Waching daily Apr 1 2018

Monetary policy is the process by which the monetary authority of a country, like the

central bank or currency board, controls the supply of money, often targeting an inflation

rate or interest rateto ensure price stability and general trust in the currency.

Further goals of a monetary policy are usually to contribute to economic growth and stability,

to lower unemployment, and to maintain predictable exchange rates with other currencies.

Monetary economics provides insight into how to craft an optimal monetary policy. Since

the 1970s, monetary policy has generally been formed separately from fiscal policy, which

refers to taxation, government spending, and associated borrowing.

Monetary policy is referred to as either being expansionary or contractionary. Expansionary

policy is when a monetary authority uses its tools to stimulate the economy. An expansionary

policy increases the total supply of money in the economy more rapidly than usual. It

is traditionally used to try to combat unemployment in a recession by lowering interest rates

in the hope that easy credit will entice businesses into expanding. Also, this increases the aggregate

demand (the overall demand for all goods and services in an economy), which boosts growth

as measured by gross domestic product (GDP). Expansionary monetary policy usually diminishes

the value of the currency, thereby decreasing the exchange rate.

The opposite of expansionary monetary policy is contractionary monetary policy, which slows

the rate of growth in the money supply or even shrinks it. This slows economic growth

to prevent inflation. Contractionary monetary policy can lead to increased unemployment

and depressed borrowing and spending by consumers and businesses, which can eventually result

in an economic recession; it should hence be well managed and conducted with care.

History: Monetary policy is associated with interest

rates and availability of credit. Instruments of monetary policy have included short-term

interest rates and bank reserves through the monetary base.For many centuries there were

only two forms of monetary policy: (i) Decisions about coinage; (ii) Decisions to print paper

money to create credit. Interest rates, while now thought of as part of monetary authority,

were not generally coordinated with the other forms of monetary policy during this time.

Monetary policy was seen as an executive decision, and was generally in the hands of the authority

with seigniorage, or the power to coin. With the advent of larger trading networks came

the ability to set the price between gold and silver, and the price of the local currency

to foreign currencies. This official price could be enforced by law, even if it varied

from the market price. Paper money called "jiaozi" originated from

promissory notes in 7th century China. Jiaozi did not replace metallic currency, and were

used alongside the copper coins. The successive Yuan Dynastywas the first government to use

paper currency as the predominant circulating medium. In the later course of the dynasty,

facing massive shortages of specie to fund war and their rule in China, they began printing

paper money without restrictions, resulting in hyperinflation.

With the creation of the Bank of England in 1694, which acquired the responsibility to

print notes and back them with gold, the idea of monetary policy as independent of executive

action began to be established. The goal of monetary policy was to maintain the value

of the coinage, print notes which would trade at par to specie, and prevent coins from leaving

circulation. The establishment of central banks by industrializing nations was associated

then with the desire to maintain the nation's peg to the gold standard, and to trade in

a narrow band with other gold-backed currencies. To accomplish this end, central banks as part

of the gold standard began setting the interest rates that they charged, both their own borrowers,

and other banks who required liquidity. The maintenance of a gold standard required almost

monthly adjustments of interest rates. The gold standard is a system under which the

price of the national currency is measured in units of gold bars and is kept constant

by the government's promise to buy or sell gold at a fixed price in terms of the base

currency. The gold standard might be regarded as a special case of "fixed exchange rate"

policy, or as a special type of commodity price level targeting. Nowadays this type

of monetary policy is no longer used by any country.

During the period 1870–1920, the industrialized nations set up central banking systems, with

one of the last being the Federal Reserve in 1913. By this point the role of the central

bank as the "lender of last resort" was understood. It was also increasingly understood that interest

rates had an effect on the entire economy, in no small part because of the marginal revolution

in economics, which demonstrated how people would change a decision based on a change

in the economic trade-offs. Monetarist economists long contended that

the money-supply growth could affect the macroeconomy. These included Milton Friedman who early in

his career advocated that government budget deficits during recessions be financed in

equal amount by money creation to help to stimulate aggregate demand for output. Later

he advocated simply increasing the monetary supply at a low, constant rate, as the best

way of maintaining low inflation and stable output growth. However, when U.S. Federal

Reserve Chairman Paul Volcker tried this policy, starting in October 1979, it was found to

be impractical, because of the highly unstable relationship between monetary aggregates and

other macroeconomic variables. Even Milton Friedman later acknowledged that direct money

supply targeting was less successful than he had hoped.

