Transcript Central banking

Progress text (21 April)
10.15: 1st half – LH 32
11.00: 2nd half – LH 32
Units covered by the 1st progress test:
The Business Cycle (causes, Keynesianism and
monetarism, graph description - vocabulary)
Trade
(retail, wholesale, e-commerce, international trade,
free trade & protectionism, the EU)
Banking
(types of banks, banking services, microfinance,
central banking, monetary policy, crisis of credit)
+ language of meetings
Central banking
Central banking functions
Listening: RB, p 61
1a Listening
The functions of a central bank:
1) Implementing monetary policy
• 1a) setting interest rate ceilings and floors
• 1b) printing money or destroying it
• 1c) open-market operations
2) Exchange rate supervision
3) Commercial banking supervision
4) Acting as a lender of last resort
Read the text carefully, underline words/phrases
that seem important/relevant to the topic.
Are you sure you understand them?
Ask a colleague for help...
Do task II
1a Listening
I The functions of a central bank:
1) Implementing monetary policy
• 1a) setting interest rate ceilings and floors
• 1b) printing money or destroying it
• 1c) open-market operations
2) Exchange rate supervision
3) Commercial banking supervision
4) Act as a lender of last resort
Read the text carefully, underline words/phrases
that seem important/relevant to the topic.
Are you sure you understand them?
Ask a colleague for help...
II: A–1b B–1a C–3
D–2 E–4 F–1c
Implementing monetary policy
HW check
RB, p 62
I – 2 Do you understand the words below?
TIC-TAC-TOE: What is...
C + I + G + (X-M) = ?
Implementing monetary policy
HW check
RB, p 62
I – 2 Do you understand the words below?
TIC-TAC-TOE: What is...
C + I + G + (X-M) = AD
C = Consumers' e___________ on goods and services.
I = Investment spending by companies on c______ goods.
G = G_________ expenditures on publicly provided goods
and services.
X = E______ of goods and services.
M = I_______ of goods and services.
http://www.investopedia.com/terms/a/aggregatedemand.asp#ixzz3XDmhLpOl
Implementing monetary policy
HW check
RB, p 62
I – 2 Do you understand the words below?
TIC-TAC-TOE: What is...
C + I + G + (X-M) = AD (aggregate demand = “total spending”)
C = Consumers' expenditures on goods and services.
I = Investment spending by companies on capital goods.
G = Government expenditures on publicly provided goods and
services.
X = Exports of goods and services.
M = Imports of goods and services.
http://www.investopedia.com/terms/a/aggregatedemand.asp#ixzz3XDmhLpOl
What is...?
... the total stock of money circulating in an economy. The
circulating money involves the currency, printed notes,
money in the deposit accounts and in the form of other
liquid assets.
MONEY SUPPLY
• An increase in the supply of money typically ________
interest rates, which in turns generates _______
investment and puts more money in the hands of
consumers, thereby stimulating c________. Businesses
respond by ordering ______ raw materials and
increasing p________. The increased business activity
r______ the demand for labor. The opposite can occur if
the money supply falls or when its growth rate declines.
http://www.investopedia.com/terms/m/moneysupply.asp#ixzz3XDpFmcRF
What is...?
... the total stock of money circulating in an economy. The
circulating money involves the currency, printed notes,
money in the deposit accounts and in the form of other
liquid assets?
MONEY SUPPLY
• An increase in the supply of money typically lowers
interest rates, which in turns generates more investment
and puts more money in the hands of consumers,
thereby stimulating spending. Businesses respond by
ordering more raw materials and increasing production.
The increased business activity raises the demand for
labor. The opposite can occur if the money supply falls or
when its growth rate declines.
http://www.investopedia.com/terms/m/moneysupply.asp#ixzz3XDpFmcRF
What is...
... the rate charged by the central bank for lending to other
banks?
DISCOUNT RATE
What is...
... bank’s ability to fund loans?
LENDING CAPACITY
What is...
... the amount of funds that banks must hold in reserve
against deposits made by their customers?
http://www.investopedia.com/terms/r/requiredreserves.asp#ixzz3XDxScvfn
RESERVE REQUIREMENT
What is...
... the opposite of borrow?
LEND
What is...
... a synonym for loose monetary policy?
EXPANSIONARY
What is...
... the use of government spending and taxation to
influence the economy?
FISCAL POLICY
What is...
... debt that is not supported by any assets of the borrower?
UNSECURED DEBT
II Hand in the table?
III Present expansionary or restrictive
monetary policy.
Suppy the opposite term to complete the text
about restrictive monetary policy.
