Class notes - Financial Markets and institutions

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Samenvatting - Class notes - Financial Markets and institutions

  • 1422918000 Lecture 1: Traditional Banking

  • Hebben chimpansees of mensen een beter kortetermijngeheugen?
  • 1424386800 Lecture 6: Bank Regulation

  • How are banks different? 5 reasons
    1. Capital structure: they are highly leveraged and have demand deposits as liabilities
    2. Public confidence matters
    3. They have diffuse debt holders
    4. They are large creditors
    5. Bank assets are opaque (bank risk taking can be unnoticed & fast changing)
    6. They are systemically important & benefit fro the safe net (i.e. deposit insurance, LoLR, TBTF)
  • Name two pro's and con's of Portfolio restrictions:

    • Prevents conflict of interests: consumer / borrower protection
    • Constrains moral hazard on the part of banks (risk-taking)

    • Economies of scale and scope
    • banks can't diversify their income
  • 1425423600 Lecture 9A: Monetary policy QE and other tools

  • The Euro area follows a two pillar influence strategy. Explain how that works.
    1. The monetary policy strategy looks at two sets of indicators: the economic indicators (output and components, demand, labor market conditions, etc. ) and the monetary indicators (finacials such as money based inflation indicators, liquidity measures, etc.)
    2. They proces this information. The different indicators are used to model future projections.
    3. The projection are analysed based on the same indicators: 1. Economic analysis (assessment short&medium term determinants inflation) 2. Monetary analysis (monetary trends with the focus on long term)
    4. Governing council makes the monetary policy decision aimed at influencing price stability
  • Explain the difference between the four financial transmission channels of monitory policy

    Most central banks conduct monetary policy by setting a target for a specific short-term interest rate. Changes to the short-term policy interest rate, all else being constant, induce changes to medium- and long-term interest rates, as well as to other financial indicators such as the exchange rate. These rates, in turn, affect economic activity by decreasing the cost of mortgages when the prime rate falls, by making it cheaper for firms to borrow when yields on corporate bonds go down or by increasing exports when the exchange rate depreciates. They can, therefore, ultimately lead to changes in economic activity, because they influence the spending and investment decisions of consumers and firms.
    The transmission of monetary policy to the broader economy takes place through several channels. The first, which can be considered the traditional channel, operates through both the overall level of interest rates and the exchange rate. This is because, on one hand, long-term rates depend on the average expected short-term interest rate, while, on the other hand, the expected change in the exchange rate (adjusted for foreign exchange risk) depends on the differential between domestic and foreign interest rates (Sarno and Taylor 2008, 18).

    Additional channels through which policy rates affect firms that rely on bank financing are the balance-sheet channel and the bank-lending channel (Bernanke and Gertler 1995). Through the balance-sheet channel, shifts
    in the policy rate affect the financial position of borrowers. For example,
    all else being equal, accommodative monetary policy strengthens the bal- ance sheets of firms because lower interest rates decrease the interest rate expenses on their short-term debt, which increases net cash flows and improves their financial positions. In addition, falling interest rates, typically associated with increasing asset prices, may improve the value
    of borrowers’ collateral and hence access to bank loans.2 Through the bank-lending channel, banks affect the spending and investment decisions of firms by shifting the supply of credit. For example, tight monetary policy drains reserves from the banking system, limiting the ability of banks to supply credit, all else being equal.
    The recent financial crisis has spurred a debate on whether an additional mechanism in the transmission of monetary policy—the risk-taking channel—affects the supply of credit (Rajan 2006; Borio and Zhu 2008; Boivin, Lane and Meh 2010). Through this mechanism, prolonged periods of low interest rates may induce banks to increase the supply of credit to riskier borrowers, resulting in an overall increase in the riskiness of bank loan portfolios.The presence of the risk-taking channel implies that, because of an elevated appetite for risk in times of prolonged low interest rates, banks may increase their lending by more than they normally would through traditional transmission mechanisms. The effect of prolonged low interest rates, therefore, may be amplified because of an excessive tolerance of risk.
  • 1425596400 Lecture 10: Institutional investors: pension funds

  • What is needed in order to maintain full funding of pension funds? 
    1. transparency, checks and balances
    2. balance between input (contributions) and output (pensions)
    3. adequate supervision
    4. contributions are invested, no affected by bankruptcy sponsor.
  • 1426201200 Lecture 12: Global banks and crisis transmission

  • What is the difference between the support and substitution effect in explaining why global banks matter?

    Support effect:
    • Dampens local banking crisis. When their is a idiosyncratic shock in the host country, the home country supports the company in order for the business to maintain in operation
    • Reverse support effect. When their a idiosyncratic shock in the home country, the company in the host country supports the company in the home country.

    Substitution effect:
    • Exacerbates local business cycle. If the business is low at one subsidiary, funds are than are then channels to other subsidiaries with higher return on assets. In this way funds are channeld toward the most profitable investment opportunities. 
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Voorbeelden van vragen in deze samenvatting

How are banks different? 5 reasons
Name two pro's and con's of Portfolio restrictions:
The Euro area follows a two pillar influence strategy. Explain how that works.
What is needed in order to maintain full funding of pension funds? 
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