Money & Banking

· financial intermediation: the process through which funds are channeled from savers (lenders) to borrowers via a third party (an intermediary), rather than directly.

· financial intermediaries: the institutions that perform the intermediation process — connecting savers and borrowers.

· economic volatility: refers to the frequency and magnitude of fluctuations in economic indicators, such as GDP, inflation, and employment rates. It highlights the unpredictability of economic performance and can result from various factors, including market dynamics, external shocks, and policy changes. High levels of volatility can lead to uncertainty for businesses and consumers, affecting investment decisions and overall economic stability.

· direct finance: in which a borrower sells a security directly to a lender. In the case of direct finance, where the saver acquires a direct claim on the user of the funds, a financial institution like a stockbroker or an investment bank is usually involved in the transaction. Borrowers raise funds in financial markets.

· indirect finance: in which an institution like a bank stands between the lender and the borrower. In indirect finance, a financial institution like a bank takes the resources from the lender in the form of a deposit (or something like it) and then provides them to the borrower in the form of a loan (or the equivalent). Financial intermediaries stand between savers and borrowers.

· financial/market depth: extent of financial activity and intermediation relative to the size of the economy. A country with higher financial depth typically offers more credit, savings products, insurance, and investment vehicles per dollar of GDP—enabling businesses to expand and households to smooth consumption. Too little depth can starve the economy of capital; too much (especially unregulated) can fuel asset bubbles.

· security: is a financial instrument that holds monetary value and represents either ownership, a creditor relationship, or rights to ownership, and can usually be traded in a financial market.

· market-oriented (or market-based) financial system: is one in which capital markets—like stock exchanges and bond markets—play a dominant role in channeling funds from savers to borrowers.

· bank-oriented (or bank-based) system: relies more on banks and financial institutions to intermediate funds (as in traditional loans).

· shadow bank: are financial institutions that perform bank-like activities (such as lending, investing, or credit creation) but are not traditional banks and are not regulated as tightly as banks. They operate outside the regular banking system, meaning: They don't take insured deposits. They are less regulated by banking authorities. They can still create credit and move money across the economy.

· comparative advantage: leads to specialization so that each of us ends up doing just one job and being paid in some form of money.

· stockbroker: a person or firm that buys and sells stocks and other securities on behalf of clients.

· financial instrument: the written legal obligation of one party to transfer something of value (usually money) to another party at some future date, under certain conditions.

· https://en.wikipedia.org/wiki/2008_financial_crisis

· https://en.wikipedia.org/wiki/Great_Recession

· https://en.wikipedia.org/wiki/Belt_and_Road_Initiative

· How it Happened - The 2008 Financial Crisis: Crash Course Economics #12

· financial development: the improvement in size, efficiency, and accessibility of financial institutions and markets (e.g., banks, stock exchanges, insurance). Supports better allocation of capital.

· economic development: a broad measure of a nation’s progress, including income growth, education, health, infrastructure, and reduction in poverty/inequality.

· information problems: refers to asymmetric information where one party in a financial transaction knows more than the other. This leads to adverse selection (pre-deal) and moral hazard (post-deal).

· the value of stock & bond markets: indicates the total market capitalization of traded stocks and aggregate value of outstanding bonds. Reflects the depth and health of a country’s financial system.

· value of a company: typically measured as market capitalization (stock price × number of shares). Alternatively, it may include enterprise value (includes debt & cash).

· outstanding domestic debt securities: total value of bonds issued by domestic entities (gov & firms) still unpaid. Used to gauge debt levels and market depth in a nation’s economy.

· https://datacatalog.worldbank.org/search/dataset/0038648

Funds Flowing through the Financial System

Uses of Financial Instruments:

· Means of payment: Purchase of goods or services.

· Store of value: Transfer of purchasing power into the future.

· Transfer of risk: Transfer of risk from one person or company to another.

· counterparty: is the person or institution on the other side of a contract.

· leverage: the use of borrowing to finance part of an investment is called leverage. Borrowing to finance part of an investment increases expected return and risk.

Deleveraging spiral

· asymmetric information: the fact that the two parties to a transaction have unequal knowledge about each other. A borrower, for example, has more information about their abilities and prospects than a lender.

· misrepresenting: refers to giving false, misleading, or incomplete information—often in financial disclosures, contracts, or sales pitches.

· underlying instruments (sometimes called primitive securities): these are the basic financial assets that form the foundation for more complex instruments.

· derivative instruments: derivatives are contracts whose value is based on ("derived from") an underlying asset or group of assets.

· “lemon” (slang): is a bad or defective car — one that looks fine on the outside but has serious hidden problems.

· hidden attributes problem: arises when one party in a transaction cannot observe the true quality or characteristics (attributes) of the other party or their product before the transaction occurs. ✅ This is a pre-contractual problem. ❗ It leads to adverse selection — where the “bad” drives out the “good.”

· homeowner’s equity: is the difference between the market value of a home and the outstanding amount owed on the mortgage.

adverse selection: the problem of distinguishing a good risk from a bad one before making a loan or providing insurance; it is caused by asymmetric information.
moral hazard: the risk that a borrower or someone who is insured will behave in a way that is not in the interest of the lender or insurer; it is caused by asymmetric information.
deflation: a sustained fall in the general price level; the opposite of inflation.
free rider: someone who gets the benefit of a good or service without paying the cost.

collateral: assets pledged to pay for a loan in the event that the borrower doesn’t make the required payments.
unsecured loan: a loan that is not guaranteed by collateral.
net worth: the difference between a firm’s or household’s assets and liabilities.

principal–agent problem: arises when one party (the principal) hires another (the agent) to act on their behalf, but the agent’s interests don’t fully align with those of the principal — especially when the principal cannot fully monitor the agent’s behavior.

· positive spillover: occurs when the benefits of an activity extend beyond the person, company, or country that created it, helping others without those others paying for it.

· restrictive covenants: clauses in loan or bond contracts that restrict borrower behavior to protect lenders' interests. A company may agree not to take on more debt or sell key assets without lender approval.

