

Output: A European option

Central banks influence their country's rates


Input: equals the underlying asset's price minus the option's exercise price.

Output: An option's intrinsic value

Central banks influence their country's rates


Input: equals the option's price minus its intrinsic value.

Output: An option's time value

Central banks influence their country's rates


Input: Before their exercise dates, options typically sell for more than thier intrinsic values because buyers and sellers know that the value of an option at expiration is almost always more than its intrinsic value. In other works buyers pay for the option's time value.

Output: Intrinsic value and time value

Central banks influence their country's rates


Input: limited losses (the call premium) but unlimited gains, because the price of the underlying security could skyrocket.

Output: The call option buyer faces...

Central banks influence their country's rates


Input: unlimited losses but limited gains: The seller profits when the buyer does not exercise the option, but his profits are limited to the call premium

Output: The call option writer faces...

Central banks influence their country's rates


Input: gives the buyer the right to sell the underlying security to the option writer at a specified price (exercise or strike price) on a specified date. - The buyer must gvie the option writer an up-front fee (put premium)

Output: A Put Option

Central banks influence their country's rates


Input: the price of the underlying security is below the exercise price

Output: A put option is in the money when...

Central banks influence their country's rates


Input: the price of the underlying security is above the exercise price. Buyers exercise put options when they are in the money.

Output: A put option is out of the money when...

Central banks influence their country's rates


Input: limited losses (the put premium) but much larger gains. - the best case scenario for buyers is for the price of the underlying asset to fall to zero. He can then sell the asset at the specified price and make a profit of the exercise price minus the put premium.

Output: The put option buyer faces...

Central banks influence their country's rates


Input: large losses but limited gains (the put premium)

Output: The put option writer faces...

Central banks influence their country's rates


Input: The first options market, the Chicago Boark of Options Eschange, was formed in 1973. - options markets have grown rapidly since 1973 - The trading process is the same as for futures contracts - Trades may be placed as market orders or as limited orders.

Output: The Options market:

Central banks influence their country's rates


Input: 1. The spot price of the underlying asset 2. The exercise price on the option 3. The exercise date 4. The underlying asset's price volatility 5. The risk-free rate of interest

Output: The Black-Scholes pricing model for cal options considers five factors that affect option prices

Central banks influence their country's rates


Input: 1. Stock option 2. Stock index option 3. Option on Futures contract

Output: Three Underlying Assets

Central banks influence their country's rates


Input: is based on the stock of a publicly traded company

Output: Stock Option

Central banks influence their country's rates


Input: is based on the value of a major stock market index. - The dollar value of a stock index option equals the product of the index times a multiplier.

Output: Stock index option

Central banks influence their country's rates


Input: - is based on futures contract. - The buyer of this option has the right to buy (or sell, if a put option) the underlying future contract before expiration.

Output: Option on futures contract

Central banks influence their country's rates


Input: - The Commodoties Futures Trading Commissions (CFTC) is the primary regulator of futures markets and thus is the main regulator of options on futures contracts. - The SEC is the primary regulator of stock markets, and thus is the main regulator of stock options and stock index options.

Output: Regulation of futures and options markets

Central banks influence their country's rates


Input: is an agreement between 2 parites (called coutnerparties) to exchange an asset or a series of cash flows for a specified period of time. - Counterparties typically swap interst rates, currencies, credit risks, commodoties, and/or equities.

Output: a SWAP

Central banks influence their country's rates


Input: is an exchange of fixed-interest payments for floating-interest payments. - The swap buyer agrees to make a number of fixed interest rate payments on specified dates to the swap seller who agrees to make a number of floating interest rate payments on specified dates to the swap buyer. - both interest rates are based on a contractual amount called the notional principal. - Swaps are typically long-term contracts - Using future contracts to achieve the same effect would require the periodic creation of new contracts. - the counterparties can arrange the swap directly or through a financial institution

Output: An Interest Rate Swap

Central banks influence their country's rates


Input: is a hedge against exchange rate risk from mismatched currencies on assets and liabilitlies. - a financial institiuationw ith most of its assets in 1 currency (US dollars) and large liabilities in an other currency (yen) runs the risk that the dollar will depreciate agains thte yen, making it more costly to pay it liabilities. - If the FI finds another FI with the opposite problem (most assets in yen and large liabilities in US dollars) they can arrange a currency swap - the 1st FI would issue notes in dollars and sel lthem to the 2nd FI. - the 2nd FI woudl issue notes in yen and sell them otthe 1st FI. - each FI would pay off its mismatched liabilites and assume new liabilities in a currency matching most of its assets.

Output: A currency swap

Central banks influence their country's rates


Input: - there are no standardized swap contracts. - swap dealers find and match counterparties or take on side of a swap - swap dealers usually guarantee swap payments over the life of the contract.

Output: Swap markets

Central banks influence their country's rates


Input: 1. the international swaps and derivatives associations (ISDA) 2. the Board of Governors of the Federal Reserves 3. the FDIC

Output: Swap markets have little direct regulations but they are indirectly regulated by

Central banks influence their country's rates


Input: are derivative securities used to hedge interst rate risk

Output: Caps, Floors, and collars

Central banks influence their country's rates


Input: is a call option on interst rates, often with more than one exercise date. When the interst rate rises above the cap, the seller compenstates the buyers in return for an upfront premium. - FI buy caps when they're exposed to losses if interest rates rise

Output: A cap

Central banks influence their country's rates


Input: is a put option on interest rates, often with more than one exercise date. - When the interest rate falls below the floor, the seller compensates the buyer in return for an up-front premium. - FI buy floors when they have fixed debt costs and variable returns on assets or when they are net long in bonds

Output: A floor

Central banks influence their country's rates


Input: is a compination of a cap and a floor. - The FI usually buys a cap and sells a floor. FI buys collars: a. to finance cap and floor positions b. if they're concerned about interest rate volatility

Output: A collar

Central banks influence their country's rates


Input: **add'l info only***

Output: ADD'L info - global OTC trading far outweighs exchange trading, with US markets and currencies dominating global derivative securities markets. European markets are a close second

Central banks influence their country's rates


Input: - a commercial bank, a saving institution, or a credit union. - most funds come from customer deposits - main assets are loans - main liabilities are deposits - the opposite is true of nonfinancial firms

Output: Depository institution

Central banks influence their country's rates


Input: a depository institution that has seveal types of nondeposit sources of funds (subordinated notes, debentures) and is regulated separately from, and offers a broader range of loans than, savings institutions and CU.

Output: Commercial Bank

Central banks influence their country's rates


Input: - majority are loans, including business loans, commercial and residential real estate loans, individual loans and other loans - The next most significant asset category is US gov't securities (in effect loans to the US gov't) - Commercial banks compete with the commercial paper and bond markets for commercial loan customers.

Output: Commercial Bank Assets

Central banks influence their country's rates


Input: through their high exposure to loan default.

Output: Commercial Banks risk insolvency......

Central banks influence their country's rates


Input: - The two main sources of funds are deposits and borrowed funds. Banks are highly levaraged, holding littel equity, because most of their assets are funded by debt.

Output: Commercial Bank Liabilities

Central banks influence their country's rates


Input: 1. Transaccction accounts 2. Small nontransaction accounts 3. Negotiable certificates of deposits

Output: The major segments of deposit funds:

Central banks influence their country's rates


Input: include noninterest paying checking accounts (depand deposits) and interest paying chacking accounts (NOW, negotiable order of withdrawal, accounts)

Output: Transaction accounts

Central banks influence their country's rates


Input: comprixe a large but shrinking section of deposit funds because banks are competing with money market mutual funds for those customers

Output: Small nontransaction accounts

Central banks influence their country's rates


Input: are fixed maturity, interest-bearing deposits that can be traded in the secondary market

Output: Negotiable certificates of deposits (CDs)

Central banks influence their country's rates


Input: - purchases of federal funds, repurchase agreements, notes and bonds. - A commercial banks's liabilities have a shorter maturity structure and are more liquid than its assets. That causes a matuirty mismatch that results in interest rate risk and liquidity risk. - Regulators require banks to maintain a minimum level of equity capital. Banks stick close to that minimum because equity funding is more expensive than laibility funding (funds from depositors)

Output: Commercial bank's borrowed funds include....

Central banks influence their country's rates


Input: Because the competitiion for high quality loan applicants is intense, banks engage in off-balance-sheet activities to charge fees and to raise more capital

Output: Off balance sheet activities of commercial banks

Central banks influence their country's rates


Input: the occurrence of a specified event moves the item onto the asset side of the balance sheet or converts it into realized revenue on the income statement.

Output: An intem or activity is an off-balance-sheet (OBS) asset if

Central banks influence their country's rates


Input: the occurrence of a specified event moves the item onto the liability side of the balance sheet or converts it inot realized expense on the income statement.

Output: An item or activity is an OBS liability if

Central banks influence their country's rates


Input: to raise funds while avoiding the need to raise reserves or to pay deposit insurance premiums because the the items do not appear on the balance sheet until the contigent event occurs.

Output: Off balance sheet activities allow the bank

Central banks influence their country's rates


Input: insolvency exposures

Output: OBS increase banks

Central banks influence their country's rates


Input: risk by reducing or hedging banks' intererst rate, credit, and foreign exchange risks.

Output: OBS decrease

Central banks influence their country's rates


Input: - transactions in derivatives, loan commitments, standby letters, letters of credit, when-issued securities, loans sold, trust services and correspondent banking.

