Financial Markets, Banking, and Monetary Policy Wiley Finance Series
Auteur : Simpson Thomas D.
The financial sector is a vital component of the US economic machinery. The Federal Reserve works within this sector to promote its congressional mandates of maximum employment and low inflation. Unfortunately, the contribution of the financial system to the economy’s performance is not well understood. Students of standard college courses on money, banking, and monetary policy often find that the textbooks have not kept pace with the evolution of the financial sector, including the rise of securitized finance and the Federal Reserve’s evolving monetary operations. Tom Simpson’s book represents a huge step forward in this regard. His comprehensive exposition of the essential parts of the financial system and modern explanation of how the Federal Reserve supports the economy gives readers a much better understanding of the US financial system and the Federal Reserve. This book provides a comprehensive introduction to the financial system, including the markets, institutions, and mechanisms of finance, as well as the role of the Federal Reserve and monetary policy. The economic principles underlying finance are woven through the chapters, and the book includes an insightful introduction into the causes of and responses to the recent financial crisis. Tom Simpson has had a front-row seat on financial developments in recent decades and has written a book that provides an ideal introduction to the financial system and monetary policy.
Preface xvii
Chapter 1 Introduction 1
What You Will Learn in This Chapter 1
Overview 1
Where We are Going in This Book 2
Contributions Made by the Financial System 4
Transfers of Resources from Surplus to Deficit Units 4
Other Contributions 8
Recurring Themes in the Chapters Ahead 11
Resources 12
Chapter 2 Overview of the Financial System 17
What You Will Learn in This Chapter 17
Introduction 17
Features of an Effective Financial System 17
Direct Methods of Finance 18
Investment Banks 19
Debt versus Equity 20
Money versus Capital Markets 21
Asymmetric Information 21
Adverse Selection 21
Moral Hazard 22
Indirect Methods of Finance 22
Primary versus Secondary Markets 27
Primary-Market Transactions 27
Secondary-Market Transactions 28
Trading Platforms 29
Brokers 29
Chapter 3 The Special Role of Commercial Banks 33
What You Will Learn in This Chapter 33
Background 33
Commercial Bank Balance Sheet 34
Assets 35
Liabilities 35
Net Worth (Capital) 36
Payment System and Money 36
Commercial Banks and the Payment System 36
Payment System Infrastructure 40
Credit and Stored Value Cards 40
Payments Media in the Money Stock 41
Velocity (Turnover of Money) 42
Liquidity Provision 44
Dealing with Asymmetric Information 46
Maturity Transformation 46
The Safety Net and Regulatory Policy 47
Chapter 4 The Pricing of Financial Assets 55
What You Will Learn in This Chapter 55
Background 55
Present Value 56
Value of a Single Future Payment 57
Value of a Coupon Security 58
Other Applications 59
Solving for Yield to Maturity 59
Solving for Fixed Payments 60
The Special Case of a Consol 61
Maturity and Price Sensitivity 61
Holding Periods versus Maturities 63
Return versus Yield 63
Duration 64
Nominal versus Real Yields 66
Appendix A: Variations of the Valuation Relationship 69
Appendix B: Solutions Using a Financial Calculator 70
Future Value 70
Future Value—A Higher Interest Rate 70
Present Value of Single Cash Flow 71
Lottery Choice 71
Current Price of a Coupon Security 71
Price of an Aasset Providing Uneven
Cash Flows 71
Yield to Maturity 72
Chapter 5 Factors Affecting Yields 75
What You Will Learn in This Chapter 75
Background 75
The Term Structure of Interest Rates 76
The Expectations Hypothesis 77
The Term Premium Hypothesis 81
Market Segmentation Hypothesis 83
Implicit Forward Rates 84
The Role of the Term Structure 85
Credit Risk 85
Credit Rating Agencies 86
Investment-Grade versus Below-Investment-Grade Debt 87
Cyclical Behavior of Credit Risk and Spreads 88
Credit Default Swaps (CDSs) 89
Changing Investor Tolerance for Risk 90
Liquidity 90
Taxation 91
Embedded Options 91
Flights to Safety 92
Chapter 6 Principles of Portfolio Selection and Efficient Markets 97
What You Will Learn in This Chapter 97
Overview 97
Uncertainty, Expected Return, and Risk 98
Selecting a Portfolio 99
Expected Return 99
Risk 99
Interpreting the Expression for Risk 100
An Illustration 101
These Principles in Practice 102
