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

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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.

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