Private securities firms selected by the Fed that trade government securities and are permitted to trade directly with the Fed.

Financial institutions (investment banks, brokers & dealers, and organized exchanges) that reduce costs of matching savers and borrowers.

 institutions such as commerical bankes, credit unions, savings & loan associations, mutual savings banks, finance companies, and pension funds that borrow funds from savers and lend them to borrowers.

Investment Banks

Securities market institutions that assist businesses in raising new capital and advise them on the best means of doing it (issuing shares or structuring debt instruments)

Basis that allows the investment bank to make no guarantee, requiring it to sell to investors only as much of the new issue as it can.

• Guarantee to an issuing firm that needs capital, sells the issue at a higher price, and keeps the profit- Known as Spread.
• Offers lower information costs
• Gives investors confidence about new issues

The company issuing the security receives nothing unless the investment bank sells the complete issue at offering price.

Place their own funds at risk by investing in firms that were undergoing restructuring.

• Risky debt with ratings of less than Baa or BBB.
• Has a high yield, but high risk of default
• Issued primarily by corporations and also by municipalities
• Often take the form of subordinated debentures
• Highly speculativeYield is historically between 4-6% above treasuries

• Trade between ultimate buyers and sellers
• They hold inventories of securities and sell them for a price higher than they paid for them, earning the spread between the bid and asked price

• A physical location at which securities are traded.
• An institution providing an auction market for securities.
• Lower information costs for savers
• Best known are NYSE and AMEX

Over-the-Counter trading

(OTC)

• Where trading takes place over the telephone and by computer.
• Traders keep track of the market by examining the activity in individual issues on their computer screens.

• An account against which checks convertible to currency can be written.
• National banks adopted this innovation, and as a result, the two types of banks coexist today.

• A Federal government guarantee of certain types of bank deposits.
• F.D.I.C.- Federal Deposit Insurance Corporation

• C- Capital adequacy
• A- Asset quality
• M- Management
• E- Earnings
• L- Liquidity
• S- Sensativity to market risk

Ratings regulators use examinations in order to monitor complance with capital standards and restrictions on permissible activities.

A sufficiently low CAMELS rating can lead to "cease and desist" orders to change behavior, a means of restraining moral hazard.

• A sequence of events in which depositors lose confidence in a bank, for real or imagined reasons, and make withdrawls, exhausting the banks liquid funds.
• Banks will pay depositors in full on a first-come, first-serve basis until its liquid funds are exhausted
• Bad news about one bank can snowball and affect other banks

The spreading of bad news about one bank to include other banks.

• The ultimate source of credit to which banks can turn during a panic.
• A "banker's bank"
• Advances credit to solvent banks using a bank's good, but illiquid, loand as collateral
• The Fed's role as LLR has expanded over the years to include ensuring general financial stability.

Federal Open Market Committee

(FOMC)

• Banks that are members of the Federal Reserve System.
• Federal Reserve Act required all national banks to become members.
• State banks may elect to become members.

Low memberships are due to costs and a requirement to keep part of their deposits in idle funds (not allowing them to gain interest)

Fed argued it gave an unfair advantage to nonmember banks.

• Used to inform the members on changes in the economy since the last meeting
• Is "public"
• Summarizes its views in a statement of the balance of risk

A theory of central bank decision making implying that officials maximize their personal well-being rather than that of the general public.

• Theory of central bank decison making implying that officials maximize their personal well-being rather than that of the general public.
• Government goals may not match their stated mission
• Predicts that the Fed acts to increase its power, influence, and prestige as an organization.

Private securities firms selected by the Fed that trade government securities and are permitted to trade directly with the Fed.

the bank's cushion against losses on loans and investments

(aka: Net Worth)

• means by which the Fed makes discount loans, reducing the monetary base and the money supply

• Provides the most direct way for the Fed to act as the Lender of Last Resort