· conflicts of interest: situations where an individual or organization has competing interests that could compromise fairness or loyalty. A financial advisor recommending a product that earns them a commission but is not the best choice for the client.

· underwriters: financial specialists (usually investment banks) who assess risk and help companies issue securities (stocks or bonds) to the public. Goldman Sachs underwrites an IPO by buying shares from a company and reselling them to investors.

· venture capital firm: investment firm that provides capital to startups and early-stage businesses in exchange for ownership stakes. Sequoia Capital investing in a new technology company, hoping for high returns when the company grows or goes public.

· tangible capital: physical, measurable assets used in production or service delivery. Machinery, buildings, vehicles, tools, computers, land. Can be used easily as collateral for loans. Easier to finance through traditional lending (banks, asset-based loans).

· intangible capital: non-physical assets that still contribute to production and value creation. Patents, copyrights, software, brand reputation, R&D, organizational know-how. Difficult to use as collateral (hard to repossess or resell). (banks, asset-based loans). Harder to finance; often requires venture capital or special credit structures.

What Makes a Financial Instrument Valuable?

· Size: Payments that are larger are more valuable.

· Timing: Payments that are made sooner are more valuable.

· Likelihood: Payments that are more likely to be made are more valuable.

· circumstances: Payments that are made when we need them most are more valuable.

· collateral: is the term used to describe specific assets a borrower pledges to protect the lender’s interests in the event of nonpayment. If the payments aren’t made, the lender can take the house, a process called foreclosure.

· asset-backed securities (ABS): are shares in the returns or payments arising from specific assets, such as home mortgages, student loans, credit card debt, or even movie box-office receipts.

· mortgage-backed securities (MBS): a financial security backed by a pool of mortgage loans (typically residential). Investors receive monthly payments derived from homeowners' mortgage payments.

· subprime mortgages: mortgages issued to borrowers with poor credit histories (low FICO scores, irregular income, or high debt-to-income ratios).

· futures contract: is an agreement between two parties to exchange a fixed quantity of a commodity (such as wheat or corn) or an asset (such as a bond) at a fixed price on a set future date.

· options: like futures contracts, options are derivative instruments whose prices are based on the value of some underlying asset. Options give the holder the right, but not the obligation, to buy or sell a fixed quantity of the underlying asset at a predetermined price either on a specified date or at any time during a specified period.

· swap contracts: are agreements to exchange two specific cash flows at certain times in the future.

· portfolio: a collection of assets.

The Structure of Financial Markets

Primary versus Secondary Markets

· Primary markets: Markets where newly issued securities are sold.

· Secondary markets: Markets where existing securities are traded.

Centralized Exchanges versus Over-the-Counter Markets

· Centralized exchanges: Secondary markets where dealers meet in a central, physical location. (NYSE)

· Over-the-counter markets: Decentralized secondary markets where dealers stand ready to buy and sell securities electronically. (Nasdaq)

· Electronic communication - An electronic system that brings buyers and sellers networks (ECNs): together for electronic execution of trades without the use of a broker or dealer.

Debt and Equity versus Derivatives Markets

· Debt and equity markets: Markets where financial claims are bought and sold for immediate cash payment.

· Derivatives markets: Markets where claims based on an underlying asset are traded for payment at a later date.

· trading algorithm: a rule-based program for automatically executing hundreds or thousands of trades.

· debt markets: are the markets for loans, mortgages, and bonds, the instruments that allow for the transfer of resources from lenders to borrowers and at the same time give investors a store of value for their wealth.

· equity markets: are the markets for stocks.

· money markets: that are completely repaid in less than a year (from their original issue date) are traded in money markets.

· bonds markets: debt instruments with a maturity of more than a year are traded in bond markets.

Flow of Funds through Financial Institutions Financial institutions perform both brokerage and asset transformation services. As brokers, they provide access to financial markets, allowing households and firms to buy and sell direct claims on other firms and on governments. Institutions transform assets by taking deposits or investments or issuing insurance contracts to households at the same time that they make loans and purchase stocks, bonds, and real estate.

The Simplified Balance Sheet of a Financial Institution

Assets Liabilities

Bonds Deposits

Stocks Shares

Loans Insurance policies

Real estate

· depository institutions: (commercial banks, savings banks, and credit unions) take deposits and make loans.

· nondepository institutions: financial institutions that do not accept deposits but raise funds in other ways to provide financial services.

· insurance companies: accept premiums, which they invest in securities and real estate (their assets) in return for promising compensation to policyholders should certain events occur (their liabilities). Life insurers protect against the risk of untimely death. Property and casualty insurers protect against personal injury loss and losses from theft, accidents, and fire.

· pension funds: invest individual and company contributions in stocks, bonds, and real estate (their assets) in order to provide payments to retired workers (their liabilities).

· securities firms: include brokers, investment banks, underwriters, asset management firms, private equity firms, and venture capital firms. Brokers and investment banks issue stocks and bonds for corporate customers, trade them, and advise customers. All these activities give customers access to the financial markets. Asset management firms pool the resources of individuals and companies and invest them in portfolios of bonds, stocks, and real estate. Hedge funds do the same for small groups of wealthy investors. Customers own shares of the portfolios, so they face the risk that the assets will change in value. But portfolios are less risky than individual securities, and individual savers can purchase smaller units than they could if they went directly to the financial markets. Private equity and venture capital firms also serve wealthy investors: They acquire controlling stakes in a few firms and manage them actively to boost the return on investment before reselling them. In contrast, most mutual funds consist of passive investors, who do not seek to influence management.

· finance companies: raise funds directly in the financial markets in order to make loans to individuals and firms. Finance companies tend to specialize in particular types of loans, such as mortgage, automobile, or certain types of business equipment. While their assets are similar to a bank’s, their liabilities are debt instruments that are traded in financial markets, not deposits.

· government-sponsored enterprises (GSEs) are federal credit agencies that provide loans directly for farmers and home mortgagors. They also guarantee programs that insure loans made by private lenders. Aside from GSEs, the government also provides retirement income and medical care to older adults through Social Security and Medicare. Pension funds and insurance companies perform these functions privately.

