Term
| definition of bank capital |
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Definition
equity
long term debt
reserves |
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Term
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Definition
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Term
| equit in capital management |
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Definition
common stock, PS, surplus, unidvided profits=BV equity
MV equity |
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Term
| LT debt in capital management |
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Definition
subordinate notes and debentures
interest payments are tax deductible |
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Term
| reserves in capital management |
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Definition
PLL is expensed on the income statement
RLL is a captial account on the right hand side of the BS |
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Term
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Definition
source of funds
cushion to absorb unexpected operating losses
adequate capital |
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Term
| cushion: long term debt can only |
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Definition
| absorb losses in the even of institutional failure |
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Term
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Definition
| promote bank safety and soundness |
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Term
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Definition
regulatiory requirements promote bank safety and soundness
mitigate moral hazard by increasing shareholder exposure to bank operating losses
market confidence |
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Term
| bank regulators are concerned abou |
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Definition
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Term
| bank shareholders concerned about |
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Definition
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Term
| regulator perceive that financial risk increases |
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Definition
| the probability of insolvency as greater variablity of earnings makes it more likely that negative earnings could eliminate bank capital |
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Term
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Definition
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Term
| excessive capital regulation |
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Definition
inhibit competitiveness and efficiency of the system
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Term
| capital standards to measure adequacy |
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Definition
OCC uses capital deposit rate 1900's
Fed resv in 1950's classified assets into 6 different risk cat
OCC moved to subjective system in the 1960's |
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Term
| early 1900's OCC capital standards |
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Definition
| capital deposit rate motivated by fears of bank runs |
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Term
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Definition
FABC
form for analyzing bank capital
6 risk types |
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Term
| OCC switched to in the 1960's |
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Definition
subjective system of captial evaluation
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Term
| subjective system of capital evaluation |
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Definition
OCC 1960
management quality
asset liquidity
operating expenses
deposit compostition
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Term
| problem with early capital standards |
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Definition
different standards by dif regulators OCC FRB FDIC
not enforceable by law until International lending act 1983
fairness was questionable with smaller banks |
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Term
| what made capital standards enforacble by law |
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Definition
| international lending act of 1983 |
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Term
| minimum primary capital to asset ration created |
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Definition
in 1981 by three federal bank regulators
5-6% |
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Term
| becuase of the first min cap to asset ratio large banks |
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Definition
| increased their risk taking |
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Term
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Definition
risk based capital requirements 1988
12 industiralized nations |
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Term
| what was the basel agreement under |
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Definition
| bank of international settlements |
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Term
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Definition
| the fed approach the FABC but it has 4 catagorizes of risk |
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Term
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Definition
| 1988 include rules to securites trading banks |
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Term
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Definition
2 teir
1. core capital
2. supplemental capital
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Term
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Definition
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Term
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Definition
teir 2 basel
LT debt and reserves
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Term
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Definition
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Term
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Definition
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Term
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Definition
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Term
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Definition
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Term
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Definition
mortgage backed bonds and govt obligations GO muni bonds
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Term
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Definition
| home loans and muni rev bonds |
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Term
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Definition
| bus consumer and other loans other securities and bank premises |
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Term
| market risk is the reason |
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Definition
more doing derivitive and securitized speculating derivities
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Term
| market risk capital requirements |
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Definition
jan 1998
10% of total assets or 1billion in trading account posisiton
8% risk adjusted capital requirement on a daily basis based on market to market values
added to credit risk weighted assets or risk adjusted assets after removing these securities from previous
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Term
previous risk adjusted asset
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+ |
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Definition
-GO munies trading account sec. ($1500x.2)
+VAR over the last 60 days
=Risk adj assets with market risk capital requirements |
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Term
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Definition
on VAR models by using assumptions
allow VAR models to continuously update |
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Term
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Definition
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Term
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Definition
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Term
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Definition
financial market as a whole
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Term
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Definition
| on the `10day 99th percentile |
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Term
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Definition
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Term
| for general market risk and VAR must use |
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Definition
and average VAR over the last 60 days x 3
the previous VAR (if volatile) |
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Term
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Definition
| other risk factors including credit risk of the securites issuer and liquidity risk |
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Term
| scaling factor for specific risk |
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Definition
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Term
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Definition
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Term
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Definition
| Basel 2 that has more risk sensitive framework |
