Chapter 4. Depository Institutions “Banks”. Asset/Liability problem Commercial Banks Savings and Loans Credit Unions. I. Asset/Liability Problem . Assets how banks USE their funds loans, cash reserves, securities Liabilities how banks GET their funds
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1970 30 yr. loan 9.1%, 6 mo. CD 8%
1981 6 mo. CD 18.27%
-- all federal & some state banks
-- the Federal Reserve
-- other banks (federal funds)
-- financial markets (commercial paper)
& resulting bank failures
but still affects banks today
-- U.S. has many smaller banks
-- no economies of scale
-- a lot of merger activity since
-- belief that abuses led to 1929 market crash
-- advantages for global banking,
economies of scale
-- depositors won’t withdraw $
-- banks, depositors less careful
-- low risk, low wt
-- Tbills, 0% wt.
-- high risk, high wt.
-- commercial loan, 100% wt.