Subintervals standardized gap analysis accounts for

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Unformatted text preview: s Accounts for dierent degrees of rate sensitivity. Gap and Duration Analysis Duration analysis % change in market value of security-%change in interest rate × duration in years Uses the weighted average duration of a nancial institution's assets and of its liabilities to see how net worth responds to a change in interest rates. O-Balance-Sheet Activities Loan sales (secondary loan participation) Generation of fee income. Examples: Servicing mortgage-backed securities Creating SIVs (structured investment vehicles) which can potentially expose banks to risk, as it happened in the global nancial crisis O-Balance-Sheet Activities Trading activities and risk management techniques Financial futures, options for debt instruments, interest rate swaps, transactions in the foreign exchange market and speculation. Principal-agent problem arises Three Players in the Money Supply Process Central bank (Federal Reserve System) Banks (depository institutions; nancial intermediaries) Depositors (individuals and institutions) The Fed's Balance Sheet Liabilities Currency in circulation: in the hands of the public Reserves: bank deposits at the Fed and vault cash Assets Government securities: holdings by the Fed that aect money supply and earn interest Discount loans: provide reserves to banks and earn the discount rate Control of the Monetary Base High-powered money: MB = C + R C=currency in circulation R=total reserves in the banking system Open Market Purchase from a Bank Open Market Purchase from a Bank Net result is that reserves have increased by $100 No change in currency Monetary base has risen by $100 Open Market Purchase from the Nonbank Public Person selling bonds to the Fed deposits the Fed's check in the bank Identical result as the purchase from a bank Open Market Purchase from the Nonbank Public The person selling the bonds cashes the Fed's check Reserves are unchanged Currency in circulation increases by the amount of the open market purchase Monetary base increases by the amount of the open market purchase Open Market Purchase: Summary The eect of an open market purchase on reserves depends on whether the seller of the bonds keeps the proceeds from the sale in currency or in deposits The eect of an open market purchase on the monetary base always increases the monetary base by the amount of the purchase Open Market Sale Reduces the monetary base by the amount of the sale Reserves remain unchanged The eect of open market operations on the monetary base is much more certain than the e...
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This document was uploaded on 04/03/2014 for the course ECON 029 at Lehigh University .

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