Output: Major OBS activities include

Central banks influence their country's rates


Input: futures, forwards, swaps and options

Output: Derivatives

Central banks influence their country's rates


Input: - hold and manager assets for individuals and corproations - the 2 largest groups of clients are individuals and pension funds

Output: Trust Services

Central banks influence their country's rates


Input: - provides banking services to banks that lack the staff to provide those services for themsleves. - typical services include: check clearing and collection, foreign eschange trading, hedging services and participation in large loans and securities. - the bank receiving the services pays for them through noninterest bearing deposits.

Output: Correspondent Banking

Central banks influence their country's rates


Input: Regulatory deveopments in the past 20 years have led to the consolidation of the banking industry. - in the 80s and 90s regulators began to let banks merge with other banks across state lines, which resulted in a great number of bank mergers

Output: How economies of scale and scope effect commercial banks:

Central banks influence their country's rates


Input: lets banks branch across state lines

Output: The Reigle-Neal Act of 1994

Central banks influence their country's rates


Input: lets commercial banks merge with investment banks

Output: The Financial Services Modernization Act of 1999

Central banks influence their country's rates


Input: 1. Economies of Scale 2. Economies of scope

Output: Banks merge to form larger banks to save money through

Central banks influence their country's rates


Input: - bank expansion reduces the average cost of producing services. - Enhanced and improved technology lowers all banks' average costs, but larger banks can buy more and better technology and use it to provide services to more customers, maximizing the cost savings - Large scale technological investments soemtimes don't create expected future revenues, causing banks to operate under condition of diseconomies of scale

Output: Economies of scale

Central banks influence their country's rates


Input: the average costs of financial service production increase

Output: Diseconomies of scale

Central banks influence their country's rates


Input: - combining financial services reduces the cost of producing each service separately. - take the forms of reduced costs and increased volume -

Output: Economies of scope

Central banks influence their country's rates


Input: occur when providing one financial sercie lowers the cost of providing other financail services

Output: Costs economies of scope

Central banks influence their country's rates


Input: lets a single finamcial institution provide banking, securities, and underwriting activities, creating cost economies of scope.

Output: The Financial Services Modernization Act

Central banks influence their country's rates


Input: a. a merger includes a FI in a growing market b. a merger brings together 2 asset and liability portfolios that offset each other's risks (which often occurs when the merging institutions are in different geographic areas) and/or c. a merger expands an already successful FI inot a less competitive area

Output: Revenue economies of scope occur when

Central banks influence their country's rates


Input: are small banks (under $1billion in assets) that specialize in retain and/or consumer banking. - They finance their activities through depsits, fee, and interest.

Output: Community Banks

Central banks influence their country's rates


Input: - are large banks (over $1billion in assets) - finance their activities through purchased funds and capital markets as well as through depositis.

Output: Regional or Superregional banks

Central banks influence their country's rates


Input: - are larger banks in major financial centers that rely heavily on borrowed funds. - because large banks loan money to large corporations, their interest rate spread and net interest margin are lower than for small banks. - large banks also pay more for salaries, buildings and supplies.

Output: Money center banks

Central banks influence their country's rates


Input: the average interest rate charged on loans minus the average interest paid on deposits

Output: Interest rate spread

Central banks influence their country's rates


Input: [(Interest income - interest expense) / earning assets]

Output: net interest margin

Central banks influence their country's rates


Input: Loans 90 days or more past due and all loans not accruing interst

Output: Noncurrent loans

Central banks influence their country's rates


Input: actual losses on loans ans leases

Output: Net charge-offs

Central banks influence their country's rates


Input: income before taxes and extraordinary items

Output: Net Operating income

Central banks influence their country's rates


Input: 1. Controlled disbursement account 2. Account reconciliation 3. Lockbox service 4. Electronic lockbox 5. Funds concentration 6. Electronic funds transfer 7. Check deposit service 8. Electronic Initiaion of letter of credit 9. Treasury management software 10. Electronic data intercahnge 11. Business-to-business e-commerce 12. Electronic billing 13. Encryption technology

Output: 13 technological innovations in the wholesale banking industry

Central banks influence their country's rates


Input: informs the client in the morning of the total disbursements likely to be made from the client's account during that day

Output: Controlled disbursement

Central banks influence their country's rates


Input: records which of the client's checks have been paid by the bank

Output: Account reconciliation

Central banks influence their country's rates


Input: is a centralized collection service for corporate payments that reduces the delay in float and wries the details to the corporate client

Output: Lockbox services

Central banks influence their country's rates


Input: the time it takes a check to clear

Output: float

Central banks influence their country's rates


Input: is a lockbox service that collects online payments for public utilities and other corporate clients.

Output: Electronic lockbox

Central banks influence their country's rates


Input: redirects funds from several accounts at several banks to fewer accounts at one bank

Output: Funds concentration

Central banks influence their country's rates


Input: makes overnight payments, automated payment of payroll and dividends, and automated transmission of payment instructions

Output: Electronic funds transfer

Central banks influence their country's rates


Input: encodes, endorses, microfilms and handles customers' checks

Output: Check deposit services

Central banks influence their country's rates


Input: lets customers request letters of credit via the bank's computer

Output: Electronic initiation of letter of credit

Central banks influence their country's rates


Input: facilitates efficient management of muliple currency and security portfolios

Output: Treasury management software

Central banks influence their country's rates


Input: is email that lets businesses transfer and trasact invoices, purcahse orders, and shipping notices automatically, via their bank's computer

Output: Electonic data interchange

Central banks influence their country's rates


Input: automates information flow for buying and shipping goods and sevices among large and small businesses

Output: Business-to-Business e-commerce

Central banks influence their country's rates


Input: automates businesses' collection services

Output: Electronic billing

Central banks influence their country's rates


Input: verifies clients' identities

Output: Encryption technology

Central banks influence their country's rates


Input: 1. Automated teller machine 2. Point-of-sale debit card 3. Preauthorized debit/credit 4. Telephone payment 5. On-line banking 6. Smart Card

Output: 6 technological innovations in the retail banking industry

Central banks influence their country's rates


Input: ATM allows 24 hour world-wide access to checking accounts

Output: Automated Teller Machine

Central banks influence their country's rates


Input: POS - pays for goods via an immediate transfer of funds

Output: Point-of-sale debit card

Central banks influence their country's rates


Input: deposits payroll checks and pays mortgage and utliity bills automatically

Output: Preauthorized debit/card

Central banks influence their country's rates


Input: uses voice or touch tone commands to transfer funds

Output: Telephone payment

Central banks influence their country's rates


Input: lets customers conduct banking and investment activities via the internet

Output: On-line banking

Central banks influence their country's rates


Input: a card with a chip stoage device that "stores" money and disburses it on command.

Output: smart card

Central banks influence their country's rates


Input: 1. The Federal Deposit Insurance Corporation (FDIC) 2. The Office of the Comptroller of the Currency (OCC) 3. The Federal Reserve System (FRS, the Fed) 4. State authorities

Output: 4 key commercial bank regulators

Central banks influence their country's rates


Input: FDIC - was est. in 1933 to insure commercial bank deposits - levies insurance premiums, manages the insurance deposit fund and the S&L fund, conducts bank examinations, and acts as areceiver and liquidator when insured banks close.

Output: The Federal Deposit Insurance Corporation

Central banks influence their country's rates


Input: OCC - was est. in 1863 to charter, examine, approve the bergers of, and close national banks.

Output: The Office of the Comptroller of the Currency

Central banks influence their country's rates


Input: banks may be nationally chartered or state chartered, gives banks a choice of regulators. - Most large banks apply for national charters, but some banks prefer the less-heavily-regulated state charters.

Output: The dual banking system

Central banks influence their country's rates


Input: regulates all nationally chartered banks, all state chartered member banks, and those banks' holding companies

Output: The Federal Reserve System (FRS, the Fed)

Central banks influence their country's rates


Input: parent companies that own controlling interests in their bank subsidiaries

Output: holding companies

Central banks influence their country's rates


Input: charter and regulate banks in their states

Output: State authorities

Central banks influence their country's rates


Input: 1. risk diversification 2. Economies of scale 3. Innovation 4. Funds source 5. Customer relationships 6. Regulatory avoidance

Output: 6 advantages of international bank expansion

Central banks influence their country's rates


Input: International banks depend less on thier domestic economies

Output: Risk Diversification

Central banks influence their country's rates


Input: Expansion lowers a bank's average operating costs

Output: Economies of Scale

Central banks influence their country's rates


Input: Selling new products internationally generates additional returns

Output: Innovation

Central banks influence their country's rates


Input: International banks can find the best and cheapest sources of funds

Output: Funds source

Central banks influence their country's rates


Input: International banks can better meet the needs of their multinational clients

Output: Customer relationships

Central banks influence their country's rates


Input: International banks can pursue activities abroad that are regulated against domestically

Output: Regulatory avoidance

Central banks influence their country's rates


Input: 1. Information/monitoring costs 2. Nationalization/Expropriation 3. Fixed Costs

Output: 3 disadvantages of international expansion

Central banks influence their country's rates


Input: International banks must monitor their foreign investments closely. Information consts on those investments may be higher than they would be domestically.

