p.2
Role of Financial Intermediaries
What is the special role of financial intermediaries (FIs) in the financial system?
They facilitate the flow of funds between savers and borrowers, enhancing efficiency in the financial markets.
p.2
Regulatory Environment for Financial Institutions
Why do financial intermediaries receive special regulatory attention?
Due to their critical role in maintaining financial stability and protecting consumers.
p.2
Functions of Financial Institutions
What functions do financial intermediaries provide?
They provide services such as risk management, liquidity provision, and information processing.
p.1
Functions of Financial Institutions
What is the primary role of financial institutions?
To facilitate the flow of funds between savers and borrowers.
p.1
Regulatory Environment for Financial Institutions
What does the regulatory environment for financial institutions ensure?
Stability, transparency, and protection for consumers and investors.
p.1
Regulatory Environment for Financial Institutions
Who typically oversees the regulatory environment for financial institutions?
Government agencies and regulatory bodies.
p.1
Safety and Soundness Regulation
What is one key aspect of financial regulation?
Preventing systemic risk in the financial system.
p.1
Functions of Financial Institutions
How do financial institutions contribute to economic growth?
By providing credit and facilitating investments.
p.10
Brokerage and Asset Transformation
How do financial institutions finance their purchases of primary securities?
By selling financial claims to household investors and other sectors in the form of deposits, insurance policies, etc.
p.20
Monetary Policy and Credit Allocation
What type of money does the Federal Reserve directly control?
Outside money, such as notes and coins.
p.33
Impact of Financial Services Modernization Act
What factors contributed to the wave of mortgage defaults in the subprime market?
Falling house prices, rising interest rates, and rising mortgage costs.
p.18
Safety and Soundness Regulation
If a bank has 10 percent of its assets funded by its own capital, how much can it lend to any one party?
No more than 1.5 percent of its assets.
p.16
Regulatory Environment for Financial Institutions
Why do financial institutions (FIs) receive special regulatory attention?
Due to the negative externalities of FI failure, which can impose costs on other economic agents.
p.12
Monitoring and Liquidity Costs
What does liquidity cost refer to for savers?
The cost related to the ease of converting an investment into cash without significant loss in value.
p.20
Monetary Policy and Credit Allocation
How do financial institutions view required reserves?
As similar to a tax and a positive cost of undertaking intermediation.
p.19
Safety and Soundness Regulation
How does a higher net regulatory burden affect financial institutions?
It leads to more inefficient production of financial services from a private owner's perspective.
p.13
Monitoring and Liquidity Costs
How do FIs act as information producers?
They create new secondary securities that enhance monitoring capabilities.
p.14
Functions of Financial Institutions
What is a key advantage of secondary claims issued by financial institutions (FIs)?
They have less price risk.
p.27
Functions of Financial Institutions
What does the percentage share of assets of financial institutions in the United States represent?
The distribution of assets held by various financial institutions over time.
p.37
Functions of Financial Institutions
What is the significance of the largest banks?
They play a crucial role in the global financial system.
p.9
Brokerage and Asset Transformation
What is the role of a financial institution (FI) when acting as a pure broker?
It acts as an agent for the saver by providing information and transaction services.
p.14
Functions of Financial Institutions
How do financial institutions (FIs) have an advantage over households in terms of investment?
FIs can diversify due to their size.
p.14
Functions of Financial Institutions
What allows financial institutions to diversify away significant amounts of portfolio risk?
Exploiting the benefits of size and having returns on different investments that are not perfectly positively correlated.
p.27
Functions of Financial Institutions
Why is the percentage share of assets important for financial institutions?
It helps in understanding the evolution and dominance of different types of financial institutions.
p.21
Regulatory Environment for Financial Institutions
What sectors does Credit Allocation Regulation support?
Socially important sectors, such as housing and farming.
p.11
Brokerage and Asset Transformation
Why do FIs aim to transform primary securities into secondary securities?
To create more attractive investment options for household savers and generate profit.
p.34
Enterprise Risk Management and FinTech Trends
What event led to a renewed focus on Enterprise Risk Management?
