financial intermediaries in the united states: what they are. what they do
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Financial Intermediaries in the United States: What they are. What they do. Why the Banking Industry Is Regulated. Banks hold money. Banks provide credit. The government focuses on information problems and liquidity risk. - PowerPoint PPT PresentationTRANSCRIPT
Financial Intermediaries in the United States:
What they are. What they do.
Why the Banking Industry Is Regulated• Banks hold money. Banks provide credit.
• The government focuses on information problems and liquidity risk.
• Bank run: many depositors withdraw their deposits and the bank’s funds are exhausted.
• Contagion: spreading of bad news about one bank to include other banks.
• Bankers’ private information limits depositors’ ability to sort out weak banks.
Government Intervention in the Banking Industry
• Federal Reserve was created to serve as a lender of last resort and issue currency.
Since 1863 limits on banks’ ability to open branches have been imposed.
• Numerous bank failures led to the creation of the Federal Deposit Insurance Corporation.– Moral hazard problems caused by bank insurance
increased the need for monitoring.
• Interest rate ceilings (Regulation Q) were intended to buttress bank profits.
Crisis and ResponseFinancial Crises We Have Known
• Stock Market Crash, 1929
• Britain off Gold, Sept. 1931
• Banking Crises, 1932-33
• Credit Crunch, 1966
• Penn Central Bankruptcy, 1970
• Continental Illinois, 1975
• Hunt Brothers Silver Corner
• Franklin National Bank, 1984
• LDC Debt Crisis, 1980s
• Stock Market Crash, 1987
• S & L Debacle, 1989 – 91
• Penn Square/Oil Patch/Junk Bonds
• Tequila Crisis, 1994-5
• Asian Contagion, 1997 – 8
• Long – Term Capital Management, 1998
• 911
• Enron, 2001
• Argentina, 2001
International Banking ServicesBranches, Agency Offices, Edge Act Corps, IBFs
Eurodollar Markets (LIBOR)
The Money Supply ProcessM = C + D and B = Bnon + BR = C + R
so M = {[1 + (C/D)] / [(C/D) + (R/D) + (ER/D)]} x B = m x B
The Effect of Open Market Operations
Multiple Deposit Creation