Output: Information/monitoring costs

Central banks influence their country's rates


Input: Changing governments may lead to nationalization of a bank's foreign branches

Output: Nationalization/Expropriation

Central banks influence their country's rates


Input: It is expensive to establish a foreign branch

Output: Fixed Costs

Central banks influence their country's rates


Input: 1. Safety and soundness regulations 2. Monetary policy regulation 3. Credit allocation regulation 4. Consumer protection regulation 5. Investor protection regulation 6. Entry and chartering regulation

Output: 6 types of banking regulations

Central banks influence their country's rates


Input: Protects depositors and borrowers from commercial bank failures. - The 1st layer of protection requires CB to diversify their assets - The 2nd layer of protection sets minimum equiety requirements, because the equity holders are junior clmts to the CB's assets in the event of a bank failure - The 3rd layer of protection requires guarantee funds to protect depositors against bank failures - The 4th layer of protection is bank monitoring and surveillance by regulators. Safety and soundness regulation imposes a regulatory burden on commercial bankds because each CB incurs costs while complying with regulations. - The net regulatory burden equals the CB's private benefist minus the CBs private costs of regulation.

Output: Safety and Soundness regulation

Central banks influence their country's rates


Input: uses minimum reserve requirements to control commercial bandks and implement monetary policy. - If reserve requirements are higher than the CB would otherwise hold, those requirements increase the CB's regulatory burden by tying up money that could have been loaned.

Output: Monetary policy regualtion

Central banks influence their country's rates


Input: supports lending to socially important sectors, such as housing and farming. Commercial banks may be required to hold a minimum amount of assets in a particular sector and/or to stay below maximum interest rates, prices or fees to subsidize a partivular sector. EX: The aualified thrift lender test requires each savings institution to hold at least 65% of its assets in residential mortgages to reain its thrift charter.

Output: Credit Allocation regulation

Central banks influence their country's rates


Input: prohibits unfair discrimination in lednign. CB's use a standard form to report to their chief regulators the reason for granting or dneying credit. - The cost of comoplying with consumer protectiuon regulations is mainly the cost of producing information

Output: Consumer Protection regulation

Central banks influence their country's rates


Input: protects investors who use CBs to buy securities or to otherwise access securities markets. - Specifically investor protection regulations protect investors against insider trading, lack of disclosure, malfeasance, and breach of fiduciary responsibilities

Output: Investor protection regulation

Central banks influence their country's rates


Input: limits the number of CBs in each financial services sector. Regulations can keep competitiors outof protected sectors through high entry fees, entry restrictions and restrictions on activities that may be pursued under a charter.

Output: Entry and chartering regulation

Central banks influence their country's rates


Input: - Over the years US banks have been subject to many restirctions on their products and geographic activities. - US CBs have always been heavily regulated, especially when compared tothe universal FIs of Germany, Switzerland, and the United Kingdom. - Early regulation sough to separate commercial banking from investment banking

Output: Regulatory history leading up to the financial services modernization act

Central banks influence their country's rates


Input: - separate commercial and investment banking - went largely unchallenged until the early 60s when CBs began asking for and rec'g permission to UW municipal revenue bonds, commercial paper and morgage backed securities; act as discount brokers and advise on mutual funds. - in 1987 the fed let CB holding companies establish separate section 20 affiliates - 1997 the Fed and the OCC broadened the activities bank holding companies were allowed to pursue

Output: Glass Steagall Act

Central banks influence their country's rates


Input: in 1999, repealed the Glass Steagall Act barriers between commercial banking and investment banking. - let banks pursue insurance activities and insurers to offer banking services through financial services holding companies

Output: Financial Services Modernization Act

Central banks influence their country's rates


Input: - banks were heavily restricted in their insurance activities - National banks could only offer limited types of insurance, and could only act as agents in small towns (under 5K population) - Bank holding companies and state chartered banks were also very restricted in their insurance activities - most banks could offer annuities

Output: Banks before 1999

Central banks influence their country's rates


Input: Bank regulators regulate the banking activites and state insurance regulators regulate the insurance activities - Financial services holding companies are functionally regulated

Output: Fuctionally regulated

Central banks influence their country's rates


Input: is a bank divested of either its commercial loans or its demand deposits.

Output: Nonbank bank

Central banks influence their country's rates


Input: restricts commercial firms' acquisition of banks. - Commercial firms that acquire bank subsidiaries turn them into nonbank banks to meet the demands fo the Act while also entering into commercial banking activities - The Financial Services Modernization Act of 1999 lets commercail banks owned by financial swervies holding companies take a controlling interest in nonfinancial enterprises, in some cases

Output: the Bank Holding Company Act of 1956

Central banks influence their country's rates


Input: - 100 years ago most banks were unit banks, with just one office. - As banks began to grow and form branches some states restricted the number of intrastate branches a bank could have. - By 1977 only 6 states still restricted intrastate branching

Output: Intrastate banking

Central banks influence their country's rates


Input: - prevented any US banks from branching across state lines. - banks established multibank holding companies (parent companies that own more than one banking subsidiary) to get around the act.

Output: The McFadden Act (1927, amended in 1933)

Central banks influence their country's rates


Input: closed a few interstate-banking loopholes, but banks got around those by establishing one-bank holding companies (parent companies tha town one bank subsidiary and other nonbank subsidiaries) with nonbank subsidiaries in other states

Output: The 1956 Douglas Amendment

Central banks influence their country's rates


Input: closed the loophole

Output: 1970 Bank Holding Compnay Act Amendments

Central banks influence their country's rates


Input: allowed US and foreign banks to branch interstate, generally through acquisitions and mergers, making full interstate banking a reality in these US

Output: The Riegle Neal Act (1994)

Central banks influence their country's rates


Input: The FDIC was created in 1933 to regulate the US financial system. It worked well until the 1980's when bank failures began toincrease draining the FDIC fund

Output: History of guarantee funds

Central banks influence their country's rates


Input: restructured the bank insurance fund. The funds finances have improved since then and bank failures are down again.

Output: The FDIC improvement Act (1991)

Central banks influence their country's rates


Input: was created to insure savings institutions' deposits. In the 80s and increase in S&L failures depleted the fund so much that the FSLIC adopted a policy of forbearance toward failing savings instituations because it couldn't afford to close them.

Output: The Federal Savings and Loan Insurance Corporation (1934)

Central banks influence their country's rates


Input: restructured the fund, renamed is SAIF and placed is under FDIC control

Output: The Financial INstitutions Reform, REcovery, and Enforcement Act (1989)

Central banks influence their country's rates


Input: 1. merginng the BIF and SAIF into a Deposit INsurance Fund 2. indexing deposit insurance coverae levels to inflation 3. replacing the minimum reserve ratio with a ratio ranging from 1.0 to 1.5 % AND 4. charging regular premiums for all risks

Output: The 2001 FDIC proposal for Deposit Insurance Reform suggested

Central banks influence their country's rates


Input: to reduce the moral hazard of deposit insruance - Penalizing FIs for investing in high-risk assets enourages them to reduce their risks.

Output: Deposit Insurance Premiums Ought to be Risk-based

Central banks influence their country's rates


Input: regulators impose minimum liquid asset reserve requirements, which vary according to the type, scope and country of the commercial bank

Output: Balance Sheet regulations: Commercial Bank liquidity

Central banks influence their country's rates


Input: The FDICIA requires banks and thrifts to maintain minimum capital requirements relative to their assets.

Output: Balance Sheet regulations: Leverage

Central banks influence their country's rates


Input: Capital-to-asset ratio Risk-based capital ratios

Output: 2 different capital requirements:

Central banks influence their country's rates


Input: Equals the ratio of the book value of core capital divided by the book value of assets. - A ratio of 5% or more indicates a well capitalized bank - A ratio of 4% or less signals an undercapitalized bank - A bank that is not well capitalized is subject to prompt corrective action (PCA)

Output: Capital-to-asset ratio

Central banks influence their country's rates


Input: Market Value - The actual market value of assets may be well below the book value Asset Rish - The book values of assets do not express do not express their different credit and interest rate risks Off-balance-sheet activities - The capital-to-asset ratio does not consider the influence of off-balance-sheet activities

Output: The Capital-to-assets ratio is subject to 3 weaknesses

Central banks influence their country's rates


Input: compenstae for the different credit risks of assets and off-balance sheet assets whose values are adjusted for approximate credit risk

Output: Risk based capital ratios

Central banks influence their country's rates


Input: imposed risk based capital ratios on banks in major industrialized companies

Output: 1993 Basel Accord (aka Base I)

Central banks influence their country's rates


Input: Tier I capital and Tier II capital

Output: Risk based capital ratios distinguish between

Central banks influence their country's rates


Input: the book value of the common equity + an amoutn of perpetual stock + minority equity interests held in subsidiaries - goodwill

Output: Tier I capital

Central banks influence their country's rates


Input: secondary captial resources, such as loan loss reserces upto 1.25% of risk-adjusted assets

Output: Tier II capital

Central banks influence their country's rates


Input: are on-balance and off-balance sheet assets whose values are adjusted for approx credit risk

Output: Risk adjusted assets

Central banks influence their country's rates


Input: (Tier I capital + Tier II capital / risk adjusted assets) Must not fall below 8%

Output: Total Risk based capital ratio

Central banks influence their country's rates


Input: (Tier I capital / risk adjusted assets) Must not fall below 4%

Output: Tier I capital ratio

Central banks influence their country's rates


Input: The bank is immediately subject to prompt corrective action by the FDICIA

Output: If total risk based capital ratio falls below 8% or Tier I capital ratio falls below 4%

Central banks influence their country's rates


Input: incorportates optional risk into capital requirements, empahsizes regulatory review to enforce minimum capital requirements and provides detailed requirements for the disclosure of capital structure, risk exposure and capital adequacy

Output: New Basel Accord (Base II)

Central banks influence their country's rates


Input: IN the 80s losses on loans to less developed and Eastern European contries, interest rate volatility, and decreasing interest rate margins encouraged banks to pursue off balance sheet activities to increase fee income and to avoid some regulatory costs and taxes. - The Fed accordingly introduced a plan to track OBS activities in 1983, including reporting requirements

Output: Off balance sheet regulations

Central banks influence their country's rates


Input: Teh Financial Services Modernization Act has made US banks' product diversification comparable to that allowed in most other major industrialized countries

Output: Foreing versus domestic regulations Product diversification

Central banks influence their country's rates


Input: A. US banks into foreing countries - Federal Reserve Regulation K lets US banking offices in foreign countires engage in those countries' permitted practices, even if those activities would not be permitted in the US. B. Foreign banks into the US - the International Banking Act (1978) requires national treatment of foreign banks in the US - Foreing banks must have FDIC insurance to take retail deposits under $100,000 and can not pursue any activity not permitted to a federal bank

Output: Foreing versus domestic regulations Global Expansion

Central banks influence their country's rates


Input: extends federal regulatory authority ofer foreign banks in the US - The Federal Reserve has the authority to approve the bank's entry into the US, examine it, and close it if it violates US laws or engages in unsafe banking practices.

