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Chapter 3
The FCM and Monetary Policy
•Open market operations
–Purchases of government securities (Treasuries) ® increase in bank lending
–Sales of government securities has the opposite effect
•Reserve requirement changes
–Increase in reserve ® less lending
–Reduction in reserve ® more lending
•Discount rate changes
–Higher discount rate ® less lending
–Lower discount rate ® more lending
Large Financial Intermediaries
1) Brokerage as a Natural Moneopoly :
This is an effective mechanism as long as the team members can monitor each other to ensure that nobody gets a "free ride"
If not, "free rider" problems will crop up, and it may not be beneficial to grow beyond a certain size because of the difficulty of implementing effective internal controls.
2) Asset Transformation as a Natural Monopoly :
First, Suppose multiple depositors are needed to finance a single bank borrower and the borrower's creditworthiness has to be established through costly credit analysis.
Second, the depositors' payoff is a debt contract, it is a concave function of the bank's payoff as shown on the next page.
How banks can help to make nonbank financial contracting more efficient
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