If the economy is in recession / ___________, the
central bank should stimulate / ______ it. This
can be done be lowering / ________ the reserve
requirement, dropping / ________ the discount
rate, or by buying / ________ bonds on the open
market.
II Hand in the table?
III Present expansionary or restrictive
monetary policy.
If the economy is in recession / overheating, the
central bank should stimulate / cool it. This can
be done be lowering / raising the reserve
requirement, dropping / increasing the discount
rate, or by buying / selling bonds on the open
market.
IV Monetary and fiscal policy
Fiscal policy
spending greater
reduce
unemployment
demand
hiring
expansionary fiscal
inflation
wishes
restrictive
fiscal
make
Monetary policy
rate
borrow
bank
more
less
expansionary monetary policy
opposite
spend
less
restrictive monetary policy
V Up or down?
How do the two types of fiscal and monetary
policies change the following?
Expansionary
UP
Money supply
Restrictive
DOWN
DOWN
Interest rate
UP
UP
DOWN
UP
Public spending
Taxes
Demand
DOWN
UP
DOWN
DOWN
UP
DOWN
Bank savings
Growth
Unemployment
UP
DOWN
UP
UP
Inflation
DOWN
US monetary policy according to
CBS students (2006)
The Federal Reserve (Central bank of
Glenn Hubbard
Ben Bernanke
Dean of Columbia Business School
Chairman of the Federal Reserve
http://www.youtube.com/watch?v=3u2qRXb4xCU
The functions of a central bank
1) Implementing monetary policy
2) Exchange rate supervision (after 1st ppt)
3) Commercial banking supervision
4) Acting as a lender of last resort
Pair up!
•
•
•
•
•
•
Treasury
Bank of England
Chancellor
The Governor
George Osborne
_________
Boris Lalovac
Ministar financija
Ministarstvo financija
Hrvatska narodna banka
Guverner HNB
Boris Vujčić
Paired up!
•
•
•
•
•
•
Treasury
Bank of England
Chancellor
The Governor
George Osborne
Mark Carney
Ministarstvo financija
Hrvatska narodna banka
Ministar financija
Guverner HNB
Boris Lalovac
Boris Vujčić
Northern Rock Banking Crises, RB, p 59
Match up the words and definitions below
1 bank run
2 shakeout
3 the Treasury
4 credit squeeze
5 the Chancellor
6 solvent
• Read the introduction – underline unknown words
Scan the rest of the text and match questions to
corresponding paragraphs
1D 2G 3F 4B 5E 6A 7C
• Read carefully and underline unknown words / parts
you do not understand
IV Match the following words from the text to
corresponding explanations, p 60 (finish for HW)
HW: V Draft notes/draw a flow chart for events described
Northern Rock, RB, p 59-60
follow-up activity
1 unsecured debt
2 bailout
3 on the cheap
4 to stem
5 to hamper
6 covered bonds
a to stop
b to prevent, hinder
c issued with a
guarantee (an asset)
d at a low cost
e debt that is not
supported by any
assets of a borrower
f providing money to
get sb. out of financial
trouble
Northern Rock, RB, p 59-60
follow-up activity
1e
unsecured debt
2f
bailout
3d
on the cheap
4a
to stem
5b
to hamper
6c
covered bonds
a to stop
b to prevent, hinder
c issued with a
guarantee (an asset)
d at a low cost
e debt that is not
supported by any
assets of a borrower
f providing money to
get sb. out of financial
trouble
7 run on a bank
8 come under
pressure
9 (borrow) over their
heads
10 mortgage lender
g organization that
makes loans for
buying property with
the property as
security
h a sudden demand by
many people
i more than would be
reasonable, intelligent
j to feel pushed to act
7h run on a bank
8j come under
pressure
9i (borrow) over their
heads
10g mortgage lender
g organization that
makes loans for
buying property with
the property as
security
h a sudden demand by
many people
i more than would be
reasonable, intelligent
j to feel pushed to act
Northern Rock Banking Crises, RB, p 59
•
•
•
•
•
Who is to blame for the Northern Rock crisis?
Why did the Bank of England not act earlier?
Why did the Tresury get involved?
Are critics convinced by the Bank’s response?
What does the Chancellor’s guarantee for
Northern Rock cover?
• How long will the guarantee last?
• What about investors who lent money to
Northern Rock? Who will not be repaid? a) or b)
a) Investors who bought the bank’s covered bonds.
b) Investors who made unsecured loans.
Northern Rock Banking Crises, RB, p 59
•
•
•
•
•
Who is to blame for the Northern Rock crisis?
