Banking, Liquidity Transformation, and Bank Runs

These flashcards cover key vocabulary related to banking, liquidity transformation, and bank runs, important for understanding the principles of macroeconomic analysis.

Asymmetric Information

Describes a situation in which two parties to a transaction are not equally well-informed.

Adverse Selection

Information asymmetry about characteristics of the parties before a transaction takes place.

Moral Hazard

Information asymmetry about actions taken by parties after a transaction takes place.

Liquidity Transformation

The process by which banks simultaneously invest in illiquid projects while providing households with liquid assets.

Financial Intermediation

The process of funneling savings from households to investment by firms, primarily conducted by banks.

Bank Run

Occurs when depositors withdraw funds en masse due to fears about the bank's solvency.

Deposit Insurance

A government guarantee that protects depositors' funds up to a specified amount in case of bank failure.

Equity Multiplier

The ratio of a bank's total assets to its equity capital, indicating leverage.

Shadow Banking

A system of financial intermediation that occurs outside traditional regulated banking, often lacking deposit insurance.

Securitized Banking

A modern banking system where loans are sold and transformed into asset-backed securities instead of keeping them on a bank's balance sheet.