208-2011-L16

208-2011-L16 - Econ208 MarekKapicka Lecture16...

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Econ 208 Marek Kapicka Lecture 16 Banking and Bank Runs
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Agenda n Today:   n Gary Gorton: ``Slapped in the Face by the Invisible Hand:  Banking and the Panic of 2007” (on the web)
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Agenda n Today we will: n Relate the theory that we have studied to banking panics in  the National Banking Era and the 2007-2008 financial crisis n Look at the case of the Northern Rock banking panic in  September 2007
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1. National Banking Era Panics
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1. National Banking Era The effects
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1. National Banking Era A response to a banking panics n No central bank n A response was coordinated by the  private bank clearing house n Joint suspension of convertibility n Issued  loan certificates  to replace missing  currency n Joint  liability of the clearinghouse n Suspended release of information
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1. National Banking Era A response to a banking panics
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1. National Banking Era A response to a banking panics n Did not prevent panic n Prevented a liquidation of assets n Helped to alleviated currency famine
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2. Shadow Banking What is shadow banking? n Instead of  people  depositing money in  the bank,  firms  and  financial institutions  deposit in a different financial institution n The market is called  repo market  n The “deposit” is collateralized with some  assets n The collateral can be used elsewhere
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2. Shadow Banking Example of repo n Microsoft: $1 million in idle funds n Makes a loan to Goldman Sachs for a  week n GS uses $1 million worth of Treasury  bills as collateral n After a week, Microsoft gets back $1  million plus interest, GS gets back  Treasury bills
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2. Shadow Banking Similarities with commercial banking n No 1:     n Deposits can be withdrawn at any time ~    Repo agreement can be terminated any  time
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2. Shadow Banking
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This note was uploaded on 12/26/2011 for the course ECON 208 taught by Professor Staff during the Fall '08 term at UCSB.

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208-2011-L16 - Econ208 MarekKapicka Lecture16...

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