The recent financial crisis.
p.9
Brokerage and Asset Transformation
How does a financial institution fulfill its brokerage function?
By reducing transaction and information costs or imperfections between households and corporations.
p.34
Enterprise Risk Management and FinTech Trends
What shift occurred in risk management focus after the financial crisis?
Building a strong risk culture supported by government arrangements.
p.29
Brokerage and Asset Transformation
What does the term 'secondary market' refer to in the context of bank loans?
A market where existing bank loans are bought and sold.
p.17
Safety and Soundness Regulation
What is the purpose of safety and soundness regulation?
To enhance the net social welfare benefits of financial intermediaries’ services.
p.17
Monetary Policy and Credit Allocation
What type of regulation involves managing the money supply and interest rates?
Monetary policy regulation.
p.17
Monetary Policy and Credit Allocation
What does credit allocation regulation aim to achieve?
To enhance the net social welfare benefits of financial intermediaries’ services.
p.17
Consumer and Investor Protection Regulations
What is the goal of investor protection regulation?
To safeguard investors in financial markets.
p.4
Functions of Financial Institutions
What is the impact of Financial Institutions (FIs) on funds flow between households and corporations?
Without FIs, there is a low level of funds flow.
p.14
Functions of Financial Institutions
Why are demand deposits considered more attractive to small investors?
Because they are more liquid.
p.34
Enterprise Risk Management and FinTech Trends
What does Enterprise Risk Management (ERM) prioritize?
The impact of risks on an interrelated portfolio basis.
What is the primary purpose of FinTech?
To deliver financial solutions that compete with traditional financial methods.
p.17
Consumer and Investor Protection Regulations
What is the focus of consumer protection regulation?
To protect consumers in financial transactions.
p.11
Brokerage and Asset Transformation
What is the process by which FIs transform primary securities into secondary securities?
They package or modify the securities to make them more appealing to household savers.
p.11
Brokerage and Asset Transformation
How can financial institutions (FIs) purchase direct or primary securities issued by corporations?
By participating in the primary market where these securities are initially offered.
p.26
Impact of Financial Services Modernization Act
What significant legislation did the U.S. Congress pass to address changing dynamics in financial services?
The Financial Services Modernization (FSM) Act.
p.32
Brokerage and Asset Transformation
What does the originate to distribute model allow banks to do?
Retain little or no part of the loans, transferring default risk.
p.33
Monetary Policy and Credit Allocation
What action did the Federal Reserve take in response to inflation fears?
Started to raise interest rates.
p.30
Monetary Policy and Credit Allocation
What event contributed to the housing market bubble starting in 2001?
The terrorist attacks of 9/11.
p.20
Monetary Policy and Credit Allocation
What is the role of banks in monetary policy?
Banks transmit monetary policy from the central bank to the rest of the economy.
p.32
Brokerage and Asset Transformation
What is asset securitization?
A process that allows banks to sell loans and transfer risk.
p.30
Regulatory Environment for Financial Institutions
What was the immediate regulatory response to the 9/11 attacks?
To create stability in the financial markets by providing liquidity to financial institutions.
p.22
Consumer and Investor Protection Regulations
What is one effect of the Home Mortgage Disclosure Act on regulatory burden?
It increases the information production cost of regulatory compliance.
p.21
Regulatory Environment for Financial Institutions
What is a potential downside of price and quantity restrictions in credit allocation?
They can be harmful to financial institutions by increasing private costs.
p.15
Functions of Financial Institutions
What is maturity intermediation in financial institutions?
It involves producing long-term contracts while raising funds with short-term liability contracts.
p.20
Monetary Policy and Credit Allocation
Why do financial institutions hold cash reserves?
To meet the liquidity and transaction needs of their customers.
p.28
Impact of Financial Services Modernization Act
What was the consequence of the shift in financial practices on asset quality?
Degraded quality and increased risk.
p.19
Safety and Soundness Regulation
What is meant by 'net regulatory burden'?