Why did the Bank of England not act earlier?
Why did the Tresury get involved?
Are critics convinced by the Bank’s response?
What does the Chancellor’s guarantee for
Northern Rock cover?
• How long will the guarantee last?
• What about investors who lent money to Northern
Rock? Who will not be repaid?
a) Investors who bought the bank’s covered bonds.
Why? What are covered bonds?
Intro to crisis of credit
HANDOUT: Helga’s bar (a humorous
explanation of how the crisis of credit
started – the crisis of 2008)
Students who did not attend on Tuesday
should read Helga’s bar and do the
exercises.
You can download the text from my web site
for BE 2.
Crisis of credit
Forget about Helga and “DRINKBONDS” for a
moment.
This is what really happened:
CRISIS OF CREDIT VISUALISED
http://jonathanjarvis.com/crisis-of-credit
Vocabulary focus
1 subprime borrowers
2 credit rating
3 default
4 hedge fund
5 security
6 foreclose
A failure to repay a loan
B investment fund that combines
safe & risky investments
C clients who may not be
able to repay their loans
D assets you promise to
give if you cannot repay a loan
E estimates of people’s ability to
fulfill their financial
commitments
F to take possession of one’s
property because they failed to
continue paying a loan
Vocabulary focus
1 subprime borrowers
C clients who may not be
able to repay their loans
2 credit rating
credit standing
credit worthiness
E estimates of people’s
ability to fulfill their
financial commitments
3 default
4 hedge fund
5 security
6 foreclose
A failure to repay a loan
B investment fund that
combines safe & risky investments
D assets you promise to
give to the lender if you
cannot repay a loan
F to take possession of one’s
property because they failed
to continue paying a loan
MK, p 75 – Reading:
The subprime crisis and the credit crunch
MK, p 75 – Reading:
The subprime crisis and the credit crunch
INTRO:
• Subprime crisis...?
... a financial crisis that arose...
1 Where?
2 When?
3 What happened?
A numerous institutional lenders and hedge funds
collapsed
B the mortgage market
C after a sharp increase in mortgage foreclosures
(mainly subprime) - Write your own definition!
Subprime crisis is a financial crisis that arose in...
the mortgage market after a sharp increase in ....
mortgage foreclosures (mainly subprime) collapsed ...
numerous mortgage lenders and hedge funds.
The subprime crisis and the credit crunch
• credit crunch = credit squeeze = credit crisis: ________ in the general availability of loans (or
credit) or a sudden tightening of the conditions
required to obtain a loan from the banks.
increase
reduction
Causes:
- often caused by a sustained period of ________
and inappropriate lending which results in losses for
lending institutions and investors in debt when the
loans turn sour and the full extent of bad debts
becomes known.
careless
careful
The subprime crisis and the credit crunch
• credit crunch = credit squeeze = credit crisis: ________ in the general availability of loans (or
credit) or a sudden tightening of the conditions
required to obtain a loan from the banks.
increase
reduction
Causes:
- often caused by a sustained period of ________
and inappropriate lending which results in losses for
lending institutions and investors in debt when the
loans turn sour and the full extent of bad debts
becomes known.
careless
careful
Investor in debt?
Loan turns sour?
How did the subprime crisis lead to the
credit crunch/crisis/squeeze?
Read: MK, p 75
Put the sentences below in the right order
3 1 5 2 4 6
→ Vocabulary:
1B
2C
3E
4D
5A
Who is to blame?
• The sharp increase in foreclosures and the
problems in the mortgage market were
largely blamed on:
low
bubble
loose
lenders
– _______ lending practices
– ______ interest rates
– a housing _________
– excessive risk taking by ________ and
investors.
Who is to blame?
• The sharp increase in foreclosures and the
problems in the mortgage market were
largely blamed on:
– loose lending practices
– low interest rates
– a housing bubble
– excessive risk taking by lenders and
investors.
HW: Watch the Crisis of credit video and answer the questions
(pause the video when necessary)
• Following the tech bubble and the events of September 11, the
Federal Reserve stimulated a struggling economy …HOW?
... by ________________________________________
• WHAT WAS THE RESULT ON THE HOUSING MARKET?
_____________________________________________
• WHAT WAS THE CONSEQUENCE FOR BORROWERS?
______________________________________________
• This left mortgage lenders with property that was worth …
HOW MUCH? ______________________________________
• WHAT HAPPENED TO SEVERAL LENDERS
______________________________________________
• In the wake of the meltdown, …WHAT DID CENTRAL BANKS DO?
Source: SUBPRIME MELTDOWN (www.investopedia.com)