ECON 203 Lecture Notes - Lecture 13: Overnight Rate, Openmarket, Foreign Exchange Market
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Capital requirement: a government regulation that specifies a minimum amount of capital, intended to ensure that banks will be able to pay off depositors and debts. Leverage and the financial crisis: in the financial crisis of 2008, banks suffered losses on mortgage loans and mortgage-backed securities due to widespread defaults. Many banks become insolvent (unable to repay debts), and others found themselves with too little capital, responded by reducing lending, leading to a credit crunch. To ease the credit crunch, the federal reserve and us treasury injected hundreds of billions dollars worth of capital into the banking system. This policy temporarily made taxpayers part-owners of many banks. Central banks have 3 main tools for monetary control: open-market operations. Central bank either sells or buys bonds to commercial banks. Buying is expansionary and selling is contractionary: changes in reserve requirements. Asking banks to keep a certain amount in reserves, so they will have hard cash readily available.