Regulation of Financial Institutions Exam Outline

Flashcards summarizing key concepts from the Regulation of Financial Institutions lecture.

Real Economy

The part of the economy concerned with producing goods and services, creating value by combining labor, technology, and raw materials.

Financialization

A structural transformation wherein financial markets dominate the real economy, making profits through financial channels rather than production.

Financial Intermediation

The process by which financial intermediaries such as banks facilitate the flow of funds between savers and borrowers.

Direct Finance

A method where investors provide funding directly to borrowers, exposing themselves to the associated gains or losses.

Indirect Finance

A financing method where a financial intermediary stands between the capital providers and capital users.

Asset Transformation

The pooling of resources from many small investors to create larger assets, such as loans.

Maturity Transformation

The conversion of short-term liabilities into long-term assets, creating a mismatch between the liquidity of deposits and loans.

Bank Run

A situation when many depositors withdraw their money from a bank simultaneously due to fears of a bank's insolvency.

Moral Hazard

A situation where an entity engages in risky behavior because it does not bear the full consequences of that risk, often due to safety nets like deposit insurance.

FDIC

Federal Deposit Insurance Corporation, which insures deposits up to $250,000 and aims to maintain public confidence in the banking system.

Shadow Banking

Non-bank financial intermediaries that provide services similar to traditional banks but operate outside normal banking regulations.

Securitization

The process of pooling various types of debt and selling them as securities to investors.

Dodd-Frank Act

Legislation aimed at reducing risks in the financial system, created after the 2008 financial crisis, which includes multiple regulatory reforms.

Stress Testing

A simulation technique used to determine an institution's ability to handle an economic crisis.

Living Wills

Plans required by the Dodd-Frank Act that outline how a financial institution would be resolved in the event of failure.

TLAC

Total Loss-Absorbing Capacity, a minimum amount of capital and debt banks must have to absorb losses in a crisis.

Volcker Rule

Part of the Dodd-Frank Act that restricts the ability of banks to make risky investments that do not benefit their customers.

Market Discipline

The mechanism whereby investors or market participants can influence a financial institution's risk-taking behavior by their actions.

CAMELS Rating System

A supervisory rating system used to classify a bank's overall condition based on Capital adequacy, Asset quality, Management quality, Earnings, Liquidity, and Sensitivity to market risk.

SIFI

Systemically Important Financial Institution, a designation given to financial institutions whose failure could pose a threat to the broader financial system.

Bagehot's Dictum

A framework for providing emergency liquidity which states that central banks should lend freely at high-interest rates against good collateral to solvent institutions.