Therefore, monetary decisions today take into account a wider range of factors, such as:

 short-term interest rates;  long-term interest rates;

 velocity of money through the economy;  exchange rates;

 credit quality;  bonds and equities (debt and corporate

ownership);  government versus private sector spending/savings;

 international capital flows of money on large scales;

 financial derivatives such as options, swaps, futures contracts, etc.

Monetary policy instruments: Conventional instrument:

The central bank influences interest rates by expanding or contracting the monetary base,

which consists of currency in circulation and banks' reserves on deposit at the central

bank. Central banks have three main tools of monetary policy: open market operations,

the discount rate and the reserve requirements. The most commonly usedIs it true? tool by

which the central bank can affect the monetary base is by open market operations. This entails

managing the quantity of money in circulation through the buying and selling of various

financial instruments, such as treasury bills, company bonds, or foreign currencies, in exchange

for money on deposit at the central bank. Those deposits are convertible to currency,

so all of these purchases or sales result in more or less base currency entering or

leaving market circulation. For example, if the central bank wishes to lower interest

rates (executing expansionary monetary policy), it purchases government debt, thereby increasing

the amount of cash in circulation or crediting banks' reserve accounts. Commercial banks

then have more money to lend, so they reduce lending rates, making loans less expensive.

Cheaper credit card interest rates boost consumer spending. Additionally, when business loans

are more affordable, companies can expand to keep up with consumer demand. They ultimately

hire more workers, whose incomes rise, which in its turn also increases the demand. This

tool is usually enough to stimulate demand and drive economic growth to a healthy rate.

Usually, the short-term goal of open market operations is to achieve a specific short-term

interest rate target. In other instances, monetary policy might instead entail the targeting

of a specific exchange rate relative to some foreign currency or else relative to gold.

For example, in the case of the USA the Federal Reservetargets the federal funds rate, the

rate at which member banks lend to one another overnight; however, the monetary policy of

China is to target the exchange rate between the Chinese renminbi and a basket of foreign

currencies. If the open market operations do not lead

to the desired effects, a second tool can be used: the central bank can increase or

decrease the interest rate it charges on discounts or overdrafts (loans from the central bank

to commercial banks, see discount window). If the interest rate on such transactions

is sufficiently low, commercial banks can borrow from the central bank to meet reserve

requirements and use the additional liquidity to expand their balance sheets, increasing

the credit available to the economy. A third alternative is to change the reserve

requirements. The reserve requirement refers to the proportion of total assets that banks

must keep on hand overnight, either in its vaults or at the central bank. Banks only

maintain a small portion of their assets as cash available for immediate withdrawal; the

rest is invested in illiquid assets like mortgages and loans. Lowering the reserve requirement

frees up funds for banks to increase loans or buy other profitable assets. This is expansionary

because it creates credit. However, even though this tool immediately increases liquidity,

central banks rarely change the reserve requirement because it is expensive and requires a lot

of new policies and procedures, disrupting member banks. The use of open market operations

is therefore preferred. Unconventional monetary policy at the zero

bound: Other forms of monetary policy, particularly

used when interest rates are at or near 0% and there are concerns about deflation or

deflation is occurring, are referred to as unconventional monetary policy. These include

credit easing, quantitative easing, forward guidance, and signaling. In credit easing,

a central bank purchases private sector assets to improve liquidity and improve access to

credit. Signaling can be used to lower market expectations for lower interest rates in the

future. For example, during the credit crisis of 2008, the US Federal Reserve indicated

rates would be low for an "extended period", and the Bank of Canada made a "conditional

commitment" to keep rates at the lower bound of 25 basis points (0.25%) until the end of

the second quarter of 2010. Further heterodox monetary policy proposals

include the idea of helicopter money whereby central banks would create money without assets

as counterpart in their balance sheet. The money created could be distributed directly

to the population as a citizen's dividend. This option has been increasingly discussed

since March 2016 after the ECB's president Mario Draghi said he found the concept "very

interesting". Nominal anchors:

A nominal anchor for monetary policy is a single variable or device which the central

bank uses to pin down expectations of private agents about the nominal price level or its

path or about what the central bank might do with respect to achieving that path. Monetary

regimes combine long-run nominal anchoring with flexibility in the short run. Nominal

variables used as anchors primarily include exchange rate targets, money supply targets,

and inflation targets with interest rate policy. Types:

In practice, to implement any type of monetary policy the main tool used is modifying the

amount of base money in circulation. The monetary authority does this by buying or selling financial

assets (usually government obligations). These open market operations change either the amount

of money or its liquidity (if less liquid forms of money are bought or sold). The multiplier

effect of fractional reserve banking amplifies the effects of these actions.

