Money and Banking Exam 2 Study Guide
Money and Banking Exam 2 Study Guide ECON 04305 - 1
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This 2 page Study Guide was uploaded by Nicole Rossi on Tuesday April 5, 2016. The Study Guide belongs to ECON 04305 - 1 at Rowan University taught by Robert Ferrari in Spring 2016. Since its upload, it has received 89 views. For similar materials see Money and Banking in Economcs at Rowan University.
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Date Created: 04/05/16
Money and Banking Study Guide Time Value of Money: present money is worth more than in the future Bank of US I/II:I: main office was in Philly, and it would have branches that oversee what is happening in each state. At the time, we were a developing nation, and where would we get the money to start the bank? They gave it a 20 year life. II: was created in 1816. It was the same concept of US I bank; give it another 20 year life. This problem was the president of the bank and the US president didn’t get along. Jackson said he wouldn’t renew the bank of US II. National Banking Act: creates the system of national banks to be chartered by the comptroller of the currency and establishes a uniform currency. Congress passed the act to help resolve the financial crisis that emerged during the early days of the American Civil War (1861–1865). Comptroller of Currency: 3 functions: charters, regulates, examines; you file an application with them to start a bank, they then would give you a license to start the bank. Duel Banking System: we still use this today; if you are going to start a bank, you need a license from either the state/federal government. You could get either state or federal charters. State: you can either become a member of the Federal Reserve or become a non-member. Federal: you must become a member of the Federal Reserve System. Federal Reserve Act: creates the Federal Reserve System and gives it the responsibility as a lender of a last resort. The System consists of a seven member Board of Governors with headquarters in Washington, D.C., and twelve Reserve Banks located in major cities throughout the United States. 3 primary functions: monetary policy, banking supervision, financial services FDIC: the Federal Deposit Insurance Corporation insures deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails. In the insurance context, the term "moral hazard" refers to the tendency of insured parties to take on more risk than they would if they had not been indemnified against losses. The argument is that deposit insurance reassures depositors that their money is safe and removes the incentive for depositors to critically evaluate the condition of their bank. With deposit insurance, unsound banks typically have little difficulty obtaining funds, and riskier banks can obtain funds at costs that are not commensurate with their levels of risk. Unless deposit insurance is properly priced to reflect risk, banks gain if they take on more risk because they need not pay creditors a fair risk– adjusted return. A truly risk–based assessment discourages such risky behavior. Moral hazard arises in banking if the firm receiving a bank loan behaves differently because it has the loan than if it didn’t have the loan, in a way that harms the bank. Glass-Steagall Act: established the FDIC; was also known as the Banking Act of 1933. It prohibits commercial banks from engaging in the investment business. It prohibited banks from owning commercial firms and vice versa. It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression. Monetary Control Act: stated that they were the same C/B, S/B, S/L, C/U are all interchangeable. They are all the same now. The new form of disintermediation is MF Global; Corzine, the president of MF Global, would invest heavily in European debt and would borrow money to make investments. They went bankrupt b/c they didn’t have the money. Commercial Paper: usually matures in one to two months. It is often traded in the secondary market and used by investors as a liquid security for temporary cash flows. (debt securities) Repeal of Glass Steagall Act: o Citigroup gives up insurance underwriting o Banking, insurance, and securities industries remain structurally unchanged Evaluation of Banking Evolution: The McFadden Act allowed national banks to have branch locations if the bank was located in a state in which banks with state charters were allowed to have branches and allowed them to have additional offices in the same city as their main office. The impact is now more banks can have branches in more states. Investment Banking Function: Advisory, syndication, management, underwriting
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