Efficient Portfolios and Risk-Return Trade-Offs 103
Efficient Markets Hypothesis 104
Implications for a Random Walk 106
Other Implications 106
Asset Bubbles 106
Evidence 107
Chapter 7 The Money Market 111
What You Will Learn in This Chapter 111
Background and Basic Features of the Money Market 111
Pricing 112
Treasury Bills 114
Auction Procedures 114
The Role of Primary Dealers 114
Purpose for Issuing Bills 115
Commercial Paper 115
Credit Quality 115
Maturities 116
Asset-Backed Commercial Paper (ABCP) 116
Retreat of the ABCP Market 116
Commercial Paper Placement 117
The Role of Commercial Banks in the Money Market 117
Letters of Credit and Bankers’ Acceptances 119
Monetary Policy Effects on the Money Market 120
Chapter 8 The Bond Market 125
What You Will Learn in This Chapter 125
Background 125
Treasury Notes and Bonds 126
Maturities 126
Features of TIPS 127
Placement 127
When-Issued Trading 127
STRIPS 128
Secondary-Market Trading 128
Reopening 128
Purposes for Issuing Coupon Securities 129
Credit Quality 129
Corporate Bonds 129
Placements 130
Tension between Bond and Shareholders 130
Indentures and the Role of Covenants 131
Credit Default Swaps (CDSs) 132
Below-Investment-Grade Market 132
Private Placements 133
Secondary-Market Trading 133
Munis 133
Tax Considerations 134
Credit Risk and Liquidity Differences 134
General Obligation versus Revenue Bonds 134
Placement 135
Indentures 135
Ratings 135
Government-Sponsored Enterprises (GSEs) 135
Fannie Mae and Freddie Mac 136
Federal Home Loan Banks 136
Features of GSE Bonds 136
The Impact of Monetary Policy on the Bond Market 136
Chapter 9 Securitization 143
What You Will Learn in This Chapter 143
Background 143
Obstacles to Overcome 144
Asymmetric Information and Adverse Selection 144
Corrective Measures 145
Regulatory Capital on Ordinary Loans 145
Beginnings of Securitization—MBSs 146
Ginnie Mae 146
Illustration of the Process 146
Fannie Mae and Freddie Mac 147
Secondary-Market Trading 148
Other Mortgage Pools 148
Other Securitized Loans—Consumer ABSs 148
Auto ABSs 148
Credit Card ABSs 149
Other Consumer ABSs 149
Common Features 149
The Effects of the Financial Crisis 150
ABSs Involving Business Credit—CDOs and Structured Securities 150
Standard Types of Pools—CLOs, CBOs, and CMBSs 150
Structured Securities 150
CMOs 151
Senior-Subordinated Securities 152
Effects of the Financial Crisis 152
Securitization and the Integration of Credit Markets 152
Monetary Policy and Securitization 152
Chapter 10 The Mortgage Market 155
What You Will Learn in This Chapter 155
Background 155
Home Mortgages 156
Homeowner Choices 156
Standard Features of Home Mortgages 159
Commercial Mortgages 163
The Mortgage Market and Monetary Policy 163
Chapter 11 The Equity Market 167
What You Will Learn in This Chapter 167
Background 167
Equities as a Source of Corporate Finance 168
Preferred versus Common Shares 168
Types of Preferred 169
Primary and Secondary Markets 169
Valuation of Individual Shares 170
Basic Model 170
Dividend Growth 170
Price-Earnings 171
Some Implications 172
Extending These Principles to the Stock Market 173
Monetary Policy and the Stock Market 178
Indexes of Stock Prices 178
Chapter 12 Central Banking and the Federal Reserve 183
What You Will Learn in This Chapter 183
Background 183
Origins of Central Banks 184
Constitutional Foundations 184
The Century and a Quarter without a Central Bank 185
Creation of the Federal Reserve 186
Early Years of the Federal Reserve 188
Reforms of the 1930s 189
Fed Independence 190
Central Bank Accountability and Transparency 191
Central Bank Responsibilities 193
Monetary Operations 196
The Demand for Reserves 196
The Supply of Reserves 196
Market Equilibrium 198
Setting the Federal Funds Rate through Open Market Operations 198
Permanent versus Temporary Transactions 200
Payment of Interest on Excess Reserves 201
The Effect of the Financial Crisis on the Reserves Market 201
Interaction of Policy Instruments in the Reserves Market 202
Chapter 13 Monetary Policy: The Basics 211
What You Will Learn in This Chapter 211
Background 211
Effects of Monetary Policy on Output and Prices 212
The Goal of Price Stability 212
The Dual Mandate in the United States 212
The Operational Counterparts to Maximum Employment and Price Stability 213
Maximum Employment 213
Price Stability 214
Aggregate Demand and Aggregate Supply 215
Aggregate Supply 215
Aggregate Demand 216
Monetary Policy and Aggregate Demand 218
The Model 219
Steady Inflation 219