Constant market transactions by the monetary authority modify the supply of currency and

this impacts other market variables such as short-term interest rates and the exchange

rate. The distinction between the various types

of monetary policy lies primarily with the set of instruments and target variables that

are used by the monetary authority to achieve their goals.

The different types of policy are also called monetary regimes, in parallel to exchange-rate

regimes. A fixed exchange rate is also an exchange-rate regime; The Gold standard results

in a relatively fixed regime towards the currency of other countries on the gold standard and

a floating regime towards those that are not. Targeting inflation, the price level or other

monetary aggregates implies floating exchange rate unless the management of the relevant

foreign currencies is tracking exactly the same variables (such as a harmonized consumer

price index). In economics, an expansionary fiscal policy

includes higher spending and tax cuts, that encourage economic growth. In turn, an expansionary

monetary policy is one that seeks to increase the size of the money supply. As usual, inciting

of money supply is aimed at lowering the interest rates on purpose to achieve economic growth

by increase of economic activity. Conversely, contractionary monetary policy seeks to reduce

the size of the money supply. In most nations, monetary policy is controlled by either a

central bank or a finance ministry. Neoclassical and Keynesian economics significantly differ

on the effects and effectiveness of monetary policy on influencing the real economy; there

is no clear consensus on how monetary policy affects real economic variables (aggregate

output or income, employment). Both economic schools accept that monetary policy affects

monetary variables (price levels, interest rates).

Inflation targeting: Under this policy approach the target is to

keep inflation, under a particular definition such as Consumer Price Index, within a desired

range. The inflation target is achieved through periodic

adjustments to the central bank interest rate target. The interest rate used is generally

the overnight rate at which banks lend to each other overnight for cash flow purposes.

Depending on the country this particular interest rate might be called the cash rate or something

similar. As the Fisher effect model explains, the equation

linking inflation with interest rates (both foreign and abroad) is the following:

π = i - r where π is the inflation at home, i is the

home interest rate set by the central bank, and r is the world real interest rate. Using

i as an anchor, central banks can influence π. Central banks can choose to maintain a

fixed interest rates at all times, or to keep a constant interest rate until the real world

interest rate changes. The duration of this policy varies, because of the simplicity associated

with changing the nominal interest rate. The interest rate target is maintained for

a specific duration using open market operations. Typically the duration that the interest rate

target is kept constant will vary between months and years. This interest rate target

is usually reviewed on a monthly or quarterly basis by a policy committee.

Changes to the interest rate target are made in response to various market indicators in

an attempt to forecast economic trends and in so doing keep the market on track towards

achieving the defined inflation target. For example, one simple method of inflation targeting

called the Taylor rule adjusts the interest rate in response to changes in the inflation

rate and the output gap. The rule was proposed by John B. Taylor of Stanford University.

The inflation targeting approach to monetary policy approach was pioneered in New Zealand.

It has been used in Australia, Brazil, Canada, Chile, Colombia, the Czech Republic, Hungary,

New Zealand, Norway, Iceland, India, Philippines, Poland, Sweden, South Africa, Turkey, and

the United Kingdom. Price level targeting:

Price level targeting is a monetary policy that is similar to inflation targeting except

that CPI growth in one year over or under the long term price level target is offset

in subsequent years such that a targeted price-level is reached over time, e.g. five years, giving

more certainty about future price increases to consumers. Under inflation targeting what

happened in the immediate past years is not taken into account or adjusted for in the

current and future years. Uncertainty in price levels can create uncertainty

around price and wage setting activity for firms and workers, and undermines any information

that can be gained from relative prices, as it is more difficult for firms to determine

if a change in the price of a good or service is because of inflation or other factors,

such as an increase in the efficiency of factors of production, if inflation is high and volatile.

An increase in inflation also leads to a decrease in the demand for money, as it reduces the

incentive to hold money and increases transaction costs and shoe leather costs.

Monetary aggregates/money supply targeting: In the 1980s, several countries used an approach

based on a constant growth in the money supply. This approach was refined to include different

classes of money and credit (M0, M1 etc.). In the US this approach to monetary policy

was discontinued with the selection of Alan Greenspan as Fed Chairman.

This approach is also sometimes called monetarism. Central banks might choose to set a money

supply growth target as a nominal anchor to keep prices stable in the long term. The quantity

theory, is a long run model, which links price levels to money supply and demand. Using this

equation, we can rearrange to see the following: Π = μ − g

Where π is the inflation, μ is the money supply growth rate and g is the real output

growth. This equation suggests that controlling the money supply's growth rate can ultimately

lead to price stability in the long run. To use this nominal anchor, a central bank would

need to set μ equal to a constant and commit to maintaining this target.

