Investment Banking Plus The Future Of Wall Road2892721
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With banking companies and S&Ls paying a measly 5.25 percent to savers there was surly a toll to pay. In 1981 it was estimated that the industry held approximately 350 billion in savers deposits, which was inexorably down from the 500 billion in 1978. Pretty soon it became clear that money was simply being transferred from regulated banking companies and S&Ls to money markets. In this environment, firms like Merrill Lynch, which were not subject to Regulation Q, were able to easily lure deposits to their money markets, which were paying the market rate. On the other hand, the thrift industry was already in a crisis despite its access to cheap money because of Regulation Q. They had become inefficient as they had grown accustom to operating on such an unrealistic high margin environment where they could borrow at artificially low rates and lend high at much higher market rates. It was thought that to raise the ceiling on interest rates within Regulation Q or to eliminate it altogether could quickly exacerbate their problems throwing them into insolvency. The world was changing with the advent of things like credit cards, money market accounts, easier access to computers, etc., and regulations like Regulation Q were standing in the way causing bank and S&Ls to be left behind. Today, in a post Regulation Q world, while the banking institutions have survived, when is the last time you seen an S&L.
"I have found errors in some cases over hundred dollars on my monthly statements. As a bit of an unusual thing, I have kept my statements from 1989 and am currently dealing with Westpac to get my money back which has added up to over 14,000.00. Thanks for the program". Grant Redding Nerang. QLD
Making that decision was prudent and smart by the lenders, as they had to begin to protect themselves from huge losses. The problem is that they have tightened up their regulations a bit too much. Now, instead of locking out those people who would be considered "risky", they are locking out everyone with a minor blemish on the credit report. In reality, financial institutions have no choice, though. When foreclosure occurs, they take a big loss. After a while, those losses really add up.
Even though the structure of the banking institutions and S&Ls balance sheet was rather uncomplicated wherein their portfolio consisted of lending long (giving them higher interest rates coming in) and borrowing short (giving them lower interest rates going out), neither financial institutions nor S&Ls, saw the extreme risks such a portfolio had in regards to interest rate risk. The maturity mismatch of such a portfolio could lead to widespread disaster as the interest rates on deposits rise. For example, as interest rates in the typical savings account increase depositors naturally seek to deposit more of their money where it will secure for them the greatest return. This put banking companies in competition for depositors funds, which escalate interest rates even higher. Conversely, typical mortgages have fixed interest rates that do not adjust to the changing interest rate environment. Therefore, as interest rates on deposits rise above interest rates on mortgage loans a net loss results, and eventually insolvency for the institution can occur and often did. To exacerbate the problem, a fundamental law of finance proves that the value of assets which are of long maturity (mortgages) are much more sensitive to interest rate changes than are those of short maturity (deposits). And rising interest rates of the kind exhibited in the 1970s meant big losses on the balance sheets of banking institution.
Though there is no clear answer in sight, there are some indications that a little bit of change may be coming. Last week, the Federal Reserve Board announced that it would be cutting Federal interest rates by a half of a point. Though this does not have a direct impact on mortgage loans, it is a pretty good indicator of which way the market might head. By making that decision the government is deciding that they need lenders to hop off of the high horse. They are interested in making it easier for banking institutions to secure funding, so that they might pass that along to consumers. Though the idea behind this move makes plenty of sense, there are some indications that lenders might not be so quick to follow.
When Goldman Sachs and Morgan Stanley opted to become bank holding companies it marked an historic realignment of the financial services industry and also the end of a securities firm model that had prevailed on Wall Street since the Great Depression. But why did they make the change? Partly because it's given both firms access to the Federal Reserve's discount window the same line of credit that is open to other depository institutions at a lower interest rate.
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