Money and Banking
Bankers hold more liquid assets than most business firms. Why?
As is the case for all businesses, one obvious adverse liquidity outcome for banks is the inability to pay liabilities as they fall due. And, liquidity risk is even broader, including the realization of a market loss as a result of the premature or forced sale of assets to raise liquidity and loss of business opportunity or franchise due to a lack of liquidity.
But, banks face even more difficult liquidity challenges than do most businesses. Banks protect customers against liquidity problems by taking in money which can be withdrawn on demand or at short notice, and by providing committed loan facilities to corporate customers and overdraft facilities to personal sector customers. By insuring others against liquidity risk, banks become exposed to it themselves because of the mismatch between the term structure of the assets and liabilities on the balance sheets, generally illiquid loans funded by highly liquid deposits, and on-demand off-balance sheet commitments.
To function and prosper, banks must not maintain a prudent margin of solvency through liquid assets to maintain market and customer confidence. One potential trigger for deposit runs is fear that a bank may be insolvent. Therefore, it is essential that the business and balance sheets of banks to be fundamentally sound, adding even greater pressure for banks to maintain more liquidity than most businesses.
Academics rely on research on banking scale efficiency that shows that the average cost curve is a flat U-shape. This means that large banks getting even larger would be inconsistent with cost minimization. However, a wave of consolidation has swept through the U.S. banking industry, indicating that bankers obviously feel that there are economies of scale in banking.
Bankers may be right given the wave of changes in the banking industry that have impacted production functions and cost curves. For example, the Riegle-Neal Interstate Banking and Branches Efficiency Act, which permits interstate branching effective 1997, may have changed the underlying production function of banking firms. Now that banks do not need to set up separately capitalized banks in different states to deliver their financial products, it could be less costly to expand outputs. Further, rapid advancements in information technology and the sharp drop in the cost of computers and technology may have shifted the average cost curve. And banks have altered to cost of offering certain types of banking products by cultivating alternative delivery channels for certain financial products, for example, through supermarkets, telephone lines, and the Internet.
'As a result of fewer geographic barriers, rapid technological…
economic crisis in Europe and the increasing costs for European countries to borrow money and bail out other Euro countries in financial distress. The EU nations that use the Euro have experienced a crisis among certain countries with high debt requiring bailouts for Greece and Ireland and the likelihood that Portugal and Spain may also need a bailout. Postponing the restructuring of high interest debts has led to further
Money and Banking Monetary Policy If the central bank has an interest rate target, why would an increase in the demand for bank reserves lead to a rise in the money supply? An increase in the demand for reserves will raise the central bank's fund target. So as to preclude such a possibility, the central bank will purchase bonds, thus increasing the amount of non-borrowed reserves. As a result, this shifts the supply
Offenders here might physically transport cash to those countries in small amounts that will not violate customs regulations. However, this method is not viable for transferring large amounts of money. Very large amounts of money can be informally transferred through a network of bookees across a number of different countries. Such bookees possess or have access to large amounts of cash. Bookees in the destination country can disburse money to
Money Train Scenario Reserve requirements affect the amount of money in the banking system. My actions will increase the amount of money in the banking system. This means that banks can lend this money, which should increase the amount of economic activity. Under this scenario, increased growth will offset the negative impacts we are seeing. Reserve requirements are a good tool to use when the economy will benefit from increased investment. REDUCE
Money Interest Rates important individuals businesses making decisions finance purchases. The articles deal assessing conditions finance purchases important aspects policy. Allen, Bruce. Interest Rates The high unemployment and inflation rates are some of the most important factors that threaten to affect the stability of the U.S. economy. As a consequence, the Federal Reserve is forced to orient its strategy towards reducing the money supply. There are several methods and tools that the
There are two other things to consider. The first is that Fed policy can be assumed to be built into the markets. Prices in liquid markets are based on the best possible public information. Therefore, if I know about the pending change in the interest rates, that is public knowledge and will already be priced into the market rates. Any speculation I may have about interest rate changes is
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