Banking Crises.pdf - Final Exam th 4 Thurs May 8:00 10:00...

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1 Final Exam Thurs, May 4 th 8:00 – 10:00 am ILC N151
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Banking Crises 2 Liquidity problems Solvency issues
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Liquidity Crisis 3 •Shortage of cash reserves Bank Run •Can evolve into Bank Panic
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Terminology 4 RESERVES : most liquid financial asset, e.g., gold, cash REQUIRED RESERVES : portion of other peoples’ money to be held EXCESS RESERVES : portion of reserves available to lend
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Thinking about Reserves TOTAL RESERVES: REQUIRED + EXCESS RESERVES RESERVES (rrr * deposits) 5
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An Example (rrr = 0.10) ASSETS LIABILITIES + N.W. Cash 100,000 Loans 800,000 Securities 200,000 Deposits 1,000,000 Other Liabilities 50,000 Bank Capital 50,000 1,100,000 1,100,000 What if a depositor withdraws $80,000? Draw the new balance sheet. 6
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An Example ASSETS LIABILITIES + N.W. Cash 20,000 Loans 800,000 Securities 200,000 Deposits 920,000 Other Liabilities 50,000 Bank Capital 50,000 1,020,000 1,020,000 7
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Solution? Lender of Last Resort! 8
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Origins of Federal Reserve System Resistance to creating a central bank
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  • Spring '08
  • dolenc
  • Macroeconomics, Federal Reserve System, Bank Capital

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