FIN 537 Exam #1 Study Guide

FIN 537 Exam #1 Study Guide banks commercial - ANSWER-highly regulated financial institutions that deal with money and provide financial services; - deal mostly with ______ banks that accept deposits and provide loans intermediaries asset transactions - ANSWER-Banks are ________ between borrowers and savers - provide ______ transformation - provide financial ________ services valuable transactions - ANSWER-In ancient times, wealth was stored in the form of something _______ such as gold, cattle, or grain. However, gold, cattle and grain are hard to use for ___________. claims receipts claim tickets money - ANSWER-Innovators created paper "_____" or "______" against the gold/grain/cattle. Then, merchants and citizens started accepting these ______ ______ as payment- _____ was born. future payout - ANSWER-Markets to trade money for a ____ ______ emerged around 3000 BC. government goldsmiths religious authorities - ANSWER-In ancient times, either the _____ _______ or _______ ________ would provide "banking" services. - ANSWER-By the ____s, a pre-runner to modern banks emerged. The first Central Bank started in ____. bank money - ANSWER-Banks emerged to provide so-called "_____ ______" that were initially good in a local area, such as North Mississippi runs - ANSWER-Many local panics led to bank ____. National Bank charter - ANSWER-Eventually the US created a ______ ____ in 1791; its ______ expired in 1811. Federal Reserve - ANSWER-The _______ _______ Bank was created in 1913 to be the Central Bank for the US. charter access - ANSWER-Banks require a _____ from wither the Federal authorities (national bank) or a state authority (state bank). - they control ______ to the banking system since not anyone can start a bank credentials capital - ANSWER-With the right _______ and ______ (money invested) you can start a bank. profit salaries economy - ANSWER-Banks make a _____ on the difference between loan and security interest income (and fees) and interest paid on deposits. - they have other costs too, such as _____ - they are in business to make acceptable profits- they have great impact on the ________ at large. project evaluation - ANSWER-They provide "______ _________" by determining if a businesses prospects are worthy of investing the bank's money. cash loan - ANSWER-Banks will transform assets from ____ to a ____. default risk - ANSWER-When a bank has a bad loan, it experiences ______ ____. liquidity risk - ANSWER-If a checking account holder writes a check for $20,000 to buy a car, the bank experiences ________ ____. regulatory risk - ANSWER-The bank also faces _______ ____ if they do not have at least 10% in their reserve account (or the required rate). Glass-Steagall Act - ANSWER-created 3 separate lines of business within the financial services industry (commercial banking, investment banking, insurance); primary purpose was to separate commerce from banking in order to reduce conflicts of interest among business managers and encourage smooth functioning of markets commercial banking investment banking insurance - ANSWER-What are the 3 lines of business within the financial services industry created by the Glass-Steagall Act? McFadden Act of 1927 - ANSWER-let states write their own rules regarding the extent to which a commercial bank could branch within and outside its home state Bank Holding Company Act of 1965 - ANSWER-limited banks to specific types of business activities commercial banks - ANSWER-_______ _____ are one of the most highly regulated businesses in the US. management team board of directors business plan regulators charter dual chartering small geographic large - ANSWER-To start a bank: - Investors select an experienced _________ ____ and _______ ___ ______ and have a _______ ____ explaining the bank's business strategy and why new bank is needed - Group presents plan to bank ________ for approval - Newly formed commercial bank can obtain ______ from home-state bank regulator or federal government via Office of Comptroller of the currency - ____ ______ process fosters competition among regulators in terms of how much regulation imposed - Chartering process created a system of many _____ banks operating in limited ________ markets and only few _____ institutions operating across the US and globally US US dollar - ANSWER-____ dominated global financial and economic activity for many years - ____ _____ served as currency of choice for global transactions and central bank reserves free trade deregulation macroeconomic - ANSWER-Economic policy makers, politicians, and regulators followed 3 basic tenets to achieve sustained economic growth: - The pursuit of ____ _____ - ____________ of financial service - _____________ stability 2007 principle interest - ANSWER-Mid-______ US and global economies weaken following crises related to problem mortgages and other loans - Many lenders designed home loans that did not require borrowers to make sufficiently large monthly _______ and _______ payments originate distribute - ANSWER-Lenders originated mortgages with the intent to sell them soon after loan closings (________-to-_________ approach)→ loan originator did not retain credit risk. defaulting high risk subprime - ANSWER-National mortgage lenders (Countrywide and Washington Mutual) began to experience large waves of borrowers ________ on loans→ many borrowers were ____ ____ because their incomes did not cover the payment amount to repay obligated principal and interest→ _______ borrowers. Credit availability was _______ and terms were increasingly _____. ARM - ANSWER-monthly interest payment did not cover the contractual "principal-plusinterest" required to pay off mortgage- outstanding loan balance increased each month→ negative amortization - ANSWERrestructuring - ANSWER-Situation in led to dramatic __________ of financial markets and institutions throughout the world since many foreign-based institutions bought bad mortgages originated in US. Bear Stearns - ANSWER-March 2008, _____ ________ collapsed and was absorbed by JPMorgan Chase. Lehman Brothers Countrywide Washington Mutual Wachovia - ANSWER-Following the absorption of Bear Stearns by JP Morgan was the failure of ______ _______ and the effective failures of ___________, _________ ______, and ________, which were absorbed by Bank of America, JPMorgan Chase, and Wells Fargo (respectively). interconnected - ANSWER-Given the ____________ nature of financial markets, many healthy participants were unwilling to lend any firm at any price because they could not accurately assess the risk of loss in the near-term; ________ largely disappeared. Fannie Mae Freddie Mac US government housing origination preferred stock - ANSWER-In order to address crisis the US Government took the following actions from September through December 2008: - Placed two government-sponsored enterprises (GSEs) ______ ____ and _______ _____ into government conservatorship effectively making them fully operated by the ____ ___________- firms supported _______ market and _________ of mortgages - Banks that owned ______ _____ issued by these firms wrote value of their investments down to zero AIG mutual funds Bank of America bank holding companies commercial paper - ANSWER-In order to address crisis the US Government took the following actions from September through December 2008: - Loaned _____ over $150 billion→ effectively taking ownership of the company - Insured money market ______ _____ against default - Authorized _____ ___ _______ to acquire Merrill Lynch - Approved Goldman Sachs, Morgan Stanley, MetLife, and American Express to convert to ____ ______ _________ over a weekend - Authorized Federal Reserves to purchase ________ _____ directly from companies such as General Electric FDIC unlimited currently TARP capital purchase program 125 discount window liquidity bonds FDIC hedge funds - ANSWER-In order to address crisis the US Government took the following actions from September through December 2008: - Increased ______ deposit coverage per account for domestic deposits to $250,000 and provided unlimited coverage for noninterest-bearing business deposits - Temporary to 2009 and provided _______ coverage for noninterest- bearing deposits; extended so this coverage amount exists ________ - Passed the ______- _______ ______ _______ which allowed financial institutions to sell preferred stock to US Treasury - Purchased $____ billion of preferred stock in 9 large US banks under TARP- CPP program - Loaned large amounts to large US financial institutions through Federal Reserve _______ ______ and other ______ facilities with intent of providing liquidity and unfreezing financial markets - Authorized large financial institutions and non-financial firms to sell ______ that were _____-insured - Allowed ______ _____ to borrow from the Federal Reserve Continues...