Output: The Foreign Bank Supervision Enhancement Act (1991)

Central banks influence their country's rates


Input: works to allow foreign banks, insurers, adn securities firms to enter emergin market countries

Output: The World Trade Organization

Central banks influence their country's rates


Input: lets US and Canandian banks expand into Mexico

Output: NAFTA

Central banks influence their country's rates


Input: include savings associaitons, savings banks, and credit unions.

Output: Thrift Institutions

Central banks influence their country's rates


Input: are mainly residention mortgages

Output: Savings associaitons Assets

Central banks influence their country's rates


Input: residential mortgages, but also include commercial loans and investment securities

Output: Savings bank assets are mainly

Central banks influence their country's rates


Input: are mainly consumer loans

Output: Credit Union Assets

Central banks influence their country's rates


Input: is either a savings association or a savings bank

Output: A savings institution

Central banks influence their country's rates


Input: include Savings and Loan associations adn federally chartered savings banks that receive FDIC insurance unther the Savings Association Insurance Fund. - Savings associations were traditionally mutual organizations, in which depositors were the legal owners and not stock was issued - Now most savings associtaions are stock companies, allowing them to raise capital from outside investors

Output: Savings Associations

Central banks influence their country's rates


Input: - mortgages 62% - mortgage backed securities 14% - Consumer loans 6%

Output: in 2004 the largest asset categories for savings assocations were

Central banks influence their country's rates


Input: - Deposits 60% - borrowed funds 22% - Federal funds and repos 5%

Output: in 2004 the largest laiblity categories for savings assocations were

Central banks influence their country's rates


Input: include state chartered savings banks that receive FDIC insurance under the Bank Insurance Fund - concentrate their assets in mortgages and mortgage backed securities - Ther 3rd larges asset catagory is bonds, corp stock and other securities - rely more heavily on deposits for sources of funds than savings associations do adn have fewer borrowed funds.

Output: Savings banks

Central banks influence their country's rates


Input: - Savings associations specialized in long term mortgage loans backed by short term deposits, a practice that worked until the late 70s due to stable interest rates and the Fed's policy of smoothing interest rates. - 70s to 80s the Fed changed its monetary policy targeting bank reserves to lower inflation - Interest rates surged causing Negative net interest margins for savings associations. - Savings associations found they had to offer higher interest rates to their depositors to avoiddisintermediation, but the Fed's Reugation Q Ceilings limited interest rates savings associations could legally pay on traditional savings accounts and retail time deposits.

Output: Reasons for the decline in the number of savings institutions

Central banks influence their country's rates


Input: interest income - interest expense / earning assets

Output: Net interest margins

Central banks influence their country's rates


Input: withdrawls of deposits to be reinvested into more lucrative money market mutual fund accounts

Output: disintermediation

Central banks influence their country's rates


Input: limited the interest rates savings associations could legally pay on traditional savings accounts and retail time deposits

Output: Regulation Q Ceiling

Central banks influence their country's rates


Input: Let savings institutions offer negotiable order of withdrawal (NOW) and money market deposit accounts, adjustable rate mortgages and commercial loans to compete more effectively with mutual funds (which offer money market accounts)

Output: Depositiory Institution Deregulation and Monetary Control Act of 1980 and the Garn - ST. Germain Depository Institutions Act of 1982

Central banks influence their country's rates


Input: many mortgage defaults and the failure of many savings assocations. - during that period, the FSLIC pursued a policy of regulator forbearance, allowing insolvent FIs to continue to operate

Output: in the mid 1980s the collapse of the Texas and southwest real estate market and the nationwide recession caused....

Central banks influence their country's rates


Input: replaced the FSLIC with the Savings Association Insurance Funds (SAIF), replaced the Federal Home loan Bandk Board with the Office of Thrift Supervision (OTS) as the main regulators of savings associations and creaed the REsolution Trust Corporation (RTC) to liquidate the most insolvent S&Ls

Output: Financial Institutions Reform, Recovery, and Enforcement Act (1989)

Central banks influence their country's rates


Input: introduced risk based deposit insurance premiums and methods for closing banks faster

Output: Federal Deposit Insurance Corporation Improvement Act (FDICIA) (1991)

Central banks influence their country's rates


Input: - nonprofit, mutual, depository institutions owned by their depositors - exist not to generate profits, but to satisfy their customers' depository and borrowing needs - can be federally or state chartered - do not serve the general public - members share a common bond - are tax-exempt which lets them offer higher reates on deposits and lower rates on loans - less affected by rising interest rates in the 80s because most of their assets were in small consumer loans and were thsu well matched to their liabilities

Output: Organization Structure of Credit Unions

Central banks influence their country's rates


Input: cooperatively owned by a group of member credit unions

Output: Corporate credit unions

Central banks influence their country's rates


Input: 1. consumer credit (33%) 2. home mortgages (32%) 3. US government securities (19%)

Output: Largest asset categories (uses of funds) for credit unions (in 2004)

Central banks influence their country's rates


Input: 1. small time deposits and savings deposits (66%) 2. checkable deposits (11%) 3. Large time deposits (9%)

Output: Largest liability categories (uses of funds) for credit unions (in 2004

Central banks influence their country's rates


Input: 1. Office of Thrift Supervision 2. FDIC 3. National Credit Union Administration 4. State Regulators

Output: Thrift Insurance Regulators

Central banks influence their country's rates


Input: Charters and examines all federal savings institutions and supervises the holding companies of savings institutions

Output: Office of Thrift Supervision

Central banks influence their country's rates


Input: A. overseas SAIF, which provides insurance for savings associations B. supervises, examines, and provides insurance for savings banks

Output: FDIC

Central banks influence their country's rates


Input: regulates federally chartered credit unions

Output: National Credit Union Administration (NCUA)

Central banks influence their country's rates


Input: regulate state-chartered thrift institutions

Output: State regulators

Central banks influence their country's rates


Input: - make loans to individuals and businesses. - Some loans are similar to commercail bank loans (commercial and auto loans) while others are specialized (high-risk loans). - unlike banks, finance companies do not accept deposits - Instead, finance companies rely on long-term and short-term debt for funding

Output: Finance companies

Central banks influence their country's rates


Input: 1. Sales finance institutions 2. Personal credit instituations 3. Business credit institutions

Output: 3 types of finance companies

Central banks influence their country's rates


Input: make loans to customers of a specific retailer of manufacturer

Output: Sales finance institutions

Central banks influence their country's rates


Input: make loans to consumers

Output: Personal credit institutions

Central banks influence their country's rates


Input: make loans to coprorations, usually through equiment leasing and factoring

Output: Business credit institutions

Central banks influence their country's rates


Input: buying accounts receivable at a discount and then collecting them

Output: factoring

Central banks influence their country's rates


Input: finances the purchasing of products manufactured by its parent

Output: Captive finance company

Central banks influence their country's rates


Input: - Finance companies like to finance mortgages because the bad debt expense and admin costs of mortgages are lower than for any other finance compay loans. - Finance companies either make direct loans to morgage customers or securitize morgage asets

Output: Finance company assets: Real estate loans

Central banks influence their country's rates


Input: - major type of consumer loan is motor vehicle loans and leases. - Finance companies that lend to high risk customers are called subprime lenders

Output: Finance company assets: Consumer loans

Central banks influence their country's rates


Input: - Finance companies making business loans have 4 advantages over commercial banks: Finance companies a. are less regulated b. have specialized industry and product expertise c. are willing to accept riskier customers d. have lowe rover head costs

Output: Finance company assets: Business Loans

Central banks influence their country's rates


Input: - Mortgages packaged and used to back secondary market securities - A real estate loan protfolio can contain first mortgages and home equity loans

Output: Securitize mortgage assets

Central banks influence their country's rates


Input: are subprime lenders that lend to very high risk customers and charge very high interest rates

Output: Loan Sharks

Central banks influence their country's rates


Input: 1. equipment loans 2. retail and wholesale motor vehilcle loans and lease

Output: 2 major types of finance compay business loans are

Central banks influence their country's rates


Input: a. repossession of leased equipment is less complicated b. the lack of down payment attracts more customers c. the finance company claims equipment depreciation as a tax deduction

Output: Finance companies prefer leasing to lending because

Central banks influence their country's rates


Input: they do not accept deposits and thus do not come under the jurisdiction of bank and thrift regulators

Output: Finance companies are lightly regulated becasue

Central banks influence their country's rates


Input: - holding higher capital-to-assets ratios than banks - providing default protection guarantees and letters of credit

Output: Finance companies signal their safety and solvency to their investors by

Central banks influence their country's rates


Input: their financial heallth is closely tied to their parents' financial health

Output: Foreign finance companies are often subsidiaries of foreign commercail banks thus...