The difference between private benefits from regulation and the private costs of adhering to it.
p.19
Safety and Soundness Regulation
Why is producing information for regulators costly for financial institutions?
It involves the time of managers, lawyers, and accountants.
p.9
Brokerage and Asset Transformation
What services do full-service securities firms provide?
They conduct investment research, make investment recommendations, and facilitate the purchase or sale of securities for commission or fees.
p.29
Brokerage and Asset Transformation
What is the focus of the Bank Loan Secondary Market Trading from 1991 to 2018?
The trading of bank loans in the secondary market during that period.
p.25
Impact of Financial Services Modernization Act
What trend is observed in the share of depository institutions in the United States?
There is a decline in the share of depository institutions.
p.36
Functions of Financial Institutions
What is a significant challenge faced by US financial institutions?
Increased competition from foreign financial institutions.
p.22
Consumer and Investor Protection Regulations
What is the primary purpose of the Home Mortgage Disclosure Act (HMDA)?
To prevent discrimination in lending based on age, race, sex, or income.
p.7
Role of Financial Intermediaries
What role do brokers play in the financial system?
They act as intermediaries between buyers and sellers.
p.5
Monitoring and Liquidity Costs
What are liquidity costs?
The ease of converting an asset into cash.
p.4
Monitoring and Liquidity Costs
What are monitoring costs in the context of Financial Institutions?
Costs associated with screening and monitoring borrowers.
p.10
Brokerage and Asset Transformation
What are the financial claims of FIs considered?
Secondary securities, as they are backed by primary securities issued by commercial corporations.
p.12
Functions of Financial Institutions
Why are Financial Institutions important to the economy?
They help resolve costs faced by savers, making investments in corporate securities more accessible and attractive.
p.32
Impact of Financial Services Modernization Act
What was the result of the changes in banking models?
Deterioration in credit quality and increased consumer and corporate leverage.
p.30
Monetary Policy and Credit Allocation
What was the effect of low interest rates and increased liquidity on debt financing?
It resulted in a rapid expansion in consumer, mortgage, and corporate debt financing.
p.19
Safety and Soundness Regulation
Who monitors and regulates DIF participants?
The FDIC (Federal Deposit Insurance Corporation).
p.20
Monetary Policy and Credit Allocation
What is the optimal level of cash reserves for well-managed financial institutions?
Normally low, especially if required reserves earn little or no interest.
p.8
Functions of Financial Institutions
How do financial institutions act as asset transformers?
By issuing more attractive financial claims to household savers.
p.8
Functions of Financial Institutions
What do financial institutions do to finance the purchase of primary securities?
They sell financial claims to household investors and others.
p.24
Regulatory Environment for Financial Institutions
What are Type 6 and Type 9 licenses related to?
They are types of licenses for financial institutions.
p.13
Monitoring and Liquidity Costs
What role do financial institutions (FIs) play as delegated monitors?
FIs monitor investments on behalf of investors, reducing agency costs.
p.13
Monitoring and Liquidity Costs
How does short-term debt compare to long-term bonds in terms of information production?
Short-term debt allows for more frequent information production and monitoring.
What are some examples of services provided by FinTech?
Cryptocurrencies (e.g., bitcoin) and blockchain.
p.5
Monitoring and Liquidity Costs
How do economies of scale benefit Financial Institutions (FIs)?
They reduce costs for screening and monitoring borrowers.
p.22
Consumer and Investor Protection Regulations
What significant data did the FFIEC process in 2017?
Information on as many as 7.3 million mortgage transactions.
p.7
Functions of Financial Institutions
What is a common source of cash for financial institutions?
Deposits and insurance policies.
p.6
Monitoring and Liquidity Costs
How do economies of scale benefit Financial Institutions in terms of monitoring?
They reduce costs for FIs to screen and monitor borrowers.
p.26
Impact of Financial Services Modernization Act
What activities can financial services holding companies engage in?
Banking activities, insurance activities, and securities activities.
p.6
Monitoring and Liquidity Costs
What does liquidity cost refer to?