· future value: is the value on some future date of an investment made today.

· present value: is the value today (in the present) of a payment that is promised to be made in the future.

· internal rate of return: is the interest rate that equates the present value of an investment with its cost.

· fixed-payment loan: a type of loan that requires a fixed number of equal payments at regular intervals; home mortgages and car loans are examples.

· bond: is a promise to make a series of payments on specific future dates. It is issued as part of an arrangement to borrow.

· coupon payments: the annual amount of those payments (expressed as a percentage of the amount borrowed) is called the coupon rate.

· maturity date: the time to the expiration of a debt instrument; the time until a bond’s last promised payment is made.

· principal, face value, or par value:

· nominal interest rate: an interest rate expressed in dollar terms; the real interest rate plus expected inflation.

· real interest rate: the interest rate measured in terms of constant (real) dollars; the nominal interest rate minus expected inflation.

The Nominal Interest Rate, the Inflation Rate, and the Real Interest Rate

· risk: a measure of uncertainty about the future payoff to an investment, measured over some time horizon and relative to a benchmark. The basis for the second core principle of money and banking: Risk requires compensation.

To understand leverage, picture a set of two gears, one large and one small. The movement in the price of the

leveraged investment is measured by the number of revolutions in the big gear. This explains why some

people refer to leverage as “gearing.” The investor’s risk and return are measured by the number of revolutions in

the small gear. The bigger the big gear, the more times the small gear goes around with each revolution of the

big gear. That’s leverage.

· risk premium: the expected return minus the risk-free rate of return; the payment to the buyer of an asset for taking on risk.

· idiosyncratic risk: risk affecting a small number of people (a specific firm or industry).

· systematic risk: economywide risk that affects everyone and cannot be diversified.

· diversification: splitting wealth among a variety of assets to reduce risk.

· hedging: reducing overall risk by investing in two assets with opposing payoffs.

· spreading risk: reducing overall risk by investing in assets whose payoffs are unrelated.

· U.S. Treasury bill (T-bill): a zero-coupon bond in which the U.S. government agrees to pay the bondholder a fixed dollar amount on a specific future date; has a maturity of less than one year.

· yield to maturity: the yield bondholders receive if they hold the bond to its maturity when the final principal payment is made.

· investment horizon: the length of time an investor plans on holding an asset.

· default risk: the probability that a borrower will not repay a loan; see also credit risk.

· rating: A measure of the default risk associated with a company’s debt; normally a series of letters going from AAA for bonds with the lowest risk of default to D for bonds that have defaulted.

· investment-grade bond: bond with low default risk; Moody’s rating of Baa or higher; and Standard & Poor’s rating of BBB or higher.

· junk bond: a bond with a high risk of default. Also called a high-yield bond.

· rating downgrade: when a bond-rating agency lowers the rating of a company, signaling that its bonds have an increased risk of default.

· rating upgrade: when a bond-rating agency raises the rating of a company, signaling that its bonds have a reduced risk of default.

· expectations hypothesis of the term structure: the proposition that long-term interest rates are the average of expected future short-term interest rates.

· stock market indexes: index numbers that provide a sense of whether the value of the stock market is going up or down.

· mutual fund: a fund that pools the resources of a large number of small investors and invests them in portfolios of bonds, stocks, and real estate; managed by professional managers.

· exchange traded fund (ETF): a marketable security that tracks a basket of assets like an index fund.

· bubble: a persistent and expanding gap between actual asset prices and those warranted by the fundamentals; usually created by mass enthusiasm.

· arbitrage: the practice of simultaneously buying and selling financial instruments to benefit from temporary price differences; eliminates a riskless profit opportunity.https://www.bcg.com/publications/2017/financial-institutions-growth-global-risk-2017-staying-course-banking

· depository institution: a financial institution that accepts deposits and makes loans.

· nondepository institution: A financial intermediary that does not issue deposit liabilities.

vault cash: refers to the physical currency (bills and coins) that a bank keeps on its premises, typically in vaults, teller drawers, or ATMs, to meet customer withdrawal demands.
correspondent bank: is a bank that provides services on behalf of another bank, often because the second bank does not have a physical presence in a certain area, region, or country.
C&I loans: are Commercial and Industrial loans — loans that banks make to businesses (not individuals) for working capital, equipment, expansion, or other business purposes.
(bank) reserves: are the cash holdings that a bank keeps either in its vaults (vault cash) or on deposit at the central bank (Federal Reserve in the U.S.) to meet regulatory requirements and customer withdrawal needs.
secondary reserves: are highly liquid assets (especially short-term government securities) that banks hold in addition to required reserves to manage unexpected withdrawals and liquidity needs.

· home equity: is the portion of a property's value that the homeowner truly owns — it’s the difference between the market value of the home and the outstanding balance on any mortgages or home loans.✅ It's like ownership stake in your own house.

· checkable deposits: are bank accounts from which the account holder can withdraw funds on demand or write checks to make payments. ✅ They are part of M1 money supply (the most liquid form of money).

· demand deposits: are bank account balances that can be withdrawn at any time, on demand, without advance notice and without penalties.✅ They are one of the purest forms of money — immediately usable for payments, cash withdrawals, or transfers.

· nontransaction deposits: are bank accounts from which funds cannot be withdrawn immediately by writing a check or making frequent payments — they are primarily intended for saving rather than spending. ✅ They are less liquid than demand or checkable deposits. Savings Accounts,

· discount loan: a loan from the Federal Reserve, usually to a commercial bank.

· excess reserves: reserves in excess of required reserves.

· federal funds market: the market where banks lend their excess reserves to other banks; the loans are unsecured. The federal funds market is a critical part of the U.S. financial system where banks lend and borrow reserves with each other overnight to meet reserve requirements set by the Federal Reserve (Fed).

· repurchase agreement (repo): a short-term collateralized loan in which a security is exchanged for cash, with the agreement that the parties will reverse the transaction on a specific future date, as soon as the next day.

