Int Macro Econ Bank Capital
Int Macro Econ Bank Capital Economics 5570
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This 3 page Class Notes was uploaded by Ashish Kondoju on Saturday March 12, 2016. The Class Notes belongs to Economics 5570 at Wayne State University taught by Shuan Jung in Spring 2016. Since its upload, it has received 40 views. For similar materials see Intermediate Macroeconomics in Economcs at Wayne State University.
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Date Created: 03/12/16
Bank Capital Bank capital, leverage, and capital requirements Capital requirement: minimum amount of capital mandated by regulators intended to ensure banks will be able to pay off depositors higher for banks that hold more risky assets 2008-2009 financial crisis: Losses on mortgages shrank bank capital, slowed lending, exacerbated the recession. Govt injected billions of dollars of capital into banks to ease the crisis and encourage more lending. Monetary base, B = C + R controlled by the central bank Reserve-deposit ratio, rr = R/D depends on regulations & bank policies Currency-deposit ratio, cr = C/D depends on households’ preferences The Fed can change the monetary base using: open market operations (the Fed’s preferred method of monetary control) To increase the base, the Fed could buy government bonds, paying with new dollars. the discount rate: the interest rate the Fed charges on loans to banks To increase the base, the Fed could lower the discount rate, encouraging banks to borrow more reserves. The instruments of monetary policy The Fed can change the reserve-deposit ratio using: reserve requirements: Fed regulations that impose a minimum reserve-deposit ratio To reduce the reserve-deposit ratio, the Fed could reduce reserve requirements. interest on reserves: the Fed pays interest on bank reserves deposited with the Fed To reduce the reserve-deposit ratio, the Fed could pay a lower interest rate on reserves. CASE STUDY: Quantitative Easing Quantitative easing: the Fed bought long-term govt bonds instead of T-bills to reduce long-term rates. The Fed also bought mortgage-backed securities to help the housing market. But after losses on bad loans, banks tightened lending standards and increased excess reserves, causing money multiplier to fall. If banks start lending more as economy recovers, rapid money growth may cause inflation. To prevent, the Fed is considering various “exit strategies.” From 1929 to 1933: over 9,000 banks closed money supply fell 28% This drop in the money supply may not have caused The Great Depression, but certainly contributed to its severity. Money Definition: the stock of assets used for transactions Functions: medium of exchange, store of value, unit of account Types: commodity money (has intrinsic value), fiat money (no intrinsic value) Money supply controlled by central bank Fractional reserve banking creates money because each dollar of reserves generates many dollars of demand deposits. The money supply depends on the: monetary base currency-deposit ratio reserve ratio The Fed can control the money supply with: open market operations the reserve requirement the discount rate interest on reserves Bank capital, leverage, capital requirements Bank capital is the owners’ equity in the bank. Because banks are highly leveraged, a small decline in the value of bank assets can have a huge impact on bank capital. Bank regulators require that banks hold sufficient capital to ensure that depositors can be repaid.