The American Monetary System: An Insider's View of Financial Institutions, Markets and Monetary Policy

Автор: William H. Wallace
Название: The American Monetary System: An Insider's View of Financial Institutions, Markets and Monetary Policy
Язык: English
Издательство: Cham: Springer
Год: 2013
Формат: pdf
Размер: 15,9 mb
Страниц: 228

Today’s financial system is considerably more complex than in years past, as new financial instruments have been introduced that are not well understood even by the people and institutions that invest in them. Numerous high-risk opportunities are available, and the number of people who unwittingly wander into such ventures seems to grow daily. There is also the realization that people’s lives are affected by the financial system without their overt participation in it. Despite no active participation, pensions can be emasculated by a sudden decline in interest rates, or a rise in rates can increase the monthly payments on a mortgage, credit cards or other debt.
This book looks at the history of the American banking system, including the passage of the Federal Reserve Act in 1913, the implementation of deposit insurance, along with certain other provisions of the Glass-Steagall Act of 1933, the Bretton-Woods agreements, the forces of technological innovation and the Dodd-Frank Act, passed by Congress in 2010 for regulatory reform.
This book will be of interest to undergraduate and graduate level students that want to gain a broad understanding of how the financial system works, why it is important to the economy as a whole, and what its strengths and weaknesses are. Also, readers should gain an understanding of what the Federal Reserve, other regulators and other central banks are doing, and will be in a position to critique their actions and say with some depth of understanding why they agree or disagree with them.
 Table of contents:
Part I Historical Perspectives on Money, Financial Institutions and Markets
1 What Gives Money Its Value? From Gold to Paper...................... 3
Metallic Money........................................................ 3
The Emergence of Paper Money.......................................... 5
US Banks and Their Involvement with Paper Currency................ 5
Attempts to Establish a Central Bank.............................. 6
The National Banking Act (Greenback Act) of 1863.................. 8
Gradual Movement to a Pure Gold Standard.......................... 8
The Politics of Gold Versus Silver................................ 10
The Creation of the Federal Reserve System as the Central Bank of the United States............................................ 11
The Broader Definition of Money...................................... 12
The Demise of the Gold Standard................................... 15
Lessons of the 1930s................................................. 16
References........................................................... 17
2 What Is Driving the Financial World Today?........................... 19
World War II and Its Aftermath: The Bretton Woods Agreements...... 19
The Birth of the Eurodollar.......................................... 21
The US Dollar as the World’s Reserve Currency..................... 23
The Forces of Change: Technology, Competition, and Globalization.. 24
Free Trade and the Free Movement of Capital....................... 25
The Quickened Pace of Change in the Financial World............... 26
Today’s Financial Institutions: The Emergence of Shadow Banking... 27
References........................................................... 28
Part II Bunking: Asset and Liability Management; Banking Supervision and Regulation
3 How Are Banks Funded?................................................. 31
Intermediation....................................................... 31
The Balance Sheet of a Bank.......................................... 33
Financial Holding Companies.......................................... 34
Deposit Sources of Funds: Checkable.................................. 35
Deposit Sources of Funds: Other than Checkable....................... 37
Reserve Requirements................................................. 38
Deposit Insurance.................................................... 39
Non-Deposit Sources of Funds......................................... 40
Repurchase Agreements.............................................. 43
Federal Fund Purchases............................................. 44
Eurodollar Borrowings.............................................. 46
Large Certificates of Deposit...................................... 47
Borrowing from the Central Bank.................................... 48
Other Bank Debt.................................................... 55
Off-Balance-Sheet Items.............................................. 56
References........................................................... 57
4 How Do Banks Use Their Funds? The Asset Side of the Balance Sheet................................................. 59
Bank Reserves and the Fractional Reserve System...................... 60
Earning Assets, Investments, Government
and Government Agency Securities..................................... 61
Treasury Securities................................................ 62
Federal Agency Securities.......................................... 64
Municipal Securities............................................... 65
Earning Assets, Investments, Corporate Securities.................... 65
Corporate Debt Securities and the Bond-Rating Agencies............. 65
Junk Bonds and Leveraged Buyouts................................... 66
Corporate Equity Securities........................................ 67
Real Estate and Other Items........................................ 68
Earning Assets: Loans................................................ 69
Risks in Lending..................................................... 73
Sales and Securitizations of Loans and Asset-Backed Securities....... 73
Pass-Through Arrangements.......................................... 75
Mortgage-Backed Bonds.............................................. 76
Collateralized Debt Obligations.................................... 76
Evaluation of Bank Assets: The Mark-to-Market Issue.................. 77
References........................................................... 78
5 Who Owns the Banks? Bank Capital and the Basel Accord................. 79
The Nature of Capital................................................ 79
The Level of Capital................................................. 80
The Basel Accord: Basel 1........................................... 81
Too Big to Fail.................................................... 82
Evaluation of Bank Performance..................................... 83
Gap Analysis....................................................... 84
References......................................................... 85
6 How Safe Are Our Banks? Supervision and Regulation of the Financial System............................................ 87
The CAMELS Ratings................................................. 90
Basel II........................................................... 92