· bank capital: bank assets minus bank liabilities. The net worth of the bank. The value of the bank to its owners.

· insolvency: happens when a person, company, or bank cannot meet their financial obligations —

meaning they owe more than they own or can't pay debts when due.

· loan loss reserves: a portion of a bank’s capital that is set aside to cover potential losses from defaulted loans.

· return on assets (ROA): bank net profits after taxes divided by total bank assets; a measure of bank profitability.

· return on equity (ROE): bank net profits after taxes divided by bank capital; a measure of the return to the bank’s owners.

· net interest margin: a bank’s interest income minus its interest expenses divided by total bank assets; net interest income as a percentage of total bank assets.

· interest rate spread: 1. The difference between the interest rate a bank receives on its assets and the interest rate it pays to obtain liabilities. 2. Can also be used as a synonym for risk spread.

· off-balance-sheet activities: bank activities, such as trading in derivatives and issuing loan commitments, that are neither assets nor liabilities on the bank’s balance sheet.

· loan commitments: a promise by a bank to lend a customer money up to a certain limit if requested. Bank charges a commitment fee even if no loan is used. 💵🔒 (Credit reserved for you)

· letters of credit: a bank guarantee ensuring a buyer's payment to a seller will be received on time and for the right amount. Common in international trade. 📜✅ (Bank vouches for buyer)

· payday loan: a small, very short-term loan intended to cover expenses until the borrower's next payday. Often with very high interest rates. 🧾💸 (Fast cash, expensive)

· liability management: how a bank manages its debts and obligations, like deposits and borrowings, to balance funding needs and costs. ⚖️🏦 (Juggling deposits, bonds, loans)

· hedging risks: taking a financial action (like buying insurance or derivatives) to offset possible future losses. Reduces uncertainty but usually at a cost. 🛡️📈 (Protecting against bad surprises)

· diversification: spreading investments across different assets, industries, or geographies to reduce overall risk. 🌍📊 (Don't put all eggs in one basket)

· liquidity risk: the risk that a financial institution’s liability holders will suddenly seek to cash in their claims; for a bank this is the risk that depositors will unexpectedly withdraw deposit balances.

· required reserves: reserves that a bank must hold to meet the requirements set by regulators. In the United States, the requirements are established by the Federal Reserve.

· credit risk: the probability that a borrower will not repay a loan.

· credit risk analysis: evaluating the likelihood that a borrower might not repay a loan. Done before approving credit.

· default risk: the specific risk that a borrower fails to make required payments (interest or principal).

· interest rate risk: 1. The risk that the interest rate will change, causing the price of a bond to change with it. 2. The risk that changes in interest rates will affect a financial intermediary’s net worth. It arises from a mismatch in the maturity of assets and liabilities.

· interest rate sensitive: assets or liabilities whose value or income changes when interest rates move.

· net intertest margin: a bank’s profit from lending.

· gap analysis: a method banks use to measure mismatches between rate-sensitive assets and liabilities over different time periods. Helps predict the impact of interest rate changes.

· trading or market risk: the risk that traders who work for a bank will create losses on the bank’s own account.

· peer-to-peer (P2P) lending: individuals lending directly to other individuals (or small businesses) via an online platform, without a traditional bank.

· operational risk: the risk a financial institution faces from computer hardware or software failure, natural disaster, terrorist attacks, and the like.

· cyber risk: the losses that arise when information technology systems fail or are compromised.

· foreign exchange risk: the risk that currency value changes will hurt profits or asset values when doing international transactions.

· sovereign risk: the risk that a government might default on its debt or block foreign payments due to financial or political problems.

· The Hidden Pattern behind all Financial Bubbles

· https://www.bestmoney.com/credit-cards/compare-low-interest-cards?bkw=credit%20card%20interest%20rates&bcampid=568378063&bcamp=CC%20-%20No%20APR%20Bing&bagid=1172081153484096&bag=low%20interest&btarid=kwd-73255372926562:loc-190&bidm=be&bnet=o&bd=c&bmobval=0&bt=search&utm_source=bing&utm_medium=cpc&utm_term=credit%20card%20interest%20rates&utm_campaign=Bing+CPC+Campaign&c=73255273835824&m=e&k=73255372926562&&bphysical=51667&bfeedid=&binterest=&a=B7773BT&ts=&topic=&upf=&clicktype=&msclkid=b4d1c2be51ac187d0577aab445b3666c

· Asymmetric Information, Adverse Selection & Moral Hazard | Economics Explained

· https://www.consumerreports.org/

· https://en.wikipedia.org/wiki/Consumer_Reports

· Adverse Selection vs. Moral Hazard | Overview & Difference

· https://en.wikipedia.org/wiki/Dun_&_Bradstreet

· https://www.dnb.com/en-us/

· https://www.moodys.com/

· https://en.wikipedia.org/wiki/Value_Line

· https://valueline.com/

· https://www.spglobal.com/ratings/en/

· https://www.fitchratings.com/

· https://www.investopedia.com/terms/f/fitch-ratings.asp

· https://www.epi.org/blog/by-devaluing-its-currency-china-exports-its-unemployment/

· Why governments are 'addicted' to debt | FT Film

· https://www.khanacademy.org/college-careers-more/financial-literacy/xa6995ea67a8e9fdd:banking/xa6995ea67a8e9fdd:banking-and-financial-institutions/v/banking-institutions

· https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/banking-and-money/v/banking-1

· https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-financial-sector/definition-measurement-and-functions-of-money-ap/e/definition--measurement--and-functions-of-money

· https://study.com/academy/topic/fundamentals-of-money-banking.html

· https://study.com/academy/topic/money-banking-and-financial-markets.html

· https://www.bankregdata.com/main.asp

Chapters 13 and 14

Chapter 13

· unit bank: a bank without branches.

· bank charter: the license authorizing the operation of a bank.

· dual banking system: the system in the United States in which banks supervised by federal government and state government authorities coexist.

· systemically important financial institution (SIFI): an intermediary whose failure could undermine the entire financial system.

· bank holding company: a company that owns one or more banks and possibly other nonbank subsidiaries.