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Term
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Definition
single measure
one size fits all
broad brush approach
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Term
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Definition
emphasis on banks own internal risk models, supervisory review, and market disipline
flexibility- incentives for better risk managemnet
more risk sensitivity |
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Term
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Definition
1. min capital requirement is done on an internal basis
2. more supervisory review
3. market disipline- banks will required to increase info disclosure a measurement of credit and operatinoal risk |
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Term
| basel 2 pilar 1 capital requirement |
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Definition
| total capital >8% / credit risk + market risk + operational risk |
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Term
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Definition
standardized approach based on external credit ratings when avalible
-advanced internal risk based IRB approach |
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Term
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Definition
standardized approach
internal models approach
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Term
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Definition
basic indicator approach
standardized approach
internal measurment approach |
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Term
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Definition
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Term
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Definition
-reg requirments may change banks behavior in terms of allocation of loanable funds and investment decisions and possibly channel savings to less than the best uses
---port diversification is not taken into account
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Term
| why is FDIC in bank capital adequacy |
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Definition
| its deposit insurance activites |
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Term
| FDIC handling distressed banks |
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Definition
1. depositor payoff (liquidation)
2. purchase and assumption chop and merge
3. provision for financial aid
4. charter of a deposit insurance national bank DINM or bridge bank --> |
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Term
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Definition
| govt takes over then merges |
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Term
| variable rate deposit insurance |
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Definition
A B C
well cap 0 3 17
adequate 3 10 24
under 10 24 27 per $100 |
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Term
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Definition
firm value goes up as co uses debt
Vl=Vd+tD |
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Term
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Definition
| fewer shares dont have alot of agency prob |
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Term
| what increases corporate control of the bank |
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Definition
| greater debt increases the concentration of ownership among shareholders and increases corp control of bank |
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Term
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Definition
| for banks not closely held |
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Term
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Definition
| for banks with undervalued shares |
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Term
| preemptive rights of shareholders reduces |
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Definition
| dilution and reduces agency cost to the extent that owner concentration is increased |
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Term
| asset investment consideration |
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Definition
| asset risk and capital needs to absorb potential loss |
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Term
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Definition
| financial services mondernization act 1999 |
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Term
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Definition
Internal capital generation rate
ICR
rate bank can expand its assets and still maintain its capital ratio |
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Term
| estimating liquidity needs |
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Definition
sources and uses of funds method
structure of deposits method
funding and market liquidity needs
SSF |
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Term
| sources and usues of funds method |
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Definition
est loans est deposits change loands change dep estimated liquidity needs
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Term
| structure of deposit method |
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Definition
short term (unstable) demand dep, other trans
medium term: small time and saving dep
long term (stable):large time dep, expected dep withdrawls |
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Term
| funding and market liquidity needs |
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Definition
funding liquidity maintaining sufficient cash to meet lending and securities invesment needs
market liquidity risk : market disruptions that can widen the bid ask spreads and make hard to close out open positions in derivites sec with out losses |
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Term
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Definition
are an alternative source of funds
a reserve to protect bank from financial market loss of confidence that could threaten safety and soundness |
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Term
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Definition
vault cash and cash held on deposit at fed res
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Term
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Definition
| money market instruments held by the bank under no formal regulatory requirment |
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Term
| primary reserves lagged reserve requirments |
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Definition
avg balance of transaction during 14 day period
daily vault cash in 14 day period
skip 3 days
maintain reserve balance during a subsequent 14 day (maintenacne period)
17 days between end of comp period and beg of maintenance period
-lowers management costs
-improves the quality of info on required balances |
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Term
| managing the money position |
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Definition
| minimize cash holdings mean to meet reserve requirements |
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Term
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Definition
| t bill, fed agency securites, repurchase aggreement, bankers acceptances, negotiable certificates of deop, fed funds, commercial paper |
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Term
| secondary reserves aggressive liquidity approach |
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Definition
| yield curve relationship buy longer tern or short term sec |
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Term
| secondary reserves securitization of loans |
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Definition
asset backed financing
loans converted into securities with greater liquidity
credit risk reduced |
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Term
| liability managment of liquidity mgmt |
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Definition
| purchase the funds needed to meet loan demands and deposit withdrawals |
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Term
| liability liquidty managment |
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Definition
as interest rates rise -- reduce interest rate margins
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Term
| aggressive liability liquidity managment to implent |
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Definition
| a bond carry trade strategy can result in losses |
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Term
| capital losses on securites and assets can occur under liability mgmt |
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Definition
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Term
| loss of public confidence |
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Definition
| would prevent the bank from rolling over purchased fund |
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Term
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Definition
| interest rates are low and investors shift funds from deposits to higher earning capital assets in the in the financial market place |
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Term
| interest rates go up margin |
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Definition
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Term
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Definition
| high enough liquidity to meet unepected needs but not so hight to incure opportunity cost of near cash assets |
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