However, the money supply growth rate is considered a weak policy, because there is no way to

target real output growth, As a result, a higher output growth rate will result in a

too low level of inflation. A low output growth rate will result in inflation that would be

higher than the desired level. While monetary policy typically focuses on

a price signal of one form or another, this approach is focused on monetary quantities.

As these quantities could have a role on the economy and business cycles depending on the

households' risk aversion level, money is sometimes explicitly added in the central

bank's reaction function. Recently, however, central banks are shifting away from policies

that focus on money supply targeting, because of the uncertainty that real output growth

introduces. Some central banks, like the ECB, are choosing to combine money supply anchor

with other targets. Nominal income/NGDP targeting:

Related to money targeting, nominal income targeting (also called Nominal GDP or NGDP

targeting) originally proposed by James Meade (1978) and James Tobin (1980) was advocated

by Scott Sumner and reinforced by the market monetarist school of thought.

Central banks do not implement this monetary policy explicitly. However, numerous studies

shown that such a monetary policy targeting better matches welfare optimizing monetary

policy compared to more standard monetary policy targeting.

Fixed exchange rate targeting: This policy is based on maintaining a fixed

exchange rate with a foreign currency. There are varying degrees of fixed exchange rates,

which can be ranked in relation to how rigid the fixed exchange rate is with the anchor

nation. Under a system of fiat fixed rates, the local

government or monetary authority declares a fixed exchange rate but does not actively

buy or sell currency to maintain the rate. Instead, the rate is enforced by non-convertibility

measures (e.g. capital controls, import/export licenses, etc.). In this case there is a black

market exchange rate where the currency trades at its market/unofficial rate.

Under a system of fixed-convertibility, currency is bought and sold by the central bank or

monetary authority on a daily basis to achieve the target exchange rate. This target rate

may be a fixed level or a fixed band within which the exchange rate may fluctuate until

the monetary authority intervenes to buy or sell as necessary to maintain the exchange

rate within the band. (In this case, the fixed exchange rate with a fixed level can be seen

as a special case of the fixed exchange rate with bands where the bands are set to zero.)

Under a system of fixed exchange rates maintained by a currency board every unit of local currency

must be backed by a unit of foreign currency (correcting for the exchange rate). This ensures

that the local monetary base does not inflate without being backed by hard currency and

eliminates any worries about a run on the local currency by those wishing to convert

the local currency to the hard (anchor) currency. Under dollarization, foreign currency (usually

the US dollar, hence the term "dollarization") is used freely as the medium of exchange either

exclusively or in parallel with local currency. This outcome can come about because the local

population has lost all faith in the local currency, or it may also be a policy of the

government (usually to rein in inflation and import credible monetary policy).

With a strict fixed exchange rate or a peg, the rate of depreciation of the exchange rate

is set equal to zero, such as in currency unions. In the case of a crawling peg, the

rate is set equal to constant. With a limited flexible band, the rate of depreciation is

allowed to fluctuate within a given range. By fixing the rate of depreciation, PPP theory

concludes that the home country's inflation rate must depend on the foreign country. For

example, a two percent increase in inflation at home raises the foreign country's inflation

by two percent. Countries may decide to use a fixed exchange rate monetary regime in order

to take advantage of price stability and control inflation. In practice, more than half of

nation's monetary regimes use fixed exchange rate anchoring.

These policies often abdicate monetary policy to the foreign monetary authority or government

as monetary policy in the pegging nation must align with monetary policy in the anchor nation

to maintain the exchange rate. The degree to which local monetary policy becomes dependent

on the anchor nation depends on factors such as capital mobility, openness, credit channels

and other economic factors. In practice:

Following the collapse of Bretton Woods, nominal anchoring has grown in importance for monetary

policy makers and inflation reduction. Particularly, governments sought to use anchoring in order

to curtail rapid and high inflation during the 1970s and 1980s. By the 1990s, countries

began to explicitly set credible nominal anchors. In addition, many countries chose a mix of

more than one target, as well as implicit targets. As a result, global inflation rates

have, on average, decreased gradually since the 1970s and central banks have gained credibility

and increasing independence. The Global Financial Crisis of 2008 has sparked

controversy over the use and flexibility of inflation nominal anchoring. Many economists

argue that inflation targets are currently set too low by many monetary regimes. During

the crisis, many inflation anchoring countries reached the lower bound of zero rates, resulting

in inflation rates decreasing to almost zero or even deflation.

