Economics to TBTF
This term describes the tendency for banks to take excessive risks because they believe the government will rescue them if they fail, effectively privatizing profits while socializing losses.
What is Moral Hazard?
In a traditional "Bail-out," this group of people ends up covering most of the banks' losses, a practice that post-crisis reforms like "Bail-ins" are designed to stop.
Who are Taxpayers?
This term refers to the advantage large banks get from expectations of government bailouts.
What are implicit funding subsidies/funding cost advantages?
What is the equation for RWAs?
Sum of assets x risk weights = risk weighted assets (RWAs)
What are the two ways government can help banks if they are about to go bankrupt?
One way is to inject capital in exchange for an equity stake. Another way is to guarantee some or all of the bank’s liabilities, such as deposits, in order to prevent a run on the bank (people mass withdrawing money in fear of bankruptcy).
To reduce the risk of insolvency, these regulatory rules force banks to fund a portion of their loans with "own money," such as equity and retained profits, rather than relying entirely on borrowed debt.
What are capital requirements?
This is one implication of an increase in capital
What is profitability?
The countries that represent around two-thirds of the global population and 80% of world GDP.
G20
What is the interbank market and what did it have to do with the Lehman crisis?
The interbank market is the market where banks lend to each other. In terms of the Lehman crisis, once they failed and nobody knew which banks were exposed to similar mortgage-linked losses, banks stopped trusting each other’s ability to repay. They then became reluctant to lend in the interbank market.
When a bank with a thin capital buffer suffers a loss, it often responds by aggressively cutting lending to stay solvent—a process known by this term that can amplify economic downturns.
What is Deleveraging?
This is the approach used by the FSB to measure funding cost advantages.
What is the factor pricing approach?
What was step 3 of the policy cycle and what does it do?
Evaluate which instruments are needed prior to implementation; policymakers can compare use of different tools and try and act early rather than fixing it later, which can increase expenses and disrupt real economy