· eurodollar: dollar-denominated deposits outside the U.S.

· LIBOR: London Interbank Offered Rate; benchmark rate indicating what major global banks would charge each other for short-term unsecured loans. Tenors (Maturities): 1 day to 12 months. Currencies quoted in: USD, GBP, EUR, CHF, JPY. Each day, ~18 large global banks submitted their estimated borrowing costs to the British Bankers’ Association (BBA). The highest and lowest submissions were removed, and the remaining average became that day's LIBOR for each maturity and currency. LIBOR was once the world’s most important interest rate—but because it was easy to manipulate and not grounded in real trades, it was replaced by transaction-based, transparent alternatives like SOFR.

· Secured Overnight Financing Rate (SOFR): SOFR is based on repo rates collateralized by U.S. Treasury debt, so it is nearly devoid of default risk. Put differently, SOFR is a safe interest rate: it is not credit-sensitive.

· https://theafex.com/ameribor/

· https://www.fca.org.uk/news/speeches/the-future-of-libor

· https://www.ice.com/iba

· basic rationale behind financial benchmarks:

· https://www.investopedia.com/articles/investing/033115/why-bba-libor-was-replaced-ice-libor.asp

· https://en.wikipedia.org/wiki/Libor

· https://en.wikipedia.org/wiki/SOFR

· https://www.newyorkfed.org/markets/reference-rates/sofr

· financial holding company: A company that owns a variety of financial intermediaries.

· universal bank: An institution that engages in all aspects of financial intermediation, including banking, insurance, real estate, brokerage services, and investment banking.

· economies of scale: when the average cost of producing a good or service falls as the quantity produced increases.

· economies of scope: when the average cost of producing a good or service falls as the number of different types of goods produced increases.

· property and casualty insurance: insurance against damage from events like automobile accidents, fire, and theft.

· term life insurance: insurance that provides a payment to the policyholder’s beneficiaries in the event of the insured’s death at any time during the policy’s term.

· whole life insurance: a combination of term life insurance and a savings account in which a policyholder pays a fixed premium over his or her lifetime in return for a fixed benefit when the policyholder dies.

· vesting: when the contributions your employer has made to the pension plan on your behalf belong to you.

· defined-benefit pension plan: a pension plan in which beneficiaries receive a lifetime retirement income based on the number of years they worked at the company and their final salary.

· defined-contribution pension plan: a pension plan in which beneficiaries make payments into an account and then receive the accumulation, plus the investment income, on retirement, at which time they must decide what to do with the funds. The options include accepting a lump sum, removing small amounts at a time, or converting the balance to a fixed monthly payment for life by purchasing an annuity.

· underwriting: the process through which an investment bank guarantees the price of a new security to a corporation and then sells it to the public.

· hedge funds: private, largely unregulated, investment partnerships that bring together small groups of people who meet certain (high) wealth requirements.

Chapter 14

· shadow bank: institution with liabilities that, like bank deposits, can be withdrawn at face value with little or no notice but that are usually subject to less oversight than banks.

· insolvent: when the value of a firm’s or bank’s assets is less than the value of its liabilities; negative net worth.

· bank run: an event when depositors lose confidence in a bank and make withdrawals, exhausting the bank’s reserves.

· illiquid: the inability to meet immediate payment obligations. For a bank, reserves are insufficient to honor current withdrawal requests.

· bank panic: the simultaneous failure of many banks during a financial crisis.

· contagion: when the failure of one bank causes a run on other banks.

· adverse feedback: mutually aggravating interactions between the financial sector and the economy in a systemic crisis.

· lender of last resort: the ultimate source of credit to banks during a panic. A role for the central bank.

· market maker of last resort: a public authority—usually a central bank—that stands ready to buy or sell securities in systemically important financial markets that suddenly become illiquid when private dealers or investors are unable or unwilling to trade.

· deposit insurance: the government guarantee that depositors will receive the full value of their accounts (up to a legal limit) should a bank fail.

· too-big-to-fail policy: the idea that some financial institutions are so large that government officials cannot allow them to fail because their failure will put the entire financial system at risk.

· regulation (financial): a set of specific rules imposed by the government that the managers of financial institutions and participants in financial markets must follow.

· regulatory competition: a situation where more than one regulatory agency works to safeguard the soundness of a bank.

· supervision (financial): general government oversight of financial institutions.

· examination (of banks): the formal process by which government specialists evaluate a bank’s financial condition.

· CAMELS: the system used by U.S. bank examiners to summarize their evaluation of a bank’s health. The acronym stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to risk.

· Basel accord: an agreement requiring internationally active banks to hold capital equal to or greater than a specified share (8 percent or as agreed by regulators) of their risk-adjusted assets.

· entity-based regulation: financial rules and supervision that focus on a type of financial institution as defined by its legal form, such as a bank or an insurance company, rather than on the functions that it performs.

· activity-based regulation: financial rules and supervision that focus on the type of financial activity or function performed, regardless of the legal form of the institution that performs it.

· micro-prudential (regulation): aimed at limiting the risks within intermediaries in order to reduce the probability of an individual institution’s failure.

· macro-prudential (regulation): aimed at limiting systemic risks in the financial system.

· externality: spillover impact from an activity of one party on to other parties who are not compensated (such as may occur when a firm creates pollution or systemic risk).

· common exposure: exposure of many financial institutions to the same risk factor.

· pro-cyclicality: refers to the mutually reinforcing interaction between financial and economic activity that amplifies economic booms and busts. Note: The more general term pro-cyclical means moving in tandem with the swings of the business cycle.

Chapter 15

central bank: the financial institution that manages the government’s finances, controls the availability of money and credit in the economy, and serves as the bank to commercial banks.

monetary policy: the central bank’s management of money, credit, and interest rates.

gamut: the complete range or scope of something.

bogus: fake, false, or not genuine; intended to deceive.

pernicious: harmful in a subtle or gradual way; often destructive over time.

odious character: refers to a person who is extremely unpleasant, detestable, or morally repugnant—someone who evokes strong dislike or disgust from others.

