This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
DIRECT- involves only one contract between lender & borrower- called dis-intermediation- E.g. you loan money to your neighbor
SEMI-DIRECT- Involves essentially one contract but . . .- A middle party is needed to execute it- E.g. you buy Intel stock through Charles Schwab from your neighbor
INDIRECT- Involves two contracts - Financial intermediary is in the middle- E.g. you deposit money in the bank which loans it to your neighbor
Maturity & Liquidity IntermediationE.g. You deposit $ in savings account, which is loaned out in a 30-yr fixed-rate mortgage to your neighbor; even though the loan won’t be paid off for many years, yet you can get your money at any time. Financial intermediaries absorb liquidity risk!
Interest-rate and Inflation Risk IntermediationE.g. Bank absorbs risk from borrower locking into fixed rate for 30 years.
Repackaging SizeE.g. Bank can re-package the size of a security to the level desired. Most of us don’t have $100,000 sitting around to lend to our neighbor, so many of us poor investors can pool our $.
Diversification & Default RiskE.g. You deposit $ in savings account, pooled together with other investors, so that no one investor is lending to only one borrower. Depository institutions also offer government deposit insurance. In short, financial intermediaries absorb default risk.
Efficiencies & SpecializationE.g. Bank is better able to invest in mortgages (legal issues, credit approval, etc.). Since the bank has specialized in this, it has economies of scale (full-time lawyers, appraisers, credit specialists, etc.)
Clearing House for PaymentsE.g. financial intermediaries make possible EFT, credit/debit cards, checks, etc. which wouldn’t exist otherwise
Time Deposits (have specific maturity) Retail certificate of deposit (CD)
No secondary market Early withdrawal penalty New: Bull-market, bear-market and callable CDs
Negotiable CD Short-term, minimum $100,000, usually $1m, no
FDIC insurance Marketable -- can trade among investors via dealer
Money Market Deposit Accts (MMDAs) More liquid than CDs with no maturity Limited check writing (e.g. 5 per month) Created in 1982 with Garn St. Germain Act
Federal Funds Purchased Short-term loans between banks (usually 1-7 days), often to meet reserve
requirements (most report weekly on Wed.) Allows banks to borrow S/T (seasonal, etc.) or may provide a S/T
investment Interest rate is the Federal Funds Rate, typically above the T-bill rate since
small amounts of liquidity and default risk may exist. Borrowing from the Federal Reserve Banks
Borrowing at the discount window, which is discouraged Discount Rate (usually 1% higher than Fed Fds Rate) Intended for meeting temporary short-term reserve requirement needs Must get Fed approval, Fed may frown at you
Bank capital Represents amount of equity stockholders have Obtained from issuing stock and retaining earnings The more capital, the more “safe” the bank is because
capital is a buffer to absorb future losses Banks often resist building up too much capital because it
lowers the return on equity (ROE). Stated another way, the more leverage the bank, the more ROE is magnified.
Capital is usually approx. 6-12% of assets but it really depends on risk-based capital requirement and size of bank
Primary capital (stock & RE) is of higher quality than secondary capital (subordinated notes & bonds)
A major reason banks failed during the financial crisis because of inadequate capital.Basel III (or the Third Basel Accord) is a global regulatory standard on bank capital adequacy, stress testing, and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010–11, and scheduled to be introduced from 2013 until 2018. (Basel is a town in Switzerland where they meet.) Basel III strengthens bank capital and introduces new regs on liquidity and leverage.
Bank Loans Collateral requirements on business loans
Increasingly accepting intangible assets Important to service-oriented firms which have few hard assets Increased lending risk with service businesses--telecomm
In the 1800s, Walla Walla was the largest city in the Northwest and the financial and cultural center of the NW region (and it almost became the state capitol).
Baker Boyer Bank (BBB) was founded in 1869, twenty years before Washington became a state. The bank really started as a mercantile store where gold miners would keep their gold in the store’s safe. As much as $40,000 in gold would be left in the safe for more than a year, and though it wasn't common to give or ask for receipts, no losses were ever suffered.
At one point in 1911, the BBB building was the tallest building west of the Mississippi River.
During the banking crisis of the 1930s, most banks were forced to close, at least temporarily. But BBB was determined to remain open, even though it had been ordered closed. BBB allowed customers to use the back door of the bank until banks were allowed to reopen.
BBB is still partly owned by the families of the original founders, Dorsey Baker and John Boyer. Today the CEO is the great-great-granddaughter of Dorsey Baker.
BBB remains a community bank with 8 branches in WW, Tri-Cities, Milton-Freewater, and Yakima Megan Clubb,