MS&E 147 Chapter Notes - Chapter 4: Maturity Transformation, Investment Banking, Great Depression
7 Mar 2017
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Chapter 4: is it really a wonderful life. Repeal of glass steagall act in 1999: banks allowed combine deposit taking and investment banking. Bank must pay depositors whenever they demand money. Savings deposits tend to be somewhat less accessible, but all on short notice. Banks also have funding by borrowing from other financial institutions in the money market such as money market mutual funds that specialize in short term lending. Asset side: cash reserves and ensure that bank has cash available when depositors want to make withdrawals. Banks do not usually have large reserves. For depositors: banks must make funds readily available immediately. Banks make payment system fast and convenient. Economic exchange is smooth when payment system is efficient. Banks can also make loans, but bank must distinguish between successful loans that should be made and those that should not. Banks is the middleman in determining creditworthiness. While they improve efficiency in lending, banks benefit economy.