Central banks influence their country's rates


Input: - annuity contracts - persion plan management - health and accident insurance with includes a. medical expense insurance (covers increased expenses) b. disability income insurance (covers decreased revenues)

Output: In addition to life insurance, life insurers provide

Central banks influence their country's rates


Input: when only those customers who think they need insurance want to buy it, making losses higher and more difficult to predict. Life insurers protect against adverse selection by grouping insureds according to health and other characteristics adn using those smaller pools to calculate losses

Output: Adverse selection occurs

Central banks influence their country's rates


Input: - accounts for 59% of the life insurance policies in force in the US. - ordinary policies are usually marketed individually

Output: Ordinary Life

Central banks influence their country's rates


Input: 1. Term 2. Whole 3. Endowment 4. Variable 5. Universal

Output: 5 basic Ordinary life contracts

Central banks influence their country's rates


Input: - is called 'pure' life insurance because it has no savings element. - the beneficiary received the payout if the insured dies while coverage is in effect

Output: Term Life

Central banks influence their country's rates


Input: - pays its face value to the beneficiary upon the insures' death, if the owner has make the periodic premium payments. - as long as the owner pays the premiums, the insurer is certain to make a payment - Whole life is endowment life that matures at age 100

Output: Whole LIfe

Central banks influence their country's rates


Input: - is term life insurance with a savins element - the beneficiary receives the face value if the insured dies before the endowment date. - the insured receives the face value of the policy if he lives to the endowment date

Output: Endowment life

Central banks influence their country's rates


Input: - invests fixed premium payments in mutual funds - the policy's cash value increases adn decreases with the value of the mutual funds

Output: Variable life

Central banks influence their country's rates


Input: - lets the insured change both the premium amount and the contract maturity - Variable universal life is a univeral life policy that invests premiums in mutual funds

Output: Universal life

Central banks influence their country's rates


Input: - Accounts for 40% of the life insurance policies in force in the US - Covers a large # of people under 1 policy, which produces cost economies: a. mass admin of plans b. lower evaluation costs for each participan c. reduced selling and commision costs

Output: Group life

Central banks influence their country's rates


Input: accounts for less than 6% of the life insurance policies in force. - protects the lender against the borrowers death prior to debt repayment

Output: Credit life

Central banks influence their country's rates


Input: - liquidates a fund over a long period of time, producing a series of payouts. - may be sold to individuals or groups, and may be fixed or variable - payments may be immediate or deferred and may cease at death or continue to be paid to a beneficiary - interest earned on annuitis is tax deferred - tax deferred status of annuity contributions is not capped and not affect by the holder's income level

Output: An annuity

Central banks influence their country's rates


Input: - sometimes bases on guaranteed investment contracts which guarantee the rate of interst over a given period and the annuity rates on beneficiaries contracts. - in the early 2000s insurers manages 30% of all private pension plans

Output: Private Pension fund

Central banks influence their country's rates


Input: - protects against the risks of ill health - life insurers currently write over 50% of all health insurance premuims - the growht of health maintenance organizations (HMO) has cut into life insurers accidnet and health insurance business

Output: Accient and health insurance

Central banks influence their country's rates


Input: - life insurers are long-term investors because their liabilities are long term and because they must generate competitive returns on the savings elements of their products

Output: Life Insurance Assets

Central banks influence their country's rates


Input: 1. corporate securities 69.6% 2. government securities 11.8% 3. mortgages 6.7% 4. policy loans 2.6%

Output: Life Insureres' 4 largest asset categories in 2004

Central banks influence their country's rates


Input: loans made to policyholders using thier policies as collateral

Output: Policy loans

Central banks influence their country's rates


Input: Policy Reserves, (48.2%)

Output: The largest life insurer libility

Central banks influence their country's rates


Input: - reflects expected payments on existing policies. - based on actuarial assumptions reflecting the insurer's expected payouts for death benefits, maturing endowment policies and the surrener values of policies.

Output: Policy Reserves

Central banks influence their country's rates


Input: separate account busines (30.5%)

Output: The 2nd largest life insurer liability

Central banks influence their country's rates


Input: includes annuity programs in which each policy's payoff is linded to assets in which policy premiums are invested.

Output: Separate account business

Central banks influence their country's rates


Input: guaranteed investment contracts (7.5%)

Output: The 3rd largest life insureres liability

Central banks influence their country's rates


Input: - confirmed that state regulation of insurers is primary over federal reguation. - unlike bansk, life insurers may only be chartered at the state level. - State insurance commissions supervise and examine life insurers.

Output: Life Insurance Reguations: The McCarran-Ferguson Act (1945)

Central banks influence their country's rates


Input: requires annual contribuations from insureres which contributions are then used to compensate insureds in the even of life insurer failures

Output: State Insurance guaranted fund

Central banks influence their country's rates


Input: 1. are administered by the insurers themselves 2. are not permanent - insuerers pay into the fund only after an insurer has failed 3. do not standardize required contributions - contribution size varies from state to state depending partially on the # of failed insurers that year 4. do not provide immediate payment to insureds - because it takes time to collect the contributions

Output: Unlike bank deposit insurance, insurance guarantee fund:

Central banks influence their country's rates


Input: The top 10 firms (about 1600) have 45% share of the market while the top 200 firms combined have 95% market share.

Output: P&C insurance is dominated by it's top firms

Central banks influence their country's rates


Input: is the entire amount of premiums on insurance contracts written

Output: Net Premiums Written (NPW)

Central banks influence their country's rates


Input: 1. Auto liability and PD 2. HO multiple peril 3. Commercial multiple peril 4. liability other than auto, HO, and commercial peril 5. Fire and allied lines

Output: The 5 larges P-C lines

Central banks influence their country's rates


Input: 1. loss reserves plus loss adjustment expenses 2. unearned premiums

Output: The 2 priniciple liabilities of P-C insurers

Central banks influence their country's rates


Input: are reserves that equal the portion of premiums that has been paid before coverage has been provided. - The PH surplus for PC insurers equaled 30.1% of total assets in 2004 and the PH surplus for life insurers equaled 5.8% of total assets in 2004

Output: Unearned premiums

Central banks influence their country's rates


Input: 1. Loss Risk 2. Expense risk 3. Investemnt yield or return risk

Output: Teh priniciple measuers of profitability for property-casualty inseres are related to 3 areas of P&C UW risk

Central banks influence their country's rates


Input: the risk that losses will be hirhger than predicted. - decreases with the predictability of losses

Output: Loss Risk

Central banks influence their country's rates


Input: 1. Property v. Liability - PD are more predictible 2. Severity v. Frequency - low severity, high frequency lines are more predictable than high severity, low frequency 3. Long tail v. Short tail - short tail losses are more predictable than long tail losses. (a long tail loss has a long period between policy issuance and claim payment) 4. Product inflaction v. social inflation - social inflation is more difficult to predict (social inflation reflects juries willingnesses to increase damage awards father than the underlying rate of inflation

Output: 4 characteristics that affect predictibility

Central banks influence their country's rates


Input: measures actual losses incurred ina policy line. = the ratio of incurred losses to earned premium. - A loss ratio of less than 100 means earned premiums covered incurred losses

Output: Loss Ratio

Central banks influence their country's rates


Input: risk that expenses will be higher than predicted.

Output: Expense Risk

Central banks influence their country's rates


Input: 1. Loss adjustment expenses (LAEs) 2. commissions and other expenses A typical P&C insurer expense ration ranges from 25% - 29%

Output: 2 sources of expense risk

Central banks influence their country's rates


Input: measures overall underwriting profitability. If ratio exceeds 100 the insurer must rely on investment income for profitability = loss ratio + expense ratio

Output: combined ratio

Central banks influence their country's rates


Input: the risk that investment yields will be lower than predicted

Output: Investment yield or return risk

Central banks influence their country's rates


Input: measures overall profitability. = combined ratio - investment yield

Output: Operating ratio

Central banks influence their country's rates


Input: Treasury and corporate bonds, which provide reliable returns and a predictable stream of cash flow

Output: Most P&C insurers invest their premiums in ....

Central banks influence their country's rates


Input: subject to rate regulation mativated by social welfare, which reduces insurer profitability in those lines

Output: P&C insurers are chartered and regulated at the state level. Auto and WC lines are...

Central banks influence their country's rates


Input: Japan, Germany, and the United Kingdom are our most powerful competitors.

Output: US insureres currently lead the world market in premiums written both in P&C and life...

Central banks influence their country's rates


Input: - Securities firms offer securities services: They buy, sell and borker securities in secondary markets -- Investment banks originate, underwrite and distribute new issues of securities. They also advise corporations on acquisitions, mergers, and restructuring.

Output: Services offered by securities firms and investment banks

Central banks influence their country's rates


Input: 1. National full-line banks that serve retain and corporate customers 2. National full line banks that specialize in corporate finance 3. Specialized and regional firms

Output: 3 major typses of xecurities and investement firms

Central banks influence their country's rates


Input: a. Broker - dealers for retail customers (trading existing securities) b. underwriters for corporations (issuing new securities)

Output: National full line banks that sever retail and corporate customers act as

Central banks influence their country's rates


Input: 1. specialized investment bank subsidiaries of commercial bank holding companies 2. Specialized discount brokers (who trade securities w/out offering investment advice or tips) 3. regional securities firms 4. specialized electronics trading securities firms 5. Venture capital firms

Output: Specialized and regional firms - 5 types

Central banks influence their country's rates


Input: 1. investing 2. investment banking 3. Market making 4. Trading 5. Cash Management 6. Mergers and Acquisitions 7. Other services

Output: Securities firm and investment bank activities

Central banks influence their country's rates


Input: Securities firms compete with commercial banks, life insurers, and pension funds to manage pools of assets

Output: Investing

Central banks influence their country's rates


Input: investment banks underwrite and distribute new securities issues.

