on 25-Dec-2014 (Thu)

Annotation 149655413

 #economics #money A financial asset is unlike a real asset (a building, a car, a television, a painting) because there can only be a financial asset (notes and coins in your pocket, cash in the bank, corporate or government bonds) if there is an equal and opposite financial liability. The two always net off to nil.

values fall (because of reckless loans on land and buildings which fall in value) then the value of the liabilities fall as well (i.e. if you own shares or bonds in a bank which is making big losses, the value of your shares or bonds fall).b) <span>A financial asset is unlike a real asset (a building, a car, a television, a painting) because there can only be a financial asset (notes and coins in your pocket, cash in the bank, corporate or government bonds) if there is an equal and opposite financial liability. The two always net off to nil. So, for example, if you have a mortgage on your house, you have a liability but the bank records it as an asset.2. The traditional books explain how banks started off using 'fractional r

Annotation 149655420

 #economics #money The traditional books explain how banks started off using 'fractional reserve banking', i.e. they take 100 gold coins as deposits and lend out 90 of them, keeping 10 in the safe in case depositors come round to make a withdrawal.

the bank, corporate or government bonds) if there is an equal and opposite financial liability. The two always net off to nil. So, for example, if you have a mortgage on your house, you have a liability but the bank records it as an asset.2. <span>The traditional books explain how banks started off using 'fractional reserve banking', i.e. they take 100 gold coins as deposits and lend out 90 of them, keeping 10 in the safe in case depositors come round to make a withdrawal.3. So in the old fashioned view of banking regulation (or self-regulation), we look at the assets side: as long as the bank has a tenth* of its assets in liquid form (i.e. gold coins in

Annotation 149655427

 #economics #money n the old fashioned view of banking regulation (or self-regulation), we look at the assets side: as long as the bank has a tenth* of its assets in liquid form (i.e. gold coins in the safe), it will probably do OK.

set.2. The traditional books explain how banks started off using 'fractional reserve banking', i.e. they take 100 gold coins as deposits and lend out 90 of them, keeping 10 in the safe in case depositors come round to make a withdrawal.3. So i<span>n the old fashioned view of banking regulation (or self-regulation), we look at the assets side: as long as the bank has a tenth* of its assets in liquid form (i.e. gold coins in the safe), it will probably do OK.4. The modern view of banking regulation (i.e. Basel rules), we look at the liabilities side, and say that share capital (a non-repayable liability or source of finance) should be at lea

Annotation 149655434

 #economics #money The modern view of banking regulation (i.e. Basel rules), we look at the liabilities side, and say that share capital (a non-repayable liability or source of finance) should be at least a tenth* of total assets; so if the value of assets falls by a tenth or less, there are still enough assets left to repay depositors and bondholders.

o make a withdrawal.3. So in the old fashioned view of banking regulation (or self-regulation), we look at the assets side: as long as the bank has a tenth* of its assets in liquid form (i.e. gold coins in the safe), it will probably do OK.4. <span>The modern view of banking regulation (i.e. Basel rules), we look at the liabilities side, and say that share capital (a non-repayable liability or source of finance) should be at least a tenth* of total assets; so if the value of assets falls by a tenth or less, there are still enough assets left to repay depositors and bondholders.5. Quite how the myth that a bank can lend out ten times as much as it takes in deposits (or bonds) arose, I have no idea, it is quite simply not true. The Basel one-tenth* limit is impo

Annotation 149655441

 #economics #money Basel rule says something like "The total amount that a bank can lend out is no more than ten times its share capital" - it says nothing about ratio of lending to deposits, like in traditional view of "fractional reserve banking".

s.5. Quite how the myth that a bank can lend out ten times as much as it takes in deposits (or bonds) arose, I have no idea, it is quite simply not true. The Basel one-tenth* limit is imposed by regulators, so it might be accurate to say that <span>"The total amount that a bank can lend out is no more than ten times its share capital", but that is merely the upper limit, and depends on people wanting to borrow that much.So much to the background6. Modern banking, i.e. 'how banks behave once the government takes its e

Annotation 149655452

 #economics #money what money is, namely the physical or electronic record of who owes whom how much; 'money' is a liability as much as it is an asset

per cent interest and paying the depositor three per cent interest, pocketing two per cent for itself.11. Some refer to the process outlined in para 7 to 9 above as 'printing money', which it is - but the problem is that people don't realise <span>what money is, namely the physical or electronic record of who owes whom how much; 'money' is a liability as much as it is an asset; you can only have cash in the bank if somebody somewhere owes the bank money.12. As a final thought: the Basel capital requirement rules (see para 4 and 5 above) are of very limited us