Basel III and Subsequent Proposals................................. 93
When a Bank Fails.................................................. 95
References......................................................... 95
Part III Financial Markets and the Management of Financial Risk
7 What Makes the System Work? The Discipline of the Markets......... 99
The Evolution of the Capital Markets............................... 99
The Importance of Capital Markets to the Economy................ 100
The Markets for Derivatives........................................ 101
Markets and Exchanges........................................... 102
Market Competition Between the United States and Europe............ 104
Operating Methodologies and High-Frequency Trading.............. 106
Measures of Market Activity..................................... 108
Investor Behavior in the Markets................................ 111
The Changing Role of Financial Institutions in US Markets....... 112
Commercial Paper................................................... 113
References...................................................... 114
8 Who Finances American Industry? The Relative Roles of Commercial and Investment Banking............................ 115
The Role of Banks in Corporate Finance: An International Comparison................................... 115
Investment Banking................................................. 117
Bond Ratings....................................................... 118
Syndications of Loans and Securities............................ 119
The Bond Market and the Behavior of Interest Rates.............. 123
Zero-Coupon Bonds and Strips.................................. 129
Cash Management Bills............................................ 129
When-Issued Securities........................................... 129
Corporate Debt..................................................... 130
Callable, Convertible, and Synthetic Convertible Bonds........... 131
Investment Banks’ Role in Mergers and Acquisitions................. 131
The Pricing of Credit: The Libor Rate........................... 132
Bond Yield Curves............................................... 134
A Note on Trust Companies: The Panic of 1907.................... 136
The Fannie Mae and Freddie Mac Problem............................ 137
References......................................................... 138
9 What Went Wrong, and What Are We Doing to Fix It? A Chronology of Financial Crises.................................. 139
The Bankhaus Herstatt Failure, 1974............................... 139
The Continental Illinois Bank Crisis, 1984........................ 140
The Japanese Financial Crisis, 1990-2005.......................... 140
The BCCI Financial Scandal, 1995.................................. 141
The Barings Bank Demise. 1995..................................... 141
The Southeast Asian Financial Crisis, 1997-1998................... 142
The Russian Financial Crisis, 1998................................. 144
Hedge Funds and the LTCM Debacle, 1998............................. 144
The Enron Situation, 2002......................................... 146
The Dot.Com Crisis, 2000-2002..................................... 147
The Subprime Mortgage Crisis and Related Recession, 2007-2012..... 148
The Wall Street Reform and Consumer Protection Act (The Dodd-Frank Bill)............................................ 149
References......................................................... 151
10 Why Have Financial Risks Skyrocketed, and How Is the Industry Dealing with It?........................... 153
Managing Financial Risks........................................... 153
The Nature of Derivatives: Where Is the Value?.................... 154
Futures............................................................ 155
Interest Rate Futures........................................... 155
Currency Futures................................................. 158
Index Futures................................................... 158
Options............................................................ 158
Credit Derivatives: Credit Default Swaps.......................... 159
Swaps.............................................................. 161
Summary on Risk and Derivatives................................... 162
Payment System Risk................................................ 163
References......................................................... 165
Part IV Central Banking and Monetary Policy
11 What Are the Purposes and Functions of the Federal Reserve System?.................................................... 169
The Three Major Functions of the Federal Reserve.................. 169
The Structure of the Federal Reserve System....................... 170
Monetary Policy................................................... 174
Objectives and Targets of Monetary Policy: Short Term and Long Term........................................ 174
The Instruments (Tools) of Monetary Policy........................ 179
Discount Rate Policy.............................................. 180
Reserve Requirement Policy...................................... 181
References........................................................ 181
12 How Is American Monetary Policy Made, and How Does It Affect the Domestic and Global Economies?....... 183
Open Market Policy.............................................. 183
Setting the Targets............................................. 188
The Shift from Interest Rate to Money Supply Targeting.......... 189
The Return to Interest Rates.................................... 191
The Federal Open Market Committee................................. 192
Open Market Operations.......................................... 196
A Day at the Desk............................................... 198
Global Monetary Policy and the European Crisis.................. 200
The Austerity Versus Stimulus Debate.............................. 202
The Value of the Dollar: A Policy Question...................... 203
A Note on the Legal Status of the Federal Reserve System
Within the Government of the United States........................ 205
An Explanation of the Balance Sheet of the Central Bank........... 206
References........................................................ 208
13 A Career with the Federal Reserve: Some Personal Reminiscences..................................................... 209
My Relationship with Arthur F. Burns.............................. 210
Relations with Other Agencies and Foreign Central Banks......... 211
A Dollar Coin..................................................... 212
Currency Counterfeiting........................................... 213
End of the Burns Era.............................................. 216
The Interregnum of G. William Miller.............................. 216
The Courage of Paul Volcker....................................... 217
Postscript............................................................. 221
About the Author....................................................... 223
Bibliography........................................................... 225
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