Macro exam 3

• Money

  An asset that is widely used and accepted as a means of payment. Anything that is generally accepted in exchange as payment for goods and services. While the key function of money is to act as a medium of exchange, money also serves as a store of value, unit of account, and standard of deferred payment.
• Central Bank

  A financial institution that exercises control over key aspects of the financial system.
• Commercial Bank

  An entity whose business is to receive deposits, or close substitutes for deposits, from the public and to grant credits for its own account.
• Bank for International Settlements (BIS)


  An international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks. It is headquartered in Switzerland.
• Monetary Policy

  Actions undertaken by a central bank using the instruments at its disposal (changes in the money supply and/or changes in interest rates) in order to achieve its objectives (e.g. maintaining price stability).
• European Central Bank (ECB)

  The body at the centre of the European System of Central Banks (ESCB) and the Eurosystem. Together with the national central banks of the EU Member States whose currency is the euro, the ECB defines and implements the monetary policy for the euro area.
• Federal Reserve Board (US Central Bank aka Fed)


  The central banking system of the United States, founded by the U.S. Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Fed administers the nation's monetary policy using different monetary policy tools: open market operations, the reserve requirement, and the discount rate. The Fed also plays a major role in the supervision and regulation of the U.S. banking system.
• Central Bank Money Creation

  The central bank creates base money when it buys assets from commercial banks and pays with newly printed banknotes or when the central bank gives out loans to commercial banks against eligible collateral.
• Money Destruction

  The central bank destroys base money when it sells assets to commercial banks or calls in loans.
• Expansionary Monetary Policy

  Central bank's actions aiming to increase liquidity (increasing the money supply) and or lower interest rates.
• Restrictive (aka contractionary) Monetary Policy

  Central bank's actions aiming to reduce liquidity (lowering the money supply) and/or to increase interest rates.
• Monetary Base aka Central Bank Money (M0)

  The monetary base consists of currency (banknotes and coins) in circulation plus the minimum reserves credit institutions are required to hold with the central bank and any excess reserves they may voluntarily hold at the central bank.
• M1


  A "narrow" monetary aggregate that comprises currency in circulation and overnight deposits.
• M2


  An "intermediate" monetary aggregate that comprises M1 plus deposits with an agreed maturity of up to two years and deposits redeemable at notice of up to three months.
• M3


  A "broad" monetary aggregate that comprises M2 plus repurchase agreements, money market fund shares and units as well as debt securities with a maturity of up to two years.
• Money Multiplier


  In a fractional-reserve system, the maximum amount of money (deposits) the banking system generates through lending from each additional euro of reserves.
• Commodity Money

  Money with an intrinsic value that is used as a medium of exchange (e.g. deerskin, gold coins).
• Nominal Money / Fiat Money


  Money with no intrinsic value that takes its value from a trust or promise of payment. Fiat money is not backed by metals, such as gold.
• Great Moderation / NICE decade


  Period of low volatility in aggregate output and stable inflation rates in advanced economies between the 1980s and the 2008 financial crisis
• Greenspan-Put


  Botanical metaphor for monetary policies of the Federal Reserve (Fed) under former Chairman Alan Greenspan (1987-2006, chairman of the Fed)
• European Banking System


  • Characterized by commercial banks taking in short-term customer deposits and giving out long-term loans (maturity transformation)
  • Relationship-based finance or originate-to-hold model
  • Loans only granted to creditworthy borrowers
• US Banking System


  • Transaction-based finance or the originate-to-distribute model
  • Banks take in short-term deposits, give out long-term loans and sell the credit claim immediately to a third party
  • Banks try to give out as many loans as possible and no longer pay attention to creditworthiness
• Securitization


  Banks sell loan claims/credit claims to special purpose vehicles (SPVs), which pool loan claims and turn them into tradable securities
• Asset Backed Securities (ABS)


  • Securities that are backed by credit claims such as mortgages, auto loans or credit card receivables
  • Issuers often subdivide the securities into several classes - aka tranches - with varying levels of risk
  • In the event of a default on payments from the underlying asset pool, losses are not distributed evenly but rather according to a specific order in between the tranches
• Special Purpose Vehicles (SPVs)


  Legal entities established (e.g. by banks) for the purpose of structured finance/buying credit claims from different banks with the objective to pool them, repackage them and sell them on the capital market
• Pooling of credit claims/loans


  Purchase of different credit receivables to spread risk
• Credit Default Swaps (CDS)


  • Default-triggered credit derivative
  • Most CDS default settlements are "physical," whereby the protection seller buys a defaulted reference asset from the protection buyer at its face value
  • "Cash" settlement involves a net payment to the protection buyer equal to the difference between the reference asset face value and the price of the defaulted asset
• Rating Agency


  Business enterprises that rate the creditworthiness of other business enterprises, banks, countries and securities issued by them
• Rating / Credit Rating


  • Classifications of debtors or securities in terms of their creditworthiness or credit quality, generally carried out by rating agencies
  • The best creditworthiness rankings are denoted as AAA or Aaa (Triple A), while more negative ratings are denoted with different combinations of letters and numbers
  • Those with a lower rating are classified as speculative, such securities are also referred to as high-yield bonds
• Too big to fail / Too connected to fail


  Notion that certain banks or companies will always be supported by the government in a crisis, because their failure would have an unacceptable effect on the stability of the national or international financial system
• Predatory Lending


  Any lending practice that uses deceptive of unethical means to convince someone to accept a loan under unfair terms or to accept a loan that they do not actually need
• Teaser Rates


  Temporary low interest rate or an interest rate of zero that is offered to attract borrowers to a particular loan or mortgage product
• No-Doc(umentation) Loans


  Loans to buy property that do not require income verification from the borrower
• Liar Loans


  Mortgages obtained by lying on the loan application
• NINJAs


  Persons with no income, no jobs or assets
• Non-Recourse Loans


  Loans secured by collateral (often real estate/the house) where borrowers cannot be held personally liable if they default, and lenders may not seize their personal property or garnish wages
• Adjustable-Rate Mortgages (ARMs)


  Loans for which the interest rate can change, usually in relation to a market interest rate
• House Price Bubble


  Run-up in housing prices fueled by demand, speculation, and exuberant spending
• Boom-to-Bust Cycle


  Series of events in which a rapid increase in economic activity in the economy is followed by a rapid decrease in economic activity, and this process is repeated again and again