The ease of converting an asset into cash.
p.8
Functions of Financial Institutions
What is the brokerage function of financial institutions?
Acts as an agent for the saver by providing information and transaction services.
p.18
Safety and Soundness Regulation
What does TARP stand for?
Troubled Asset Relief Program.
p.16
Regulatory Environment for Financial Institutions
What can be a consequence of bank failures?
They may destroy household savings and restrict a firm's access to credit.
p.16
Regulatory Environment for Financial Institutions
What risk do insurance company failures pose to households?
They may leave households exposed to catastrophic illnesses and sudden drops in income during retirement.
p.18
Safety and Soundness Regulation
What does SIPC stand for?
Securities Investors Protection Corporation.
p.10
Brokerage and Asset Transformation
What do financial institutions (FIs) purchase from corporations?
Financial claims such as equities, bonds, and other debt claims called primary securities.
p.11
Brokerage and Asset Transformation
What is a primary security?
A security that is issued directly by a corporation to raise capital.
p.18
Safety and Soundness Regulation
What is the primary goal of Safety and Soundness Regulation?
To protect against the risk of financial institution failure.
p.18
Safety and Soundness Regulation
What is the maximum percentage of equity that can be lent to a single borrower?
No more than 15 percent of equity.
p.31
Functions of Financial Institutions
What are 'teaser' rates in the context of adjustable rate mortgages (ARMs)?
Relatively low initial interest rates offered to boost earnings.
p.23
Consumer and Investor Protection Regulations
Which act was established in 1940 to regulate investment companies?
Investment Company Act of 1940.
p.28
Impact of Financial Services Modernization Act
How did the shift to 'originate and distribute' affect risk management?
It affected incentives to monitor and control risk.
p.31
Functions of Financial Institutions
What is the subprime market?
A market where banks offer loans to borrowers with poor credit ratings.
p.8
Functions of Financial Institutions
What is one benefit of the brokerage function?
Results in economies of scale.
p.28
Impact of Financial Services Modernization Act
What market bubble contributed to the financial crisis?
The housing market bubble.
p.28
Impact of Financial Services Modernization Act
What did the housing market bubble encourage?
The subprime market and more exotic mortgages.
p.24
Regulatory Environment for Financial Institutions
What role does competition play in the context of financial institutions?
It influences entry regulations and market dynamics.
p.13
Monitoring and Liquidity Costs
What advantage do short-term contracts provide to FIs?
They allow for more control and frequent monitoring of investments.
p.32
Functions of Financial Institutions
What is the traditional banking model mentioned in the text?
The originate and hold model.
p.9
Brokerage and Asset Transformation
What effect does the brokerage function of financial institutions have on savings?
It encourages a higher rate of savings than would otherwise exist.
p.26
Impact of Financial Services Modernization Act
What is promoted as the biggest change in the regulation of financial institutions in 70 years?
The Financial Services Modernization (FSM) Act.
p.22
Consumer and Investor Protection Regulations
How many institutions provided data to the FFIEC in 2017?
More than 5,852 institutions.
p.33
Monitoring and Liquidity Costs
Why did many low-income households struggle with mortgage commitments?
Because many subprime mortgages had adjustable rates that increased costs.
p.28
Impact of Financial Services Modernization Act
What was a significant shift in financial practices leading up to the financial crisis?
From 'originate and hold' to 'originate and distribute'.
p.33
Impact of Financial Services Modernization Act
What was the effect of mortgage defaults and foreclosures on house prices?
They reinforced the downward trend in house prices.
p.12
Monitoring and Liquidity Costs
What is the monitoring cost in the context of investing in corporate securities?
The cost associated with overseeing and evaluating the performance of the investment.
p.23
Consumer and Investor Protection Regulations
What is the significance of the Wall Street Reform and Consumer Protection Act of 2010?
It is key legislation aimed at enhancing investor protection.
p.30
Monetary Policy and Credit Allocation
What types of debt saw a dramatic rise in demand following the financial crisis?
