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Unformatted text preview: Financial intermediaries lower transaction and information costs by: pooling resources of small savers, access to payments system, supplying liquidity, diversify risk, collecting & processing information. Adverse selection arises before the transactions occurs; moral hazard after the fact. Solve adverse selection by disclosure of information and requiring collateral. Restrictive covenants limit the amount of risk a borrower can assume, help sold moral hazard. Venture capital firm can do the monitoring by specializing in risky new ventures in return for a stake in the ownership and share of the profits. Assets are divided into 4 categories: cash, securities, loans, and all other assets. Reserves include vault cash as well as deposits with the Fed. Loans are primary asset of banks (2/3 of assets). Nontransaction deposits account for 2/3 of liabilities. Banks can borrow from Fed. ROA = net profit/total assets. ROE = net profit/capital. Interest rate spread: average difference between the interest rate received on assets and the interest rate profit/capital....
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This note was uploaded on 05/10/2010 for the course ECO 3223 taught by Professor Staff during the Spring '08 term at University of Central Florida.
- Spring '08