Rising Inflation 220
Falling Inflation 220
The Important Role of Inflation Expectations 220
Actual and Potential Output in Practice 221
Addressing Inflation 221
Addressing a Shortfall in Output 223
Okun’s Law 224
Chapter 14 Monetary Policy: Challenges Faced by Policymakers 231
What You Will Learn in This Chapter 231
Background 231
Other Forces Affecting Output and Inflation 232
Lags and Other Complications 234
Need to Be Forward Looking 234
Importance of the Expected Path of Short-Term Rates 235
Forward Guidance 236
Policy Rules 237
Money Stock Rule 237
Taylor Rule 237
Expectations and Central Bank Credibility 239
Inflation Targeting 240
The Zero-Bound Constraint and the Slow Recovery from the Great Recession 241
Chapter 15 Financial Crises 247
What You Will Learn in This Chapter 247
Background 247
Classic Banking Panics 248
The Nightmare of the Great Depression 250
Gold Standard Restraints 250
The Stock Market Crash 251
Bank Runs 251
Massive Damage 252
Broader Financial Crises 252
Big Drop in Asset Values 253
Runs on Suspected Institutions 253
Fire Sales 253
The Financial Crisis 254
Background Factors 255
Proliferation of Nonstandard Mortgages 255
Growing Exposures of Key Financial Institutions 256
The Unraveling 257
Shadow Banking Stress 257
Major Credit Crunch 258
Policy Responses 258
Dodd-Frank 259
Common Threads 259
Chapter 16 The Foreign Exchange Market and Exchange Rate Regimes 263
What You Will Learn in This Chapter 263
Background 263
Features of the Market 264
The Relation between Spot and Forward Exchange Rates 266
Long-Run Exchange Rate Relationships 267
The Real Exchange Rate 269
Exchange Rate Determination in the Shorter Run 269
Demand Schedule 270
Supply Schedule 271
Equilibrium 272
Floating Exchange Rate Regime 273
Fixed Exchange Rate Regime 275
An Undervalued Exchange Rate 275
The Dynamics of an Undervalued Currency 276
An Overvalued Currency 278
Variations on Fixed Exchange Rate Regimes 280
Chapter 17 Depository Institutions 285
What You Will Learn in This Chapter 285
Background 285
Organization of Commercial Banks and Other Depository Institutions 286
Commercial Banks 287
Savings Institutions 291
Credit Unions 292
Economic Functions of Depository Institutions 293
Payment Services 293
Liquidity Provision 293
Providing Credit When There is Asymmetric Information 293
Maturity Transformation 293
The Balance Sheet of the Commercial Banking System 294
The Balance Sheet of Savings Institutions 295
The Balance Sheet of Credit Unions 296
Deposit Insurance 296
Regulation and Supervision of Depository Institutions 297
The Regulators 297
The Focus of Regulation and Supervision 298
Capital Standards 298
Liquidity Standards 299
Depository Institutions and Monetary Policy 300
Chapter 18 Mutual Funds 305
What You Will Learn in This Chapter 305
Background 305
History 306
SEC Regulation 307
Role of Mutual Fund Complexes 307
Types of Funds 309
Open-End Funds 309
Exchange-Traded Funds 314
Closed-End Funds 314
Mutual Funds and Monetary Policy 315
Chapter 19 Hedge, Venture Capital, and Private Equity Funds 319
What You Will Learn in This Chapter 319
Background 319
Commonalities in Structure 320
Hedge Funds 321
Role of the Prime Broker 322
Leverage 322
Entry and Redemption 322
Types of Hedge Funds 322
Economic Value and Hedge Fund Risk 323
Venture Capital Funds 324
Types of Firms Selected for Financing 324
Risks Involved 324
Size and Stages of Financing 325
Exit 326
Economic Value Provided by VC Funds 326
Private Equity Funds 326
Leverage 327
Exit 328
Economic Value Provided by Private Equity Firms 328
Alternative Investment Funds and Monetary Policy 328
Chapter 20 Large Institutional Investors 333
What You Will Learn in This Chapter 333
Background 333
Pension Funds 334
Defined Benefit (DB) Plans 335
Defined Contribution (DC) Plans 336
Social Security 338
State and Local Government Pension Funds 338
Federal Government Retirement Funds 339
Life Insurance Companies 339
Life Insurance 339
Annuities 340
LICO Assets 340
Reinsurance 341
Property and Casualty Insurance Companies 341
Large Institutional Investors and Monetary Policy 342
About the Author 347
Index 349
THOMAS D. SIMPSON served as a senior officer at the Board of Governors of the Federal Reserve System. In addition to his other responsibilities, he was an officer of the Federal Open Market Committee. Simpson is on the faculty at the University of North Carolina Wilmington.
Date de parution : 08-2014
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