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dexazuxo's version from 2017-05-12 22:58

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Question Answer
What are the techniques of conducting monetary policy?1) Raising/lowing interest rates will tighten or loosen money supply in economy
2) Issuing of bonds reduces money supply in economy
3) Central bank purchasing bonds increases money supply
4) Quantitative easing - Large scale purchasing of bonds
QE initiated in response to 2008 financial crisis by US and UK central bank -> was successful in injecting liquidity and preventing crisis turing into depression
How and why is the central bank banker to commercial banks?1) Lender of last resort: Ultimate provider of reserves to the banking system
2) Maintain saver confidence in banks: to reassure savers they can withdraw their money by making sure banks have a certain percentage to withdraw. This is because banks hold a small percentage of customer savings as cash and lend out rest to borrowers on longer terms at interest. they rely on prediction rates savers will withdraw.
What is OPM?OPM = other peoples money
This illustrates the principle agent problem because banks may risk OPM and may be irresponsible
Name deposit taking institutionsTake money from lenders in the form of savings (lenders expect to receive all their money back)
Retail banks: Takes deposits and provide loans. Deals with high volume low value transactions. high admin costs so need high volume to offset.
Investment banks: Focus on large organisations and firms. Low volume high value transactions. profits from asset management, risk management, trading, high corporate advisory fees.
Mutual societies:
- Building societies ; Collects deposits and provides long term loans. have become very similar to retail banks
- Credit unions ; Allows households to deposit money and obtain short term loans
memorize