Lecture 15 - Banking, Money and interest

What are the three forms of money mentioned in the notes?

Notes and coins, bank deposits, stocks and shares.

What are the ideal attributes of money?

Durability, divisibility, transportability, non-counterfeitability.

What is the function of money as a medium of exchange?

In a subsistence economy, people barter goods instead of using money for exchanges.

How does money serve as a means of storing wealth?

It allows individuals to save the fruits of today's labor for future purchases.

What is the function of money in evaluating goods and services?

Money allows the value of goods and services to be compared via prices.

What is the significance of money in establishing future claims and payments?

Money enables parties to agree on prices for future payments or contracts.

What role do financial intermediaries play in the financial system?

They provide expert advice, channel funds, and help manage risks.

What are the types of banks within the banking system?

Retail banks, wholesale banks, and universal banks.

What is the purpose of a Special Purpose Vehicle (SPV) in the securitization process?

To buy loans from the Originator and issue new securities, isolating risk.

What are the three categories of tranches in securitization?

Senior tranche (lowest risk), mezzanine tranche (medium risk), junior tranche (highest risk).

What do credit rating agencies do in the securitization chain?

They assess and provide a credit rating for each tranche, indicating risk levels.

What are the cash flow steps in the securitization chain?

Investors give cash to SPV, SPV pays Originator, borrowers make payments to SPV.

What benefit does the bank (Originator) get from the securitization chain?

Immediate cash to issue more loans and transfer default risk to investors.

How does securitization benefit investors?

It gives them new investment options that are easier to manage compared to individual loans.