If averaging of RRs is permitted, this can be a very effective way of supporting commercial banks’ own short–term liquidity management. Averaging of RRs can be useful especially when it is hard for the central bank to forecast accurately all flows across its balance sheet since averaging creates an inter-temporal liquidity buffer to offset errors in the central bank’s forecast. If an individual bank is indifferent whether it has a reserve balance for today or tomorrow, then it should be ready to lend in the interbank market. If the rates are above the level expected for the remainder of the RMP (since it would expect to be able to borrow more cheaply lately), or to borrow if rates are relatively small (since it would expect to be able to lend at a higher rate lately). Both of the said actions would keep overnight market rates at the targeted level.
This is called securitisation and has constituted an alternative fund raising avenue for firms from the capital market. and renders traditional band services less attractive. Disintermediation also occurs due to high inflation rates but, bank interest rates remain stagnant which is often associated with government control. Therefore, where depositors are able to get better returns for their investment in mutual funds or securities, disintermediation
Measurement of the fair value of asset and liability only can refer to the active market. When the market is illiquid, the assets will be recognized at the forced sale values instead of their true values. So, the estimation introduced by the fair value valuation models, and lack of definite measurement indicator causes concerns about the reliability of the fair value measurements has been raised. According to Stephen G. Ryan (2008), when level-2 inputs are driven by forced sales in illiquid markets, the company is allowed to use level-3 model based fair values. However, the use of level-3 model might be difficult to be used by the company because it requires the company to provide to evidence to prove that the market prices are driven by the illiquid markets fire sales.
3. The Federal Reserve controls the monetary base through open market operations and extensions of loans to financial institutions, and has better control over the monetary base than over reserves. Although float and Treasury deposits with the Fed undergo substantial short-run fluctuations, which complicate control of the monetary base, they do not prevent the Fed from accurately controlling it. 4. A single bank can make loans up to the amount of its excess reserves, thereby creating an equal amount of deposits.
The first and foremost aim of the Central Bank is to maintain the inflation level to the minimum. The Quantitative Easing policy is differing and very inflationary since it uses money for both lending and keeping as reserves. Nevertheless the economic policy on the other hand states that the effect of inflation will be good when Quantitative Easing is used, when the economy goes down as it will encourage the economy as a whole initially. But it will create problems in the longer run as the effects of such a simulation will be an extreme challenge to deal with when the economy gradually recovers. Secondly, quantitative easing can lead to a fall in the interest rates in the short term and an increase in the rate of inflation in the longer run, hence causing an instability in the financial system as well as an increase in the interest rates, therefore it is essential for the central banks to keep the interest rates
Interest Rate Swaps - International Financial Management Introduction Interest rate swaps are a financial instrument that firms use to hedge themselves against interest rate exposures by exchanging interest rate obligations with each other (Smith, 2011). Interest rate exposure is the risk that a firm can make financial losses when the interest rates on the firm’s liabilities/assets move unfavorably (upwards and downwards respectively) against it within the financial market. It also refers to the opportunity for gain when interest rates in the financial market drop on these very same liabilities. The rationale behind such a derivative instrument is that, both parties to the financial arrangement have their own distinct priorities and requirements
The investment policy of a bank consists of earning high returns on its un- loaned resources. But it has to keep in view the safety and liquidity of resources so as to meet the objectives of profitability which conflicts with each other and investment policy strikes a judicious balance among them. Therefore a bank should lay down its investment policy in such a manner so as to ensure the safety and liquidity of its funds and at the same time maximize its
If hedge funds managers borrow money from bank, it may lead bank lost a lot of money. However, financial institutions bulid up a system which is Counterparty Credit Risk Management, so this system become the first line defense between unregulated hedge funds and regulated financial institutions (Kambhu 2007). As Kambhu (2007) said ‘In general, a financial institution may be willing to extend credit to the hedge fund against the posting of specific collateral that is valued at no less than the amount of the exposure. This reduction in settlement risk in leveraged trading increases confidence and thereby promotes active financing of leveraged trading’. As a result, this CCRM system could reduce some risks, make hedge funds safer and attract more
The interest rates of the bonds are somehow greater than rates paid by banks. Hence, it will turn the retirement savings into retirement income. Besides, bonds are more stable than stocks as investing in bonds are unlikely to lose money compared to stocks. This is because the bonds are fairly predictable and hence bondholders can predict their investment earnings and expected return. If the company goes bankruptcy, bondholders will have the priority over shareholders to receive payment (Randolf, n.d.).
Pro’s: They can often operate more cheaply than formal banks and therefore provide the loans under better conditions. This acts to support economic growth. Normal bank loans are much safer, but that makes them also more expensive. Lower yields and higher fees. Because they are not subject to heavy regulation they can also offer services that banks are not able or are not willing to.