The Fedwire Funds Service: is the real-time gross settlement (RTGS) system operated by the U.S. Federal Reserve. It allows banks and large institutions to send massive, time-sensitive payments securely and instantly.

fiscal policy: the government’s tax and expenditure policies, usually formulated by elected officials.

presence of externalities: the uncompensated impact on one entity from the actions of another.

public goods: goods that others cannot be excluded from using and whose consumption does not reduce availability.

tenacity: is the quality of being determined, persistent, and unwilling to give up, even in the face of difficulty or opposition.

the problem of time consistency: the condition in which there is no future incentive or no future opportunity to renege on a promise or policy commitment made today. A time-consistent policy is one where a future policymaker lacks the opportunity or the incentive to renege. Conversely, a policy lacks time consistency when a future policymaker has both the means and the motivation to break the commitment.

financial behemoth: is a very large and powerful financial institution, often so big that its actions significantly affect markets, and sometimes deemed “too big to fail.”

idiosyncratic risk: risk affecting a small number of people (a specific firm or industry).

systematic risk: economywide risk that affects everyone and cannot be diversified.

systemic risk: is the risk that the failure of one major institution or a shock to part of the financial system can cause a cascading collapse that threatens the entire economy.

price stability: one objective of the central bank is to keep inflation low so that prices are stable on average.

hyperinflation: very high inflation; when prices double every two to three months.

potential output: what the economy is capable of producing when its resources are used at normal rates; also called sustainable output.

sustainable growth: when the economy is growing at the rate dictated by potential output.

maximum sustainable employment: refers to the highest level of employment an economy can achieve without causing inflation to accelerate. It’s a key part of the Federal Reserve’s dual mandate (alongside price stability).

financial system stability: one objective of the central bank is to eliminate financial system volatility, ensuring that it remains stable.

value at risk: (VaR) is a statistical measure used to estimate the potential loss in value of a portfolio or investment over a defined time period for a given confidence level. “How much could I lose, with X% confidence, over Y time?”

interest rate stability: keeping short-term interest rates steady to reduce uncertainty for borrowers, savers, and investors.

exchange rate stability: keeping the currency's value stable relative to others (e.g., USD/EUR) to support trade and investor confidence

central bank independence: the central bank’s freedom from political pressure.

accountability: the idea that central bankers should be held responsible for their policies.

transparency: the central bank’s communication of its policy decisions and how they are made clearly to the financial markets and the public.

instrument independence: in the case of a central bank, the authority to adjust as it sees fit the tools of monetary policy (such as interest rates) in order to achieve its policy objectives (which may be mandated by the government); see also goal independence.

goal independence: in the case of a central bank, the authority to determine autonomously the objectives of monetary policy (such as price stability); see also instrument independence.

monetary policy framework: a structure in which central bankers clearly state their goals and the tradeoffs among them.

credibility: the idea that everyone trusts central bankers to do what they say they are going to do.

fiscal dominance: a situation where fiscal policy (government debt and deficits) dictates or limits what the central bank can do with monetary policy.

expansionary monetary policy: a central bank policy designed to stimulate the economy—usually by lowering interest rates or using quantitative easing (QE).

crowding out: when increased government borrowing raises interest rates, which in turn reduces private investment.

debt sustainability: the ability of a government to service its debt over time without requiring drastic fiscal adjustments or default.

The FED dot plot: a chart published by the Federal Reserve showing each FOMC member’s projection for the federal funds rate over the next few years.

FOMC: (Federal Open Market Committee): the monetary policy-making body of the Federal Reserve; 7 members of the Fed’s Board of Governors (Washington, D.C.); 5 of the 12 regional Federal Reserve Bank presidents (rotating); always includes the New York Fed President (permanent seat); sets the target federal funds rate; directs open market operations; issues forward guidance and economic projections; meets: 8 times per year (minimum), every ~6 weeks

https://www.youtube.com/results?search_query=the+FED+dot+plot

https://www.bloomberg.com/graphics/fomc-dot-plot/embed.html?utm_source=chatgpt.com

https://www.bis.org/

https://www.bis.org/cbanks.htm

https://www.federalreservehistory.org/

https://en.wikipedia.org/wiki/List_of_central_banks

Econ 321: history of central banks

Chapter 3 - Napoléon and the Banque de France

https://vlab.stern.nyu.edu/srisk/RISK.USFIN-MR.MES

VLab Tutorial: SRISK Analysis

https://fred.stlouisfed.org/series/FEDTARMD

https://study.com/academy/lesson/what-is-fiscal-policy.html

https://study.com/academy/lesson/what-is-hyperinflation-definition-causes-effects.html

https://www.youtube.com/results?search_query=dodd+frank

https://study.com/academy/lesson/central-bank-definition-purpose.html#/lesson

https://www.khanacademy.org/economics-finance-domain/economics-personal-finance-va/x3ed8f3aede624754:u-s-financial-system/x3ed8f3aede624754:the-federal-reserve/v/historical-events-that-shaped-banking

https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/banking-and-money/v/federal-reserve-balance-sheet

Chapters 16 and 18

Chapter 16

unduly:

Federal Reserve System: the central bank responsible for monetary policy in the United States.

discount rate: the interest rate at which the Federal Reserve makes discount loans to commercial banks.

Board of Governors of the Federal Reserve System: the seven-member board that oversees the Federal Reserve System, including participation in both monetary policy and financial regulatory decisions.

emergency powers: the Federal Reserve’s extraordinary authority to lend to nonbanks when circumstances are deemed “unusual and exigent.”

https://www.federalreserve.gov/central-bank-digital-currency.htm

Federal Open Market Committee (FOMC): the 12-member committee that makes monetary policy decisions in the United States. Members include the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and the presidents of four Federal Reserve Banks.

federal funds rate: the interest rate banks charge each other for overnight loans on their excess deposits at the Fed; the interest rate targeted by the FOMC.

forward guidance: communication by the central bank about future policy prospects.