Annotation 149655459

 #economics #money you can only have cash in the bank if somebody somewhere owes the bank money

outlined in para 7 to 9 above as 'printing money', which it is - but the problem is that people don't realise what money is, namely the physical or electronic record of who owes whom how much; 'money' is a liability as much as it is an asset; <span>you can only have cash in the bank if somebody somewhere owes the bank money.12. As a final thought: the Basel capital requirement rules (see para 4 and 5 above) are of very limited use in preventing credit bubbles. All the banks would have to do is tell the ven

Annotation 149655475

 #economics #money During the years of the credit bubble, banks were not issuing any new shares - if anything they were buying them back (reducing share capital). It is only after things went horribly wrong again in 2008 that banks started raising more share capital (or converting bonds to share capital).

hare capital and leverages it with deposits. 23 May 2011 at 10:33 Mark Wadsworth said... Den, that's exactly not what they do. They first create the deposits by issuing loans (see step 7), which magically turn into deposits. <span>During the years of the credit bubble, banks were not issuing any new shares - if anything they were buying them back (reducing share capital). It is only after things went horribly wrong again in 2008 that banks started raising more share capital (or converting bonds to share capital). 23 May 2011 at 10:37 Deniro said... OH I uderstood and agree your point about making loans from deposits and you made is succinctly. I just thought you are in danger of star

Annotation 149655482

 #economics #money The lending bank doesn't incur the liability until the cheque is actually paid in, whether that is minutes or days later doesn't really matter.

stantaneously. i. The lending bank hands over a bit of paper with a number written on it (the cheque, which the buyer gives to the vendor).ii. If the vendor loses the cheque or forgets to ever bank it, the lending bank gets off scot free.iii. <span>The lending bank doesn't incur the liability until the cheque is actually paid in, whether that is minutes or days later doesn't really matter.iv. Sure, the vendor might pay it in at a different bank, but the lending bank will also accept cheques issued by other banks, so it all cancels out (and the rest is just inter-bank lend

Annotation 149655489

 #economics #money the Basel capital requirement rules are of very limited use in preventing credit bubbles. All the banks would have to do is tell the vendors who arrive in their branches brandishing cheques for £100,000 that their deposit accounts are only paying 3% interest and that they would do better to subcribe for new shares in the bank, which pay 5% or 10% (in the good years). Shares in a bank are just a slightly different kind of 'money', but can be created out of thin air the same as the mortgage loan or the deposit.

realise what money is, namely the physical or electronic record of who owes whom how much; 'money' is a liability as much as it is an asset; you can only have cash in the bank if somebody somewhere owes the bank money.12. As a final thought: <span>the Basel capital requirement rules (see para 4 and 5 above) are of very limited use in preventing credit bubbles. All the banks would have to do is tell the vendors who arrive in their branches brandishing cheques for £100,000 that their deposit accounts are only paying 3% interest and that they would do better to subcribe for new shares in the bank, which pay 5% or 10% (in the good years). Shares in a bank are just a slightly different kind of 'money', but can be created out of thin air the same as the mortgage loan or the deposit.I hope that clears things up a bit!* I'm using "a tenth" for illustration purposes only, it's a bit more complicated than that. My latest blogpost: Banking made easy

Flashcard 149655513

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Question
in [asset swap type?] asset swap methodology, the floating amount will be calculated on the expected price of the bond each year (neither par nor current price of the bond)
yield accrete

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in yield accrete asset swap methodology, the floating amount will be calculated on the expected price of the bond each year (neither par nor current price of the bond)

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Flashcard 149655524

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Question
in yield accrete asset swap methodology, the floating amount will be calculated on [what notional?]
the expected price of the bond each year (neither par nor current price of the bond)

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in yield accrete asset swap methodology, the floating amount will be calculated on the expected price of the bond each year (neither par nor current price of the bond)

Original toplevel document (pdf)

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Flashcard 149655536

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Question
The yield accrete asset swap spread, S , solves the following equation:
$$\Large C\sum_{i=1}^{n_{fix}} df(t_i)=\sum_{i=1}^{n_{float}}[a_i(L_i+S)N_i+(N_i-N_{i-1})]df(t_i)$$

where N are estimates of bond price for given future periods

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The yield accrete asset swap spread, S , solves the following equation: C∑nfixi=1df(ti)=∑nfloati=1[ai(Li+S)Ni+(Ni−Ni−1)]df(ti) where N are estimates of bond price for given future periods

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