Output: Investment banking

Central banks influence their country's rates


Input: involves private and public placements. - In private placement, the investment bank places the securities wiht one or a few large instituational investors - In public placement the investement bank offers the securities to the public at large.

Output: Securities Underwriting

Central banks influence their country's rates


Input: acts as a securities distributor without guaranteeing a price to the issuer

Output: A bank that offers best underwriting efforts

Central banks influence their country's rates


Input: A. buys the securities at a guaranteed price and then b. tries to sell them to the public at a higher price

Output: A bank that offers firm commitment underwriting

Central banks influence their country's rates


Input: creates a secondary market in an asset. Agency transactions and Principal transactions

Output: Market Making

Central banks influence their country's rates


Input: are 2 way transactions for customers, such as buying stock from one customer and selling it to another

Output: Agnecy Transactions

Central banks influence their country's rates


Input: are transcation for the investment bank's own account, such as buying stock and holding itin the expectation of a price increase

Output: Principal transactions

Central banks influence their country's rates


Input: 1. Posting trading 2. Pure arbitrage 3. Risk arbitrage 4. Program trading 5. stock brokerage 6. Electronic brokerage

Output: 6 types of trading activities

Central banks influence their country's rates


Input: buys a large block of security in the expectation of a price increase

Output: Position Trading

Central banks influence their country's rates


Input: buys an asset in one market and then immediately sells that asset in another market at a higher price

Output: Pure arbitrage

Central banks influence their country's rates


Input: buys securities in anticipation of some new information

Output: Risk arbitrage

Central banks influence their country's rates


Input: the simultaneous, computer-assisted buying and selling of a protfolio of atleast 15 different stocks valued at greater than $1 million

Output: Program trading

Central banks influence their country's rates


Input: trades securities on behalf of individuals

Output: Stock Brokerage

Central banks influence their country's rates


Input: offers direct access to the market trading floor, bypassing the need for a stock broker. - Electronic brokerage is stock brokerage's main source of competition

Output: Electonic brokerage

Central banks influence their country's rates


Input: a cash managemeng account (CMA) lets a customer write checks against a mutual fund account, combining the advantages of money market investment and liquidity. - Securities firms use CMAs to compete with depsitory instituations

Output: Cash Management

Central banks influence their country's rates


Input: a. finding merger partners b. assessing the value of target firms c. recommednign merger agreement terms d. udnerwriting new securities issued by the merged firms e. helping target firms to avoid unwanted megers

Output: Mergers and Acquisitions services

Central banks influence their country's rates


Input: include custody, escrow, clearance, research, and advisory services. - Research and advisory services can produce conflicts of interest when advisors charge clients for research they buy from another area of the firm or bank: should clients pay for research the firm has already acquired?

Output: "Other Services"

Central banks influence their country's rates


Input: Assets concentrated in: - Receivables from other broker-dealers - securities bought under resell agreements - Long positions in securities and commodities Liabilities are concentrated in: - securites sold under repurchase agreements - payables to other broker-dealers - short positions in securities and commodities - payables to customers

Output: Industry balance sheet characteristics:

Central banks influence their country's rates


Input: Overseas securities firms' underwriting and trading activities and sets regulatory standards for th eentire industry

Output: The Securities and Exchange Commission

Central banks influence their country's rates


Input: Provides day-to-day regulation of trading practices

Output: The New York Stock Exchange

Central banks influence their country's rates


Input: provides day-to-day regulation of trading practices in the over-the -counter markets

Output: The National Association of Securities Dealers

Central banks influence their country's rates


Input: The guarantee fund that protects investors against losses up to $500,000 for securities firm failures

Output: The Securities Investor Protection Corporation

Central banks influence their country's rates


Input: A mutual fund is a finaincial intermediary that pools its investors' resoures and invests them in a diversified protfolio of assets. - They let small investors: 1. Invest in financial services 2. diversify their risks - They also reduce transaction costs adn commissions

Output: The purpose of a mutual fund

Central banks influence their country's rates


Input: 1. Free exchange of investments 2. automatic investing 3. check writing privileges 4. automatic reinvestment of dividends 5. automatic withdrawls

Output: Mutual fund shareholder services (5)

Central banks influence their country's rates


Input: sells new shares to investors and redeems outstanding shares on demand at their fair market value

Output: Open-end Mutual funds

Central banks influence their country's rates


Input: securities with original maturitites of less than one year

Output: Money Market Mutual Funds invests in

Central banks influence their country's rates


Input: securities (bonds or stocks) with original maturities of one year or more

Output: Bond or Equity fund invests in....

Central banks influence their country's rates


Input: buying existing mutual fund groups or managing mutual fund assets for fees

Output: Commercial banks participate in the mutual fund industry by...

Central banks influence their country's rates


Input: 1. Equity Fund 2. Bond Fund 3. Hybrid Funds 4. Money Market Mutual Fund

Output: 4 types of Mutual Funds

Central banks influence their country's rates


Input: - contains common and, possibily, preferred stock - tends to stress world equity, growth or income

Output: Equity Fund

Central banks influence their country's rates


Input: - contains fixed-income securities with matuirities of more than one year - tend to stress high yields or strategic income

Output: Bond Fund

Central banks influence their country's rates


Input: - contains stocks and bonds - tends to stress asset allocation, balance, flexibility or mixed income

Output: Hybrid fund

Central banks influence their country's rates


Input: contains a mix of money market securities with original maturities of under one year. - May be income tax taxable or tax exempt

Output: Money Market Mutual Fund

Central banks influence their country's rates


Input: Equity, bond, and hybrid funds

Output: Long term mutual funds

Central banks influence their country's rates


Input: Money Market mutual funds

Output: Short term mutual funds

Central banks influence their country's rates


Input: states its objective and lists the securities that fund holds

Output: Mutual fund prospectus

Central banks influence their country's rates


Input: 1. Income - via interest and dividends 2. Capital gains - when the fund sells an asset for more than the original public offering 3. Capital appreciation - of the underlying values of existing assets

Output: 3 elements of a mutual funds portfolio returns:

Central banks influence their country's rates


Input: = the market value of a fund's assets/the # of outstanding shares

Output: Net Asset Value (NAV) of a mutual fund

Central banks influence their country's rates


Input: - has a fixed supply of outstanding shares in vested in other firms' securities and assets - If shares are in high demand it can trade shares above NAV - if shares are in low demand it might trade shares at below NAV

Output: A closed end investment company

Central banks influence their country's rates


Input: is a closed end investment company that invests in real estate company shares and/or large mortgages

Output: A real estated investement trust (REIT)

Central banks influence their country's rates


Input: the agent's one-time sales commision charge.

Output: Sales Load

Central banks influence their country's rates


Input: has an up front sales or commission charge.

Output: a load fund

Central banks influence their country's rates


Input: investors would reather pay less for funds than recieve the extra personal attention of a sales agent

Output: No load funds are more popular because

Central banks influence their country's rates


Input: spread over the life of the investment, to help calculate total mutual fund costs per year. Simply divide the sales load % by the # of years the investor expects to hold the shares.

Output: Sales load can be "annualized"

Central banks influence their country's rates


Input: 1. Sales load 2. fund operating expenses

Output: 2 costs of investing in a mutual fund

Central banks influence their country's rates


Input: 1. increased their holdings in corporate equities 2. decreased their relative holdings in US and municipal securities

Output: In the 90s and 2000s long term mutual funds did two things

Central banks influence their country's rates


Input: requires mutual funds to file registration statements and sets rules and regulatiosn for prospectuses. - The buying and selling of mutual fund shares is subject to antifraud provisions

Output: Mutual Fund Regulation The Securities and Exchange commission

Central banks influence their country's rates


Input: supervises mutual fund share distributions

Output: Mutual Fund Regulation The National Association of Securities Dealers

Central banks influence their country's rates


Input: prevents conflicts of interest, fraud, and excessive fees for fund shares

Output: Mutual Fund Regulation The investment Company Act

Central banks influence their country's rates


Input: requires mutual funds to develop procedures for avoiding insider trading abuses

Output: Mutual Fund Regulation The Insider Trading and Securities Fraud Enforcement Act

Central banks influence their country's rates


Input: let the SEC halt trading on exchanges and restirct program trading.

Output: Mutual Fund Regulation The Market Reform Act

Central banks influence their country's rates


Input: exempts mutual fund sellers form oversight by state securities regulators

Output: Mutual Fund Regulation The National Securities Margets Improvement Act

Central banks influence their country's rates


Input: offer their investors the advantages of retimtent planning and tax deferred savings.