FOMC statement: the press release that immediately follows every FOMC meeting; usually contains an announcement of the federal funds rate target, an evaluation of the current economic environment, and a statement of the risks to the economy.

https://www.federalreserve.gov/monetarypolicy/fomc.htm

https://www.federalreservehistory.org/essays/banking-act-of-1935

inflation targeting: a monetary policy strategy that involves the public announcement of a numerical inflation target, together with a commitment to make price stability a leading objective.

European Central Bank (ECB): the central authority, located in Frankfurt, Germany, which oversees monetary policy in the common currency area.

euro area: the countries in Europe that use the euro as their common currency.

European System of Central Banks (ESCB): the European Central Bank plus the National Central Banks of all the countries in the European Union, including those that do not participate in the monetary union.

Eurosystem: the European Central Bank plus the National Central Banks of participating countries; together, they carry out the tasks of central banking in the euro area.

Executive Board of the ECB: the six-member body in Frankfurt that oversees the operation of the European Central Bank and the Eurosystem.

National Central Banks (NCBs): the central banks of the countries that belong to the European Union.

Governing Council of the ECB: the (currently) 25-member committee that makes monetary policy in the euro area.

Chapter 18

zero lower bound (ZLB): the idea that a nominal interest rate cannot fall below zero.

effective lower bound (ELB): the nominal interest rate level below which people will switch from bank deposits to cash.

interest rate policy tools: the federal funds rate target, the rate for discount window lending, and the deposit rate.

other monetary policy tools: policy mechanisms (including policy duration commitments, quantitative easing, and credit easing) that are usually reserved for extraordinary episodes when interest rate policy is insufficient for economic stabilization.

target federal funds rate range: the Federal Open Market Committee’s target range for the interest rate that banks pay on overnight loans from other intermediaries; the FOMC’s primary policy instrument.

interest rate on reserve balances (IORB rate): the interest rate paid by the Federal Reserve on reserves that the banks hold in their accounts at the central bank.

discount rate: the interest rate at which the Federal Reserve makes discount loans to commercial banks.

market federal funds rate: the overnight interest rate at which transactions between banks and their lenders take place in the market; differs from the federal funds rate target set by the FOMC.

quantitative easing (QE): an alternative to the interest rate policy in which the central bank supplies.

discount lending: lending by the Federal Reserve, usually to commercial banks.

lender of last resort: the ultimate source of credit to banks during a panic. A role for the central bank.

primary credit: the term used to describe short-term, usually overnight, discount loans made by the Federal Reserve to commercial banks.

primary discount rate: the interest rate charged by the Federal Reserve on primary credit; also known as the discount rate, it is set at a spread above the target federal funds rate.

secondary discount rate: the interest rate charged on secondary credit; it is usually 50 basis points above the primary discount rate.

repurchase agreement (repo): a short-term collateralized loan in which a security is exchanged for cash, with the agreement that the parties will reverse the transaction on a specific future date, as soon as the next day.

minimum bid rate: the minimum interest rate that banks can bid for reserves in the ECB’s weekly refinancing operation; the European equivalent of the Fed’s target federal funds rate; also known as the target refinancing rate.

ECB’s marginal lending facility: the facility through which the ECB provides overnight loans to banks; the analog to the Federal Reserve’s primary credit facility.

ECB’s deposit facility: where euro-area banks with excess reserves can deposit them overnight and earn interest.

reserve requirement: regulation obligating depository institutions to hold a certain fraction of their demand deposits as either vault cash or deposits at the central bank.

overnight cash rate: the overnight interest rate on interbank loans in Europe; the European analog to the market federal funds rate.

https://fred.stlouisfed.org/graph/?g=10SJB

ECB’s marginal lending facility: the facility through which the ECB provides overnight loans to banks; the analog to the Federal Reserve’s primary credit facility.

ECB’s deposit facility: Where euro-area banks with excess reserves can deposit them overnight and earn interest.

reserve requirement: regulation obligating depository institutions to hold a certain fraction of their demand deposits as either vault cash or deposits at the central bank.

overnight cash rate: the overnight interest rate on interbank loans in Europe; the European analog to the market federal funds rate.

inflation targeting: a monetary policy strategy that involves the public announcement of a numerical inflation target, together with a commitment to make price stability a leading objective.

Taylor rule: A rule of thumb for explaining movements in the federal funds rate; the monetary policy rule developed by economist John Taylor.

natural rate of interest: the real short-term interest rate that prevails when the economy is using resources normally.

forward guidance: communication by the central bank about future policy prospects.

targeted asset purchase (TAP): an alternative to interest rate policy in which the central bank alters the mix of assets on its balance sheet in order to change their relative prices (and hence interest rates) in a way that stimulates economic activity.

unemployment gap: the difference between the current unemployment rate and the natural rate of unemployment.

natural rate of unemployment: the rate of unemployment that persists in an economy when labor and other resources are used normally.

Chapters 20 and 21

Chapter 20

money supply: is the total amount of money available in an economy at a given time to be used for buying goods and services, saving, and investment. When U.S. economists or the Fed refer to “the money supply,” they usually mean M1 or M2.

· https://www.ecb.europa.eu/home/search/review/html/ecb.strategyreview_monpol_strategy_statement.en.html

monetary base: (MB or M0) the total amount of currency in circulation plus reserves held by banks at the central bank.

MB = currency + reserves.

money aggregates: measures of the total money supply in the economy, organized by liquidity.

