MICRO-ECONOMICS 4864
Q1
‘Systematic Instability of the Banking Sector: Causes and Cures,’ in which
you pay careful attention to at least the following aspects:
(A) The determinance of liquidity risk and solvency risk and how they are
interrelate
That is, the difference is made between the bank's loan and debt and the newly
issued money (the balance of money), but cash is needed to manage the deposit.
This article aims to explore the significance of this difference by highlighting its
various effects on bank liquidity and solvency. Of course, there is a significant
overlap between these two financial strategies in terms of enabling banks to raise
capital at the same time. This happens when people deposit real money in their
banks; when other bank account holders prepay account holders in their bank
accounts; or when they transfer funds deposited from other banks to the bank. In
these cases, the bank takes cash while increasing its balance sheet (deposit).
More importantly, however, the way all companies expand their balance sheets is
through credit expansion, which we understand as borrowing and buying products.
When banks increase credit expansion, they increase their bank balances by
expanding cash, but they are not required to increase cash according to the same
rule. This is how fractional reserve banking is involved in creating banks: by putting
money into circulation without withdrawing an equivalent amount of cash from
circulation, the fractional reserves increase (Aldasoro, Cho, and Park, 2022). The
difference between these two financial strategies disappears when companies are
modelled as intermediaries and expected to finance their assets with past earnings.
While financial institutions receive money in cash, they also receive money from their
balance sheets, and vice versa. Thus, this distinction is inextricably linked with the
concept of money creators financing loans through banks' debt securities.
(i)A Discuss how full convertibility can discourage undue liquidity risk taking
and how full (unlimited) liability can discourage undue solvency risk taking.
, Convertibility refers to the ease with which a country's currency can be converted
into gold or other currencies through international exchanges. Shows where the rules
allow for capital within and outside the country.Non-convertible currencies are often
difficult to convert to other currencies. Making the currency flexible means increased
capacity in the financial market, better employment, and easier access to trade and
capital. Unreasonable transfer capability refers to situations where the business
carries too much risk and must sell assets, increase revenue, or find other ways to
reduce the risk balance between cash and debt (Banerjee, Noss, and Pastor, 2021).
If the business is too risky, it should sell its assets, generate additional income, or
find other ways to reduce the difference between cash and debt.
Establishing an analytic framework for calculating risk, optimising capital, and
measuring market events and liquidity
Convertibility refers to the ease with which a country's currency can be converted
into gold or other currencies through international exchanges.Shows where the rules
allow for capital within and outside the country. Non-convertible currencies are often
difficult to convert to other currencies. Making the currency flexible means increased
capacity in the financial market, better employment, and easier access to trade and
capital. Unreasonable transfer capability refers to situations where the business
carries too much risk and must sell assets, increase revenue, or find other ways to
reduce the risk balance between cash and debt. If the business is too risky, it should
sell its assets, generate additional income, or find other ways to reduce the
difference between cash and debt.
Managing business data
Gain a centralised view of interest rate and liquidity risks across the company by
integrating the latest market intelligence, portfolio updates, capital returns, and a
market view of liquidity based on an intraday scenario.
Integrating business risk management processes
Valuing complex portfolios and asset classes using an efficient platform to integrate
portfolio valuation and scenario analyses with consistent market, credit, and
behavioural models Process orchestration and governance can further reduce
operational risk.
Q1
‘Systematic Instability of the Banking Sector: Causes and Cures,’ in which
you pay careful attention to at least the following aspects:
(A) The determinance of liquidity risk and solvency risk and how they are
interrelate
That is, the difference is made between the bank's loan and debt and the newly
issued money (the balance of money), but cash is needed to manage the deposit.
This article aims to explore the significance of this difference by highlighting its
various effects on bank liquidity and solvency. Of course, there is a significant
overlap between these two financial strategies in terms of enabling banks to raise
capital at the same time. This happens when people deposit real money in their
banks; when other bank account holders prepay account holders in their bank
accounts; or when they transfer funds deposited from other banks to the bank. In
these cases, the bank takes cash while increasing its balance sheet (deposit).
More importantly, however, the way all companies expand their balance sheets is
through credit expansion, which we understand as borrowing and buying products.
When banks increase credit expansion, they increase their bank balances by
expanding cash, but they are not required to increase cash according to the same
rule. This is how fractional reserve banking is involved in creating banks: by putting
money into circulation without withdrawing an equivalent amount of cash from
circulation, the fractional reserves increase (Aldasoro, Cho, and Park, 2022). The
difference between these two financial strategies disappears when companies are
modelled as intermediaries and expected to finance their assets with past earnings.
While financial institutions receive money in cash, they also receive money from their
balance sheets, and vice versa. Thus, this distinction is inextricably linked with the
concept of money creators financing loans through banks' debt securities.
(i)A Discuss how full convertibility can discourage undue liquidity risk taking
and how full (unlimited) liability can discourage undue solvency risk taking.
, Convertibility refers to the ease with which a country's currency can be converted
into gold or other currencies through international exchanges. Shows where the rules
allow for capital within and outside the country.Non-convertible currencies are often
difficult to convert to other currencies. Making the currency flexible means increased
capacity in the financial market, better employment, and easier access to trade and
capital. Unreasonable transfer capability refers to situations where the business
carries too much risk and must sell assets, increase revenue, or find other ways to
reduce the risk balance between cash and debt (Banerjee, Noss, and Pastor, 2021).
If the business is too risky, it should sell its assets, generate additional income, or
find other ways to reduce the difference between cash and debt.
Establishing an analytic framework for calculating risk, optimising capital, and
measuring market events and liquidity
Convertibility refers to the ease with which a country's currency can be converted
into gold or other currencies through international exchanges.Shows where the rules
allow for capital within and outside the country. Non-convertible currencies are often
difficult to convert to other currencies. Making the currency flexible means increased
capacity in the financial market, better employment, and easier access to trade and
capital. Unreasonable transfer capability refers to situations where the business
carries too much risk and must sell assets, increase revenue, or find other ways to
reduce the risk balance between cash and debt. If the business is too risky, it should
sell its assets, generate additional income, or find other ways to reduce the
difference between cash and debt.
Managing business data
Gain a centralised view of interest rate and liquidity risks across the company by
integrating the latest market intelligence, portfolio updates, capital returns, and a
market view of liquidity based on an intraday scenario.
Integrating business risk management processes
Valuing complex portfolios and asset classes using an efficient platform to integrate
portfolio valuation and scenario analyses with consistent market, credit, and
behavioural models Process orchestration and governance can further reduce
operational risk.
