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Financial Institutions Week III NOTES

by: Kwan

Financial Institutions Week III NOTES BU.231.710.W4.SP16

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Interest Rate
Financial Institutions
Roger Staiger
Class Notes
25 ?




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This 9 page Class Notes was uploaded by Kwan on Wednesday April 6, 2016. The Class Notes belongs to BU.231.710.W4.SP16 at Johns Hopkins University taught by Roger Staiger in Spring 2016. Since its upload, it has received 33 views. For similar materials see Financial Institutions in Finance at Johns Hopkins University.


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Date Created: 04/06/16
Institutions(III Tuesday,+April+5,+2013:35 Cf. Project+risk Portfolio+risk:+linear+covariance Lec:%Functions%of%the%Federal%Reserve Personal+Credibility 7CFA 7Words+to+differentiate+from+peers Federal+Reserve Timothy+Geithner:+sais+graduate Board+Presidents:+Vo+ Hawk;+Greenspa+ pigeon;+Bernanke,+Yellen+ 7 Dove Eg.+Prin=300,000;+3.7+15yr+(payment:+$2108);+2.75%+ 715yr+(payment:+$2035) =$73*12*15 Interview:+FOMC+minutes+latest HW3:+5+group+members History ! Federal Reserve Act – 1913 !Established reserve requirements for commercial banks choosing to become members !12 districts across U.S. specified ! City location for Federal Reserve District Bank Federal+Reserve+Districts+ Federal+Reserve+ Income+! Majority Income ! Interest on held U.S. Government Securities ! Services to Financial Institutions * Most income transferred to Treasury ! Board of Governors Components+ ! Federal Reserve District Banks ! Member Banks ! Federal OpenMarket Committee (FOMC) ! Advisory Committees Federal+District+Ban+s!New York Federal Reserve Bank ! Considered leading district bank ! Commercial banks choosing membership ! Required to purchase equity in respective District Bank ! Equity pays maximum coupon 600bps Federal+District+Ban+s!New York Federal Reserve Bank ! Considered leading district bank ! Commercial banks choosing membership ! Required to purchase equity in respective District Bank ! Equity pays maximum coupon 600bps Federal+District+Banks7+DirectorsNine in total per district ! Six elected by member banks ! Three bankers ! Three business men (nonbankers) ! Three selected by Board of Governors ! Appoint the president of their Federal District+Bank+ Federal+District+Bank7+Operations+ !Clear Checks !Replace old currency !Provide loans (through discount window)!Depository institutions only !Collect economic data !Research !Commercial banks and economic trends Member+Banks+ ! National banks (chartered by Comptroller of currency) required to be members ! State banks (charted at state level) not required to be members ! 35% of all banks members ! Represent 70% of bank deposits Board+of+Governors+ !AkaFederal Reserve Board ! Comprised 7 members with offices in Washington D.C. ! Appointed by President of U.S. ! 14-year nonrenewable term ! Federal Reserve Chairman (selected by President) ! 4-year term, renewable Federal+Reserve+Board+Presiden+ Paul Volcker (1979 – 1987) !Alan Greenspan (1987 – 2006) !BenBernanke (2006 – Present) Federal+Reserve+Board+Presiden+ Paul Volcker (1979 – 1987) !Alan Greenspan (1987 – 2006) !BenBernanke (2006 – Present) Federal+Reserve+Roles+ !Regulating Commercial Banks !Oversees operations of 12 District Banks !Establishes regulation on consumer finance ! Sets !Credit Controls !Margin Requirements !Controlling Monetary Policy !Revise reserve requirements imposed on depository institutions !Participates in decisions by FOMC Federal+Open+Market+Committee+ ! 7 members of the Board of Governors plus the presidents of five Fed district banks • ! New York Fed + 4 others • ! 7 Remaining Presidents of district banks participate but do+not+vote ! Chairman of FOMC: President of New York ! Goals ! Stable economic growth ! Price Stability Advisory+Committees+ One member from each district !Board of Directors for district elect committee member !Meets in least four times a year !Recommendations about economic and banking issues !Consumer advisory council (30 members) !Financial institutions industry and customers !Thrift Institutions advisory council (12 members) !Banks,Savings and Loans, and credit unions Advisory%Committees% •Regulates+member+banks+and+bank+holding+companies Federal+Reserve+Components+ Board%of%Governors% Supervision+ •Conducts+open+market+operations+ Federal%Reserve%District%Banks% Federal+Reserve+Components+ Board%of%Governors% Supervision+ •Conducts+open+market+operations+ Federal%Reserve%District%Banks% •Clear+Checks •Replace+Currency •Provide+loans+to+depository+institutions+ FOMC% Open+Market+Operations+ ! FOMC meets eight times/year ! Target money supply growth level and interest rate level are determined ! Actions to implement monetary policy dictated by FOMC ! Special circumstance may require additional meeting (live or phone call) Beige+Book+ !Sent approximately two weeks prior to FOMC meeting !Consolidated report of regional economic data from 12 districts !Each district responsible to report on economic conditions in respective region !Beige book is aggregate of these individual reports FOMC+Economic+Data+ !Wages !Consumer Prices !Unemployment !Gross Domestic Product !Business Inventories !Foreign Exchange Rates !Interest Rates !Financial Market Conditions FOMC+Additional+Data+ !Production Levels !Business Investment !Residential Construction !International Trade !International Economic Growth *+Used+to+predict+economic+growth+and+inflation+in+U.S.