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Economics of the Financial System (Aug 2021 - Week 10 - 13) - Coggle…

- - - - Risk-sensitive Asset
      - Risk-sensitive Liablity
      - Gap analysis
      - impact of r changes on bank profit
      - relationship bank profitability; growth
    - - DIversification vs Focus Strategy
      - Credit Risk Analysis
    - - (ii) Sovereign Risk
      - (iii) Operational Risk
      - (i) Foreign exchange Risk
    - - Asset-side
        
        sell securities portfolio
        
        refuse to renew loan dued
        
        sell some of its loans
      - Liability -side
        
        Borrow from Fed or other banks
        
        Attract additional deposits
      - Excess Reserves
  - - - Components
        
        Cash
        
        Reserves at bank's vaults
        
        Reserves at bank's deposits a Fed Reserve System
        
        Securities
        
        Banks' bond holdings
        
        Bank's stock holdings
        
        Loans
        
        Business Loans
        
        Real estate Loans (home and commercial mortgages)
        
        Consumer Loans (cars, credit cards)
        
        Interbank Loans
      - A = L+E
    - - Trading Liabilities
      - (ii) Borrowings
        
        from the Central Bank
        
        from intermediaries (Fed Funds Market)
        
        Foreign banks
        
        Government-sponsord enterprises
        
        using instrument using Repo
      - Debt
      - (i) Deposits from Savers
        
        Transaction (Checkable) Deposits
        
        Non-transaction Deposits
        
        Savings Deposits
        
        Time Deposits
    - - Debt / Equity (or Liability/Net Worth) Leverage = Using Debt to finance purchase of Asset
        
        Cost of borrowing
        
        Income or Capital gGain from new Asset
      - Measures of Profitablity
        
        RoA: How efficiently using Asset to generate earnings
        
        RoE: Bank's ability to turn equity investment into profits
        
        NII (or NIM)
        
        Interest Income (interest EARNED on customers' borrowings)
        
        Interest Expense (interest PAID on customers' deposits)
        
        MONETARY POLICY
        
        Easing MP environments (Recession)
        
        (b) 2001
        
        (a)1990
        
        (c) 2008
        
        US: NIM tend to rise
        
        Deposit rates repriced down more quickly
        
        Load rates repriced down more slowly
        
        Tightening MP environments (Growth)
        
        (a) 1994
        
        (b) 1999-2000
        
        (c) 2004-2005
        
        (d) 2016 - 2019
        
        US: NIM tend to fall
        
        Bank interest expense rise
        
        Bank interest income falls
        
        US: NIM increased
        
        Bank interest income rises
        
        Bank interest expense rise more slowly (relative abundance of deposits)
        
        Negative IR environment
        
        Case #2): Sweden and Denmark
        
        (i) ECB paper (Aug 2017)
        
        1 more item...
        
        (ii) McKInsey Report (Feb 2020)
        
        2 more items...
        
        Case #1: Japan
        
        First, NIM rise
        
        2 more items...
        
        Then, NIM falls
        
        1 more item...
        
        Questions
        
        (iv) How do NIRs impair the banking system, and harm monetary policy transmission?
        
        (iii) How are NIR priced into securities?
        
        (ii) How do NIRs flow to markets?
        
        (i) What do NIR mean for depositors and consumption?
        
        ROE = ROA * leverage
        
        small banks (ROE is small)
        
        large banks (ROE is large)
        
        Economies of scale in banking
    - - Lines of Credit
      - Letters of Credit
      - Why they are used?