Econ 330 Lecture on Money and Banking

These flashcards cover key vocabulary and concepts related to moral hazard, banking regulation, financial intermediation, and issues affecting the banking system.

Moral Hazard

The risk that a borrower has the incentive to engage in undesirable or risky behavior after a loan has been taken because the consequences are borne by the lender.

Principal-Agent Problem

A situation in which a principal hires an agent to act on their behalf, but the agent has different incentives than the principal, leading to potential conflicts of interest.

Financial Intermediation

The process by which financial institutions like banks channel funds from savers to borrowers, facilitating investments.

Asymmetric Information

A situation where one party in a transaction has more or better information than the other, often leading to adverse selection or moral hazard.

Adverse Selection

A form of market failure that occurs when buyers or sellers have information that the other party does not, leading to transactions that are not beneficial for one party.

Capital Adequacy Ratio

A measure of a bank's available capital expressed as a percentage of its weighted risks; essential for assessing a bank's stability.

Duration Risk

The risk that changes in interest rates will affect the price of bonds, particularly long-term bonds, which are more susceptible to interest rate fluctuations.

Venture Capital

Investment funds that are provided to startups and small businesses with perceived long-term growth potential, often in exchange for equity.

Private Equity

Investment in private companies or buyouts of public companies that result in a delisting, with a focus on increasing their value over time.

Debt Contracts

Legal agreements where one party borrows resources from another, specifying terms of repayment and often requiring collateral.

Collateral

An asset pledged by a borrower to secure a loan or credit, which can be seized by the lender if the borrower defaults.

Restricted Covenants

Conditions placed in loan agreements that limit the borrower's actions to protect the lender's interests.

Silicon Valley Bank

A financial institution that collapsed in March 2023, which highlighted issues related to duration risk, capital adequacy, and financial regulation.

Contagion

The spread of financial instability from one institution or market to another, often triggered by events like a bank failure.

Banking Regulation

Rules and guidelines that govern the practices of financial institutions to promote stability and protect depositors.

Basic Accounting

Fundamental principles of accounting that provide insights into an organization's financial situation by detailing assets, liabilities, and net worth.

Grade Ranges

The distribution of scores among students, often determined by curves based on average performance on exams.

T Account

A financial statement that outlines a person's or bank’s assets (A) and liabilities (L) in a format resembling the letter 'T', allowing for easy assessment of net worth.

Credit Default Swaps

Financial derivatives that allow an investor to swap or offset their credit risk with that of another investor, essentially acting as an insurance policy against a borrower's default.

Liquidity Risk

The risk that a bank or financial institution will not have sufficient cash or readily convertible assets to meet its short-term obligations.

Deposit Insurance

A system that protects depositors' funds in banks and other financial institutions in the event of a bank failure, typically up to a certain amount per account.

Interest Rate Risk (이자율 위험)

The risk that the value of fixed-income investments, such as bonds, will change due to fluctuations in interest rates. (채권과 같은 고정 수입 투자 자산의 가치가 이자율 변동으로 인해 변동할 위험.)

Systemic Risk (시스템 리스크)

The potential for a single failure to trigger a cascade of failures throughout the entire financial system, leading to widespread economic disruption. (단일 실패가 전체 금융 시스템 전반에 걸쳐 연쇄적인 실패를 유발하여 광범위한 경제적 혼란으로 이어질 수 있는 잠재적 위험.)

Too Big To Fail (TBTF) (대마불사)

The concept that certain financial institutions are so large and interconnected that their failure would pose a severe risk to the entire economy, prompting governmental intervention. (일부 금융기관이 너무 거대하고 상호 연결되어 있어 그 실패가 전체 경제에 심각한 위험을 초래할 수 있으므로 정부가 개입해야 한다는 개념.)

Leverage (레버리지)

The use of borrowed capital to increase the potential return of an investment, but also significantly increasing the risk of loss. (투자 수익률을 높이기 위해 차입 자본을 사용하는 것, 그러나 손실 위험 또한 크게 증가시킴.)

Default Risk (채무 불이행 위험)

The risk that a borrower will fail to make timely payments of interest or principal on debt. (차입자가 부채에 대한 이자 또는 원금 지급을 제때 이행하지 못할 위험.)

Securitization (증권화)

The process of combining various financial assets (e.g., mortgages, auto loans) into a pool and then issuing new securities backed by this pool. (다양한 금융 자산(예: 모기지, 자동차 대출)을 묶어 하나의 풀로 만들고, 이 풀을 담보로 새로운 증권을 발행하는 과정.)

Monetary Policy (통화 정책)

Actions undertaken by a central bank to influence the availability and cost of money and credit to help promote national economic goals. (중앙은행이 국가 경제 목표를 달성하기 위해 통화 및 신용의 가용성과 비용에 영향을 미치기 위해 취하는 조치.)

Derivatives (파생상품)

Financial contracts whose value is derived from an underlying asset, index, or rate. They include futures, options, swaps, and forwards. (기초자산, 지수 또는 금리에서 가치가 파생되는 금융 계약. 선물, 옵션, 스왑 및 선도가 포함된다.)