Residential mortgages and credit card debt.
p.15
Monetary Policy and Credit Allocation
What is credit allocation in the context of financial institutions?
It refers to directing funds to areas of special need, such as home mortgages.
p.15
Functions of Financial Institutions
What is meant by intergenerational transfers or time intermediation?
It involves transferring resources across different time periods, often for savings or investment purposes.
p.15
Functions of Financial Institutions
What type of services do financial institutions provide related to payments?
They offer payment services to facilitate transactions.
p.15
Functions of Financial Institutions
How do financial institutions reduce transaction costs?
By streamlining processes and eliminating fixed commissions.
p.13
Monitoring and Liquidity Costs
What are agency costs that investors are exposed to?
Costs arising from conflicts of interest between investors and those managing their investments.
p.13
Monitoring and Liquidity Costs
What is an example of economies of scale in obtaining information?
A small investor finds a $100 broker's report expensive for a $10,000 investment, while it is trivial for an FI managing $10 million.
p.17
Regulatory Environment for Financial Institutions
What does entry and chartering regulation involve?
Regulating the entry of new financial institutions and their operational charters.
p.26
Impact of Financial Services Modernization Act
What barriers did the FSM Act repeal?
The 1933 Glass-Steagall barriers between commercial banking, insurance, and investment banking.
p.31
Functions of Financial Institutions
What happened as the demand for mortgage debt grew?
Financial institutions began lowering their credit quality cut-off points.
p.7
Brokerage and Asset Transformation
How do asset transformers function within financial institutions?
They convert deposits and insurance policies into loans and investments.
p.12
Functions of Financial Institutions
What is the primary role of Financial Institutions (FIs) in relation to corporate securities?
FIs purchase direct or primary securities issued by corporations and transform them into secondary securities more attractive to household savers.
p.31
Functions of Financial Institutions
Who was primarily targeted in the subprime market?
Individuals with poor credit ratings who were previously excluded from the market.
p.26
Impact of Financial Services Modernization Act
What type of companies did the FSM Act allow for the creation of?
Financial services holding companies.
p.32
Monitoring and Liquidity Costs
What happens if a borrower does not default shortly after loan issuance?
The issuing bank can ignore longer-term credit risk concerns.
p.20
Monetary Policy and Credit Allocation
What constitutes the bulk of the money supply?
Inside money, which includes deposits.
p.19
Safety and Soundness Regulation
What does monitoring and surveillance in safety and soundness regulation involve?
On-site examinations and review of accounting statements.
p.18
Safety and Soundness Regulation
What are minimum capital requirements designed to ensure?
The financial stability of institutions.
p.24
Regulatory Environment for Financial Institutions
What does regulation define regarding financial institutions?
The scope of permitted activities.
p.18
Safety and Soundness Regulation
In the event of default, who gets paid first?
Debt holders are paid first, while shareholders are paid last.
p.18
Safety and Soundness Regulation
What is the purpose of guaranty funds like the Deposit Insurance Fund (DIF)?
To protect depositors in case of bank failure.
p.15
Functions of Financial Institutions
What is denomination intermediation?
It allows individual investors to invest in bonds that they might not be able to afford at face value, such as 1 million.
p.13
Monitoring and Liquidity Costs
What are information costs in the context of financial institutions?
Costs associated with obtaining and processing information for investment decisions.
p.13
Monitoring and Liquidity Costs
Why do FIs have a greater incentive to monitor investments?
Because they manage larger sums of money and have more at stake.
p.13
Monitoring and Liquidity Costs
What is the effect of financial institutions on information asymmetry?
FIs help reduce information asymmetry between investors and managers.
p.32
Monitoring and Liquidity Costs
What was a bank's concern under the originate and hold model?
Fear that loans to low credit quality borrowers would default.
p.33
Monetary Policy and Credit Allocation
What significant event occurred in housing prices in 2006?
Housing prices started to fall.
p.4
Monitoring and Liquidity Costs
What role do economies of scale play for Financial Institutions?