+ Fed+Trading+Desk+ AkaOpen Market Desk !Policy directive required for change in monetary policy !FOMC states target for Fed Funds Rate !Rate charged by banks on short- *+Used+to+predict+economic+growth+and+inflation+in+U.S.+ Fed+Trading+Desk+ AkaOpen Market Desk !Policy directive required for change in monetary policy !FOMC states target for Fed Funds Rate !Rate charged by banks on short- term loans to each other+ !Rate determined by banks but subject to Supply/Demand for funds in banking system !Buying/Selling !Open-Market-Operations- Policy+Directive+ !Determines-amount-to-buy-or-sell-of-Treasuries-in-secondary-market-by- Trading-Desk- !Trading-Desk-operations-continually-!Adjusting-money-supply-to- achieve-directive- Fed+Purchase+of+Securities+ !Lower-Fed-Funds-Rate !Purchase-Treasuries-in-secondary-market- !Increase-Money-Supply !Increases-liquidity-in-secondary-market- !Raise-Fed-Funds-Rate !Sell-Treasuries-in-secondary-market- !Decrease-Money-Supply !Decreases-liquidity-in-secondary-market- Repurchase+Agreements+(Repos)+ !Purchase-of-government-securities-from-securities-dealer-with- agreement-to-sell-back-at-specified-time-in-the-future- !Used-during-holidays-and-other-periods-to-correct-for-temporary- imbalances- !Repos-can-go-either-direction- Open+Market+Operations+ !Dynamic !Increase/decrease-level-of-funds- !Defensive !Offset-impact-of-other-conditions-that-affect-the- level+of+funds,+e.g.+holiday+traffic+ Open+Market+Operations+ !Dynamic !Increase/decrease-level-of-funds- !Defensive !Offset-impact-of-other-conditions-that-affect-the- level+of+funds,+e.g.+holiday+traffic+ Fed+Operations+&+Interest+Rates+ !FFR-could-decline-due-to-surplus-funds-of-some-member-banks- !Banks-may-offer-loans-at-lower-rates-to-“work-the-capital”- !Banks-may-lower-rates-on-deposit-accounts-as-cash-rich-at-moment- !Bank-deposit-rates- Treasury+Yields+ !As-yields-decline-investors-will-(may)-seek-alternate-investments-with- higher-yields- !Treasury-yields-influence-!Bank-lending-rates- !Alternate-investment-rates-!Corporates- Roger+Staiger, 27+of+35+ !Sovereigns- Adjusting+Reserve+Requirement+Ratio+ !Reserve-Requirement-Ratio-(Monetary-Tool)-!Proportion-of-their- deposit-accounts-that-must-be- held+as+required+reserves+ !Set-by-Board-of-Governors- !Depository-Institutions-!8-– 12%-historically- !Depository-Institutions-Deregulation-and-Monetary-Control-Act- (DIDMCA)- !1980:-All-depository-institutions-subject-to-Fed’s-reserve-requirements- !Vary-by-country- Country( Required( Roger+Staiger, 29+of+29+ $100+ $90+ 00+n▯1 Reserve+Requirements+ !Reserve-on-transaction-accounts- 10.0%+ $81+ where%: CF+▯InitialDeposit Rsv+Req+ 0 RsvReq+▯ Reserve Requirement (%) Australia United+Kingdom+Eurozone+United+States+ 0.0%+0.0%+2.0%+ Wealth+Creation+ ▯▯ CF ▯1▯ RsvReq▯▯ CF n% Discount+Rate+ !Aka-Primary-Credit-Lending-Rate-!Typically-100bps-over-FFR- !Normal-Historic-markets-(pre-2008)-!Negative-stigma-with-borrowing- from-Fed- !Higher-rate-than-FFR-from-member-banks-!Fed-is-lender-of-last-resort- !Primary/Secondary-Credit-considerations- Financial+Armageddon+Fed+Creations+ from-Fed- !Higher-rate-than-FFR-from-member-banks-!Fed-is-lender-of-last-resort- !Primary/Secondary-Credit-considerations- Financial+Armageddon+Fed+Creations+ !Primary-Dealer-Credit-Facility-!Term-Auction-Facility !Term-Securities-Lending-Facility-!Commercial-Paper-Facility- Primary+Dealer+Credit+Facility+ !Allowed-primary-dealers-(financial-intermediaries-for-bonds-and-other- securities)-access-to-overnight-funds-from-the-Fed- !Collateral-was-required-!InvestmentZgrade-corporate-securities- !Municipal-bonds !HighZrated-Mortgage-Backed-Securities- !Available-provided-it-continued-to-assist-the-functions-of-the-financial- market- Term+Auction+Facility+ !Allows-despository-institutions-to-borrow-funds-from-the-Fed-for-up-to- 35Zdays- !Fed-makes-specified-funds-available-!Interested-depository- institutions-can-participate- in+an+auction+to+bid+what+willing+to+pay+ !Funds-allocated-on-prevailing-market-interest-rates- !Borrowers-must-post-collateral-and-be-strong-financially- Term+Securities+Lending+Facility+(TSLF)+ !Banks-package-highZrisk-MBS-and-other-loans-and-swap-them-with-the- Fed-for-Treasuries-for-periods-up-to-28-days- !At-28-days,-swap-is-reversed-!During-swap-banks-have-more-liquid- securities,+i.e.+banks+are+more+liquid+ Commercial+Paper+Facility+ !Participated-in-commercial-paper-(shortZ term-debt)-market- !Allowed-Fed-to-invest-in-commercial-paper-issued-by-highly-rated-firms- !Intended-to-provide-liquidity-and-confidence-into-commercial-market- after-Lehman-collapse-


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