Week 2 Lecture Summary - Lecture 2 Monetary Policy...

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Lecture 2 – Monetary Policy Transmission (Analysing Bank Performance) Lecture Summary Monetary Policy – US Whenever there is a deposit a DI is required to retain (and deposit) a required reserve o The remainder is called an excess reserve (for lending) DIs trade excess reserves o Incentive to lend these reserves to banks who need it o This is known as the interbank market o Rate of lending is called the federal funds rate Two approaches to affect the market for bank excess reserves o Target quantity of reserves o Target interest rate of reserves Monetary policy tools o Reserve requirements o Open market operations o Discount window Change in deposit = (1/new reserve requirement) x Change in reserve created by reserve requirement Multiplier effect – the amount of money the DI “creates” o Many assumptions in lecture example Analysing Bank Performance (bank BS very different from Industrials) Accounting for loan losses Allowance for loan losses o Contra asset
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Week 2 Lecture Summary - Lecture 2 Monetary Policy...

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