M1 = currency + checkable deposits

M2 = M1 + savings deposits + money market funds

M3 = M2 + large time deposits + institutional money (not reported by Fed anymore)

monetary accommodation: is when a central bank keeps interest rates low or adds liquidity to support economic activity, especially after a shock or slowdown.

monetary tightening/contraction: is when a central bank raises interest rates or reduces liquidity to slow down inflation, prevent overheating, or cool down the economy.

velocity of money: the average number of times each unit of money is used per unit of time.

nominal gross domestic product: the market value of final goods and services produced in the economy during a year measured at current (dollar) prices.

equation of exchange: the equation stating that nominal income equals the quantity of money times the velocity of money; MV = PY.

https://www.youtube.com/results?search_query=money+aggregates

money multiplier: the ratio of broad money (like M2) to the monetary base (MB). Shows how much money is created from each dollar of base money.

money multiplier = M2/monetary base = M2/MB

a lower multiplier means banks hoarding reserves or less lending.

banks hoarding reserves: when banks hold onto large balances of reserves at the central bank instead of lending them out or investing them, they’re said to be “hoarding reserves.”

nominal income: income measured in current dollars, unadjusted for inflation. Includes wages, dividends, rents, etc., at face value.

nominal demand for money: the total amount of money people want to hold (in dollar terms), influenced by: nominal income, nominal interest rate, & transaction needs.

nominal interest rate: the stated or market interest rate, not adjusted for inflation.

Real Rate = Nominal Rate − Expected Inflation

liquidity of stocks, bonds, other assets: How easily an asset can be converted to cash without losing value:

💵 Currency = highly liquid

📈 Stocks = fairly liquid

🏠 Real estate = less liquid

🪙 Crypto = depends on market depth

uncertainty: in economics: the inability to predict future outcomes (e.g., inflation, interest rates, policy changes).

Greater uncertainty often leads to: Higher money demand, Lower investment, Flight to safe assets.

risk: exposure to loss or variability in returns. Different from uncertainty in that probabilities are known:

Risk = quantifiable; Uncertainty = not always measurable

consumption basket changes: Adjustments in the set of goods/services used to track cost of living (e.g., in CPI).

Reflects: New products (e.g., smartphones), Substitution (e.g., rice instead of bread), Cultural shifts.

welfare-enhancing goods: goods that increase well-being, not just GDP. May include: Education,

Healthcare, Clean air/water, Public goods; not all consumption increases welfare (e.g., status goods or addictive products may not).

· https://study.com/academy/lesson/equation-of-exchange-inflation-rate.html

· https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-long-run-consequences-of-stabilization-policies/money-growth-and-inflation/v/quantity-theory-of-money-ap-macroeconomics-khan-academy

· https://www.youtube.com/results?search_query=equation+of+exchange

quantity theory of money: the theory that changes in nominal income are determined by changes in the quantity of money.

· https://www.youtube.com/results?search_query=quantity+theory+of+money+and+inflation

· https://study.com/academy/lesson/quantity-theory-of-money-output-and-prices.html

· https://fred.stlouisfed.org/

transactions demand for money: the demand for money based on the use of money as a means of payment, for transactions purposes.

portfolio demand for money: the demand for money based on the use of money as a store of value; the theory that treats money as an asset analogous to a bond.

precautionary demand for money: the theory of the demand for money based on the idea that people hold money to ensure they have resources when faced with unexpected expenses.

· https://study.com/academy/lesson/money-demand-and-interest-rates-economics-of-demand.html

· https://www.youtube.com/results?search_query=demand+for+money

The fact that higher interest rates raise velocity means that they put upward pressure on inflation. Monetary policymakers combat high inflation by raising interest rates. The apparent contradiction is resolved by the fact that, while interest rate increases might drive velocity higher, they reduce real growth by even more—enough to make the overall effect the one that we have come to expect.

Lucas critique: economist Robert Lucas’s observation that changes in policymakers’ behavior will change people’s expectations, altering their behavior and the observed relationships among economic variables.

Chapter 21

conjecture: is an educated guess or hypothesis based on limited evidence.

potential output: what the economy is capable of producing when its resources are used at normal rates; also called sustainable output.

output gap: the difference between current output and potential output.

expansionary output gap: when current output exceeds potential output; the gap puts upward pressure on inflation.

recessionary output gap: when current output is below potential output; the gap puts downward pressure on inflation.

aggregate expenditure (AE): is the total amount of spending on a country’s goods and services at a given price level in a specific time period. AE is about intentions (spending plans). GDP is about results (actual production).

https://www.sca.isr.umich.edu/

consumption: spending by individuals for items like food, clothing, housing, transportation, entertainment, and education.

investment: spending by firms for additions to the physical or intangible capital they use to produce goods and services; also includes construction of new houses.

Remember that economists use the term investment differently from the way it is used in the business press. In the business press, an investment is a financial instrument like a stock or bond that people use as a means of holding their wealth. Importantly, though, people who make such a “financial investment” or who purchase a house from its current owner aren’t creating anything new; they are buying something that already exists. To an economist, investment is the creation of new physical or intangible capital.

government purchases: spending on goods and services by federal, state, and local governments.

net exports: exports minus imports; it represents an addition to the demand for domestically produced goods. Net exports are often referred to as the current account surplus.

r* (r star): is the neutral real interest rate — the inflation-adjusted interest rate at which:

The economy is neither overheating nor shrinking
Monetary policy is neither stimulative nor restrictive

r∗=i−πe

· i = nominal interest rate

· πᵉ = expected inflation

crowding out: the idea is that government spending can take the place of investment. The more common type of crowding out occurs when the government borrows funds to increase spending, thereby increasing the supply of bonds. An increase in the supply of bonds drives the price of bonds down, increasing the interest rate, and reducing investment. When the economy is operating at its potential and the government borrows, firms can’t, so investment is crowded out.

aggregate expenditure (AE) curve: the graph of the negative relationship between aggregate expenditure and the real interest rate.

long-run real interest rate: the real interest rate that equates aggregate demand with potential output.

monetary policy reaction curve: the relationship between the real interest rate set by the central bank and the level of inflation.

dynamic aggregate demand (AD) curve: the relationship between inflation and the quantity of spending on domestically produced goods and services.

short-run aggregate supply (SRAS) curve: the quantity of output supplied in the short run at any level of inflation; the SRAS curve is upward sloping with inflation.

long-run aggregate supply (LRAS) curve: the quantity of output supplied in the long run at any level of inflation; the LRAS curve is vertical at potential output.

Chapter 23

https://www.youtube.com/watch?v=BckMzcRfGso

https://www.youtube.com/watch?v=PN7XvEmjmJI

https://www.youtube.com/watch?v=zB1B4GIkQhM

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