They reduce monitoring costs for screening and monitoring borrowers.
p.23
Consumer and Investor Protection Regulations
What is the primary aim of Investor Protection Regulation?
To protect investors that use investment banks directly or indirectly.
p.21
Regulatory Environment for Financial Institutions
What was the purpose of the Community Reinvestment Act (CRA)?
To promote equality among borrowers with different income levels.
p.25
Impact of Financial Services Modernization Act
What legislation is associated with the changing dynamics of financial institutions?
Financial Services Modernization Act.
p.10
Brokerage and Asset Transformation
What is the role of financial institutions in the market?
They are independent market parties that create financial products and transform financial risk for their clients.
p.30
Monetary Policy and Credit Allocation
How did the Federal Reserve respond to the financial crisis after 9/11?
By lowering short-term interest rates and providing lender of last resort funds to nonbank financial institutions.
p.26
Impact of Financial Services Modernization Act
What has become the dominant form of financial institution in terms of total assets after the FSM Act?
The financial services holding company.
p.24
Regulatory Environment for Financial Institutions
How do entry impediments affect financial institutions?
They affect profitability and the value of the charter.
p.16
Regulatory Environment for Financial Institutions
What are negative externalities in the context of financial institutions?
Actions by an economic agent that impose costs on others, where private benefits lead to public costs.
p.16
Functions of Financial Institutions
What are some institution-specific functions provided by financial institutions?
Money supply transmission, credit allocation, and payment services.
p.21
Regulatory Environment for Financial Institutions
What is the Qualified Thrift Lender (QTL) test requirement?
65 percent of assets must be in residential mortgages.
p.29
Brokerage and Asset Transformation
What is the significance of the years 1991 to 2018 in bank loan trading?
It marks a period of evolution and growth in the bank loan secondary market.
p.25
Regulatory Environment for Financial Institutions
What may be contributing to the decline of depository financial institutions?
The net regulatory burden imposed on depository financial institutions.
p.21
Regulatory Environment for Financial Institutions
What did usury laws and Regulation Q set limits on?
Maximum rates that can be charged on mortgages and consumer loans.
p.11
Brokerage and Asset Transformation
What is a secondary security?
A security that is created from primary securities and sold to investors in the secondary market.
p.23
Consumer and Investor Protection Regulations
What are some abuses that Investor Protection Regulation protects against?
Insider trading, lack of disclosure, malfeasance, and breach of fiduciary responsibilities.
p.12
Monitoring and Liquidity Costs
What are the three costs that FIs help resolve for savers investing in corporate securities?
Monitoring cost, liquidity cost, and pricing cost.
p.15
Functions of Financial Institutions
What significant change occurred on May 1, 1975, regarding equity trades on the NYSE?
Fixed commissions for equity trades were abolished.
p.31
Monitoring and Liquidity Costs
What risk is associated with adjustable rate mortgages (ARMs)?
Substantial increases in rates could occur after the initial rate period if market rates rise.
p.21
Regulatory Environment for Financial Institutions
How can net private costs of restrictions affect financial institutions?
They can add to costs and reduce the efficiency of intermediation.
p.6
Monitoring and Liquidity Costs
What is price risk?
The risk that the sale price of an asset will be lower than the purchase price of that asset.
p.15
Monetary Policy and Credit Allocation
How do financial institutions contribute to the transmission of monetary policy?
They help implement and communicate monetary policy changes to the economy.
p.12
Monitoring and Liquidity Costs
What is pricing cost in the context of corporate securities?
The cost associated with determining the fair value of the securities.
p.24
Regulatory Environment for Financial Institutions
Which act is significant in regulating financial institutions?
Financial Services Modernization Act of 1999.
p.24
Regulatory Environment for Financial Institutions
What aspects does the Financial Services Modernization Act affect?
Charter value and size of net regulatory burden.
p.16
Regulatory Environment for Financial Institutions
What is the net regulatory burden?
The difference between the private costs of regulations and the private benefits for producers of financial services.
