Financial
Intermediation
1
Intermediation
1
The problem of distinguishing a good risk from a bad one before making a loan or providing insurance. It is caused by asymmetric information.
What is Adverse Selection?
This profession was the original bankers.
What are Goldsmiths?
Accepting resources from a large number of small savers/lenders in order to provide large loans to borrowers.
What is Pooling savings?
A financial institution that accepts deposits and makes loans.
What is a Depository Institution?
Bank assets minus bank liabilities. AKA The net worth of the bank and, the value of the bank to its owners.
What is Bank Capital?
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.
What is Moral Hazard?
Two ways to generate more information to solve the problem of hidden attributes.
What is (1) government-required disclosure and (2) private collection and production of information?
Keeping depositor's savings safe, giving them access to the payments system, and providing them with accounting statements.
What is Safekeeping and accounting?
A financial intermediary that does not issue deposit liabilities.
What is a Nondepository Institution?
The difference between the interest rate a bank receives on its assets and the interest rate it pays to obtain liabilities.
What is Interest Rate Spread?
A sustained fall in the general price level. It is the opposite of inflation. It aggravates information problems in ways inflation does not.
What is Deflation?
Someone who doesn't pay the cost but still gets the benefit of a good or service
What is a Free Rider?
Providing investors with the ability to diversify even small investments.
What is Diversifying risk?
Four broad asset categories on a bank's balance sheet.
What is (1) Cash, (2) Securities, (3) Loans, and (4) All Other Assets?
A portion of a bank's capital that is set aside to cover potential losses from defaulted loans.
What is a Loan Loss Reserve?
A loan that is not guaranteed by collateral.
What is an Unsecured Loan?
Firms that specialize in investing in risky new ventures in return for a stake in the ownership and share of the profits.
What is Venture Capital Firms?
Allowing depositors to transform their financial assets into money quickly, easily, and at a low cost
What is Providing liquidity?
The only type of security a U.S. bank can hold.
What is a Bond?
Activities such as trading derivatives and issuing loan commitments that are neither assets nor liabilities on a bank's balance sheet.
What are Off-Balance-Sheet Activities?
The fact that the borrower knows whether he or she is trustworthy, while the lender faces substantial costs to obtain the same information, results in an __________________.
What is Information Asymmetry?
The term Ponzi scheme has its origins in a 1920 scam run by serial con artist named __________.
Who is Charles Ponzi?
Generating large amounts of standardized financial information.
What is Collecting and processing information services?
The market where banks lend their excess reserves to other banks. The loans are unsecured.
What is the Federal Funds Market?
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.
What is a Repurchase Agreement (repo)?