Output: Pension Funds

Central banks influence their country's rates


Input: administered by a private corporation, such as a life insurer or mutual fund

Output: A private pension fund

Central banks influence their country's rates


Input: is administered by a federal, state or local gov't

Output: A pulbic pension fund

Central banks influence their country's rates


Input: is the document that governs the operation of a pension fund

Output: A pension plan

Central banks influence their country's rates


Input: is administered by a life insurer. - The pension plan funds of an insured pension fund are pooled and invested in the insurer's general assets. - The insurer lists its pension fund-related assets as "pension fund reserves" as a liability on its balance sheet - The insurer owns all of the fund's premium payments and assets

Output: An insured pension fund

Central banks influence their country's rates


Input: is administered by a FI orther than an insurer. - the sponsoring business, participant, or union owns the pension fund's assets, which are listed as a separate pool of assets on the FI's balance sheet. - the sponsor owns all the fund's premium payments and assets

Output: A noninsured pension fund

Central banks influence their country's rates


Input: - Pays each employee a specific cash benefit upon retirement. - The benefit formula is generally based on years of employment and salary during employment

Output: A defined benefit pension

Central banks influence their country's rates


Input: - pays a flat amount for every year of employment - employees who work longer get higher benefits

Output: The flat benefit Formula

Central banks influence their country's rates


Input: - bases benefits on the employee's average salary over the employee's entire employment period.

Output: The career average formula

Central banks influence their country's rates


Input: - bases benefits on a % of the average salary earned during a specified # of years just prior to to retirement. - usually provides the higest retirement benefits

Output: The final pay formula

Central banks influence their country's rates


Input: has enough funds set aside to meet promised payments

Output: Fully funded plan

Central banks influence their country's rates


Input: has too few funds set aside

Output: underfunded plan

Central banks influence their country's rates


Input: has more than enough funds set aside

Output: overfunded plan

Central banks influence their country's rates


Input: requires each employee to contribute a specified amount to the pension fund at regular intervals.

Output: Defined Contribution Pension

Central banks influence their country's rates


Input: guarantee a minimum rate of return

Output: Fixed income funds

Central banks influence their country's rates


Input: do not guarantee a minimum rate of return, but do fluctuate with the value of the underlying assets.

Output: Variable income funds

Central banks influence their country's rates


Input: an employer sponsored plan that supplements a basic retirement plan.

Output: 401(K) or 403(B) palns

Central banks influence their country's rates


Input: 1. Employers and employees contribute to the plan 2. Participants have some control over allocation of assets 3. Asset allocation affects the fund's risks and returns. Younger participants tend to invest in equities and older participants tend to invest in fixed income bonds funds and GIC funds. 4. Contributions and accumulations are tax-free utnil withdrawn.

Output: The 4 general charactereistics of 401(K) and 403(b) plans

Central banks influence their country's rates


Input: is a self directed retirement fund. - Individual may contribute up to $4K annually in '07 - contribution limits increased to $5K in 2008 - after 2008, the contribution limits will be indexed in $500 increments, adjusted to the cost of living. - Most IRA contirubtions are invested in mutual funds

Output: Individual Retirement Account (IRA)

Central banks influence their country's rates


Input: 1. Savings are tax deferred 2. Employees chaging jobs can transfer pension savings into IRAs to maintain tax-exempt status 3. Self-employed people may use IRAs in place of employee-sponsored pension funds.

Output: 3 advantages of IRAs

Central banks influence their country's rates


Input: 1. is at least 59 1/2 years old 2. has invested the funds for at least 5 years

Output: a ROTH IRA taxes contributions in the year of each contribution, making withdrawals tax free if the withdrawer.....

Central banks influence their country's rates


Input: 1. There is no madatory withdrawal age (the mandatory w/d age for IRAs is 70 1/2) 2. Withdrawals are tax-free - since contirubtions were made with after-tax dollar

Output: 2 advantages of ROTH IRAs

Central banks influence their country's rates


Input: - a retirment account for a self-employed individual - Contirubtions and accumulations are tax-deferred, and partiipants have some control asset allocation

Output: Keogh Account

Central banks influence their country's rates


Input: - Available to federal, state, and local gov't employees - administered by a gov't department - Most are pay as you go, meaning that contributiosn from current employees pay current benefits to retired employees

Output: Public Sector Pension

Central banks influence their country's rates


Input: - the # of current employees fall - the # of retired employees rises and/or - retired employees live longer than expected

Output: Public Sector Pensions become underfunded when...

Central banks influence their country's rates


Input: - Funds for federal gov't employees - Social Security

Output: 2 types of federal gov't pensions

Central banks influence their country's rates


Input: - Civil service funds cover all federal employees who are not in the armed forces - The military pension fund covers members of the armed forces - The federal railroad pension system covers railroad employees

Output: Funds for federal governement employees

Central banks influence their country's rates


Input: - covers almost all other employees and self-employed persons in the US. - it is underfunded and is expected to be bankrupt by 2042 - it may not remain solvent because contributions are invested in low risk, low return Treasury securities; the general population growth is slowing and the # of retired people is increasing as baby boomers retire andlife expectancies increase

Output: Social Security

Central banks influence their country's rates


Input: - over 64% of private pension fund contributions are invested in corporated equities or equity mutual fund shares. - Defined benefit plans have more assets invested in gov't and corporate bonds than defined contribution plans because defined benefit plans rely on fixed-income securities to fund their fixed benefits

Output: Asset structure of private pensions

Central banks influence their country's rates


Input: - governs private pension pension funds, requiring employers to meet certain standards to qualify for tax-exampt status. - Does not require employers to provide pension plans

Output: The Employee Retirment Income Security Act

Central banks influence their country's rates


Input: - sets guidelines for fudning and sets penalties for fund deficiencies. Contributions must meet all annual consts and expenses plus any unfunded historical liabilities over a 30 year period. - any new underfudning must be funded over a 15 year period

Output: ERISA requirements - Underfunding

Central banks influence their country's rates


Input: Pension plans must have minimum vesting requirement, and can not exceed a vesting period of 10 years.

Output: ERISA requirements - Vesting

Central banks influence their country's rates


Input: Pension fund manters must meet the prudent person rule: They must invest contributions with the same care as a prudent person in similar conditions

Output: ERISA requirements - Fund Management

Central banks influence their country's rates


Input: Emplyees may transfer pension credits from one fund to another when switching jobs.

Output: ERISA requirements - Transferability

Central banks influence their country's rates


Input: The Pension Benefit Guarantee Corporation - is an insurance fund for pension fund participants - pays defined pension fund benefits if the fund can not - has generally operate as a deficit since its inception in '74, and it has recently come under investigation for questionable practices and operations

Output: ERISA requirements - Insurance

Central banks influence their country's rates


Input: the risk that contractually promised returns from the FI's loans and secrurities will not be paidn in full. - When an borrower defaults on a loan or bond the FI loses its interest income on the asset. (but may be able to recover at least some principal by claiming the borrowers assets through legal bankruptcy and insolvency proceedings) - Credit card default rates are significantly higher than real estate loans default reates.

Output: Credit Risk of FI

Central banks influence their country's rates


Input: 1. screening and monitoring their loan applicants 2. diversifying their credit related assets

Output: FIs reduce credit risk by

Central banks influence their country's rates


Input: is associated with a particular borrower and the risk of that borrow's project. FIs protect themselves against firm-specific credit risk by diversifying their assets

Output: Firm specific credit risks

Central banks influence their country's rates


Input: is associated with general economic conditions that affect all borrowers worldwide. - Asset diversification does not reduce systematice credit risk.

Output: Systematic Credit risk

Central banks influence their country's rates


Input: is the risk that sudden w/d might force teh FI to liquidate assets quickly at low prices. - they contribute to liquidity risks by limiting their cash holdings

Output: FI's Liquidity Rish

Central banks influence their country's rates


Input: by losing confidence in the bank or by experiencing unexpected needs for cash

Output: FI's liability holders can create liquidity risk

Central banks influence their country's rates


Input: when all or many liability holders w/d their funds at the same time, often resulting in the bank's failure

Output: a run on a FI occurs

Central banks influence their country's rates


Input: the risk that the FI mismatced assets and liabilities will produce and demand different rates of return. - interest rates are affected by teh Feds monetary policy and by the increased level of financial market integration, which increases the swpeed of interest rate changes and transfers interest rate volatility among integrated countries

Output: FIs interest rate risk

Central banks influence their country's rates


Input: 1. Refinance risk 2. reinvestment risk 3. present-value uncertainty

Output: 3 types of interest rate risks

Central banks influence their country's rates


Input: a FI loses money when it holds assets with longer maturities than its liabilities' maturities, adn the interest rate INCREASES - when the FI refi's its liabilities, the higher interes rate will cost the FI money

Output: refinance risk

Central banks influence their country's rates


Input: a FI loses money when it holds assets with shorter maturities than its liabilities' maturities and the interest rate DECREASES - when the FI reinvests in new assets the lower interest rate will cost the FI money

Output: Reinvestment risk

Central banks influence their country's rates


Input: - interest rate fluctuations change the present value of future cash flows associtiated with both assets and liabilities - when the FI holds assets with longer maturities than its liabilities maturities an increas in interest rates reduces teh present values of the FIs assets by a larger amount than it does the present values of the FIs liabilities - when and FI holds assets with shorter maturities than its liaiblities maturities a decrease in interest rates increases the present values of the FIs assets by a smaller amount than it does the present value of the FI's liabilities

Output: Present-value risk

Central banks influence their country's rates


Input: the risk that changing interest rates, exchange rates, and other prices will affect the trading prices of assets and liabilites - a FI that actively trades in securities faces the risk that trading prices will change downward unexpectedly costing the FI money

Output: FIs Market risk

Central banks influence their country's rates


Input: is the risk that activities related to contingent assets and liabilities will cause the FI to lose money

Output: FIs Off Balance Sheet Risk

Central banks influence their country's rates


Input: 1. letter of credit (an insurer's or bank's guarantee to make some payment upon the occurrence of a future even -- usually the default of the buyer of the letter) entails that the issue will have to make the promised payment 2. loan commitments 3. mortgage services 4. positions in derivative securities

Output: FIs off balance sheet activities

Central banks influence their country's rates


Input: the risk that changing exchange rates will affect the value of foreign-denominated assets and liabilities - A FI is exposed due to activities such as trading in foreign currencies, making foreign currency loans, buying foreign issued securities of issuing foreign currencies

Output: Foreign Exchange Risk

Central banks influence their country's rates


Input: the risk that a foregn gov't will interfere with repayments by that country's foreign borrowers. - Businesses that lend US dollar denominated money to foreign borrowers avoid currency risk but no soverign risk - when foreign borrowers default on a loan due to governmental intereference, FIs usually have little recourse to local bankruptcy courts or international civil claims courts

Output: Country or Sovereign risk

Central banks influence their country's rates


Input: the risk that technological investments will not produce their expected cost savings - sometimes occurs through diseconomies of scale such as excess capacity, redundancies and bureaucratic inefficiencies that worsen as the FI grows - impairs the FIs efficiency and ability to compete

Output: Technology risk

Central banks influence their country's rates


Input: the risk that existing technological systems will break down - a specialized form of technology risl - the trend toward computer based and other electronic based systems since the mid 70s has increase the operation risk in the financial sector exponentially

Output: operational risk

Central banks influence their country's rates


Input: the fisk that a FI might lack enough capital to offset a sudden decline in the value of its assets - a FI become insolvent when its owners' equity approaches or equals zero - regulators like FIs to have low leverage because low leverage increases their ability to withstand decline in asset values.

Output: Insolvency risk

Central banks influence their country's rates


Input: 1. changes in taxation 2. changes in regulations 3. stock market crashes 4. major political events (wars, revolution) 5. crimes against the FIs 6. general macroeconomic changes (changes in inflation rate and/or the unemployment ratio)

Output: What outside factors can affect FI's risks

Central banks influence their country's rates


Input: 1. Liability side liquidity risk 2. Asset side liquidity risk

Output: 2 types of liquidity risk

Central banks influence their country's rates


Input: liability holders might w/d their financial claims (deposits) creating a need for cash

Output: Liability side liquidity risk

Central banks influence their country's rates


Input: are particulary prone to w/d which is why depository institutions have a high liquidity risk exposure. - demand deposits are composed of core deposits and the net deposits drain

Output: Demand deposits accounts

Central banks influence their country's rates


Input: are rarely w/d providing a stable long term source of funds

Output: Core deposits

Central banks influence their country's rates


Input: is the amount by which deposit w/d exceed deposit additions. - because there are always core deposits, a bank does not need to be prepared to convert all of its demand deposits into cash every day

Output: The net deposit drain

Central banks influence their country's rates


Input: savings accounts - they are less prone to w/d

Output: Time deposit accounts

Central banks influence their country's rates


Input: is the withdrawing funds from banks to then reinvest them elsewhere to earn higher interest rates

Output: Disintermediation

Central banks influence their country's rates


Input: holders of off balance sheet commitments might excercise those commitments converting them into assets that must then be balanced by add'l liabilities

Output: Asset side liquidity risk

Central banks influence their country's rates


Input: - cash raised through money market, either by borrowing funds from federal fund market or the repo agreement market or by issuing CDs, notes, or bonds

Output: Purchased liquidity

Central banks influence their country's rates


Input: only affects balance sheet liabilities, it doesn't affect the asset side of the balance sheet. Therefore, the business can maintain its current size while still raising cash.

Output: purchased liquidity - ADVANTAGES

Central banks influence their country's rates


Input: are not covered by deposit insurance - can be expensive because the buyer must pay the market interst rates for funds

Output: purchased liquidity - DISADVANTAGES

Central banks influence their country's rates


Input: cash raised through cash reserves adn the sale of assets

Output: Stored liquidity

Central banks influence their country's rates


Input: is less expensive than purchased liquidity

Output: Stored liquidity - ADVANTAGES

Central banks influence their country's rates


Input: the cost of stored liquidity is the opportunity cost of not investing stored cash in interest bearing assets - when used, it decreases the bank's assets

Output: Stored liquidity - DISADVANTAGES

Central banks influence their country's rates


Input: 1. Net liquidity statement 2. Maturity ladder 3. Peer group ratio comparisons 4. Liquidity index 5. Financing gap

Output: 5 measures of liquidity

Central banks influence their country's rates


Input: lists sources and uses of liquidity, and thus provides a general measure of liquidity

Output: Net Liquidity statement

Central banks influence their country's rates


Input: compares cash inflows and outflows on a daily basis and/or over a longer period to determine daily and cummulative net funding needs. - a bank with a short term funding might use a 5 day maturity ladder - a bank with less dependency on short term funding might measure liquidity over a longer period

Output: Maturity ladder

Central banks influence their country's rates


Input: compare the banks dey rations to those of similar banks

Output: Peer group ration comparisions

Central banks influence their country's rates


Input: heavy reliance on the short term money market

Output: high loans/deposits ratio and/or high borrowed funds/ total assets ration indicates...

Central banks influence their country's rates


Input: a need for high liquidity

Output: A high commitments-to-lend/ assets ratio indicates....

Central banks influence their country's rates


Input: compares fire-sale asset prices and fair market prices to measure the potential loss from a sudden sale of assets at fire sale prices.

Output: Liquidity index

Central banks influence their country's rates


Input: equals average loans minus core deposits - if the gap is positive, the bank must liquidated assets or borrow funds to bridge the gap

Output: financing gap

Central banks influence their country's rates


Input: the financing gap plus liquid assets - the amount must borrow to finish bridging the financing gap once liquid assets have been exhausted - widening financing gap indicates future liquidity problems, and may be caused by increase deposits w/d and/or increased exercise of loan commitments - as a bank increases its money market loans in response to a widening financing gap, lenders get concerned about the bank's creditworthiness and respond with stricter credit limits and higher risk premium

Output: The financing requirement equals

Central banks influence their country's rates


Input: Banks have 3 sources of cash: 1. the sale of liquid assets 2. borrowed funds 3. excess cash reserves A banks maximum borrowed funds limit is an internal guideline based on the bank managers assessment of the credit limits the market is likely to impose on the bank

Output: How banks manage liquidity

Central banks influence their country's rates


Input: lets a bank set its borrowing priorities before liquidity problems arise, lowering the bank's cost of funds and minimizing its excess reserves

Output: Liquidity planning

Central banks influence their country's rates


Input: 1. managerial details and responsibilities 2. W/d patterns 3. w/d sizes and sources of funds 4. Internal borrowing limits

Output: 4 components of liquidity plan

Central banks influence their country's rates


Input: appoint managers responsible for interacting with regulatory agencies and disclosing information to the public, in the event of a liquidity crisis

Output: Managerial details and responsibilities

Central banks influence their country's rates


Input: identify which fund providers are loikely to w/d their funds in the event of a liquidity crisis - map the likely pattern of w/d

Output: Withdrawal patterns

Central banks influence their country's rates


Input: - estimate the likely sizes of w/d over various time horizons (1 week, 1 month, 1 quarter, 1 year) - identify the sources of funds for each time horizon

Output: Withdrawal sizes and sources of funds

Central banks influence their country's rates


Input: - decide how much each subsidiary and brank may borrow. - determine acceptable risk premiums for market borrowing - this section of the liquidity plan also contains the sequence in which assets may be liquidated

Output: Internal borrowing limits

Central banks influence their country's rates


Input: is a sudden, unexpected w/d of deposits from a bank

Output: A bank run

Central banks influence their country's rates


Input: 1. concern about the bank's sovency 2. the failure of a related or nearby bank 3. sudden changes in investor preferences - if a bank does not have deposit insurance, depositors who fear that bank may be in financial trouble will want to get to the bank fast and w/d their deposits before the bank runs out of cash

Output: A bank run may be triggered

Central banks influence their country's rates


Input: when depositors lose their faith in the banking system as a whole, creating many simultaneous bank runs

Output: A bank panic occurs

Central banks influence their country's rates


Input: 1. deposit insurance 2. discount windows

Output: The banking system has 2 major liquidity risk insulation mechanisms

Central banks influence their country's rates


Input: guarantees the repayment of deposits - prevents bank runs by making depositors feel safe about their deposits even when banks are in financial trouble - the level of deposit insurance coverage per depositor is capped at $100K per account, so each depositor can get more coverage by use of separate accounts and even separate banks

Output: Deposit Insurance

Central banks influence their country's rates


Input: provides short term loans to banks at the discount rate

Output: Discount window

Central banks influence their country's rates


Input: is that portion of the poicy value the insurer must pay if the policyowner cashes in the policy before it matures

Output: Life Insurers liquidity risk exposures: The surrender value nof a life insurance policy

Central banks influence their country's rates


Input: 1. selling more policies to generate more premium income 2. relying on returns from current assets 3. selling liquid assets 4. selling assets at fire-sale prices

Output: In order of preference, life insurers raise cash to pay surrender values by ....(4)

Central banks influence their country's rates


Input: insurers pay claims as they arise and are settled. - because claims are impossible to predict perfectly and because payments, once settled, must be paid promptly, PC insurers hold lots of short term liquid assets - disasters that create many claims can deplete a PC insurers liquidity

Output: P&C insurers liquidity risk CLAIMS

Central banks influence their country's rates


Input: policy cancellations and nonrenewals reduce the PC insurer's premium income, possible creating a liquidity crisis. - This theoretical risk (many, many cancellations within a few days) rarely arises in practice

Output: PC insurers liquidity risk CANCELLATIONS

Central banks influence their country's rates