Implications: The anchors discussed in this article suggest

that keeping inflation at the desired level is feasible by setting a target interest rate,

money supply growth rate, price level, or rate of depreciation. However, these anchors

are only valid if a central bank commits to maintaining them. This, in turn, requires

that the central bank abandons their monetary policy autonomy in the long run. Should a

central bank use one of these anchors to maintain a target inflation rate, they would have to

forfeit using other policies. On that note, it is important to mention that using these

anchors may prove more complicated for certain exchange rate regimes. Freely floating or

managed floating regimes, have more options to affect their inflation, because they enjoy

more flexibility than a pegged currency or a country without a currency. The latter regimes

would have to implement an exchange rate target to influence their inflation, as none of the

other instruments are available to them. Credibility:

The short-term effects of monetary policy can be influenced by the degree to which announcements

of new policy are deemed credible. In particular, when an anti-inflation policy is announced

by a central bank, in the absence of credibility in the eyes of the public inflationary expectations

will not drop, and the short-run effect of the announcement and a subsequent sustained

anti-inflation policy is likely to be a combination of somewhat lower inflation and higher unemployment

(see Phillips curve#NAIRU and rational expectations). But if the policy announcement is deemed credible,

inflationary expectations will drop commensurately with the announced policy intent, and inflation

is likely to come down more quickly and without so much of a cost in terms of unemployment.

Thus there can be an advantage to having the central bank be independent of the political

authority, to shield it from the prospect of political pressure to reverse the direction

of the policy. But even with a seemingly independent central bank, a central bank whose hands are

not tied to the anti-inflation policy might be deemed as not fully credible; in this case

there is an advantage to be had by the central bank being in some way bound to follow through

on its policy pronouncements, lending it credibility. Contexts:

In international economics: Optimal monetary policy in international economics

is concerned with the question of how monetary policy should be conducted in interdependent

open economies. The classical view holds that international macroeconomic interdependence

is only relevant if it affects domestic output gaps and inflation, and monetary policy prescriptions

can abstract from openness without harm. This view rests on two implicit assumptions: a

high responsiveness of import prices to the exchange rate, i.e. producer currency pricing

(PCP), and frictionless international financial markets supporting the efficiency of flexible

price allocation. The violation or distortion of these assumptions found in empirical research

is the subject of a substantial part of the international optimal monetary policy literature.

The policy trade-offs specific to this international perspective are threefold:

First, research suggests only a weak reflection of exchange rate movements in import prices,

lending credibility to the opposed theory of local currency pricing (LCP). The consequence

is a departure from the classical view in the form of a trade-off between output gaps

and misalignments in international relative prices, shifting monetary policy to CPI inflation

control and real exchange rate stabilization. Second, another specificity of international

optimal monetary policy is the issue of strategic interactions and competitive devaluations,

which is due to cross-border spillovers in quantities and prices. Therein, the national

authorities of different countries face incentives to manipulate the terms of trade to increase

national welfare in the absence of international policy coordination. Even though the gains

of international policy coordination might be small, such gains may become very relevant

if balanced against incentives for international noncooperation.

Third, open economies face policy trade-offs if asset market distortions prevent global

efficient allocation. Even though the real exchange rate absorbs shocks in current and

expected fundamentals, its adjustment does not necessarily result in a desirable allocation

and may even exacerbate the misallocation of consumption and employment at both the

domestic and global level. This is because, relative to the case of complete markets,

both the Phillips curve and the loss function include a welfare-relevant measure of cross-country

imbalances. Consequently, this results in domestic goals, e.g. output gaps or inflation,

being traded-off against the stabilization of external variables such as the terms of

trade or the demand gap. Hence, the optimal monetary policy in this case consists of redressing

demand imbalances and/or correcting international relative prices at the cost of some inflation.

Corsetti, Dedola and Leduc (2011) summarize the status quo of research on international

monetary policy prescriptions: "Optimal monetary policy thus should target a combination of

inward-looking variables such as output gap and inflation, with currency misalignment

and cross-country demand misallocation, by leaning against the wind of misaligned exchange

rates and international imbalances." This is main factor in country money status.

In developing countries: Developing countries may have problems establishing

an effective operating monetary policy. The primary difficulty is that few developing

countries have deep markets in government debt. The matter is further complicated by

the difficulties in forecasting money demand and fiscal pressure to levy the inflation

tax by expanding the base rapidly. In general, the central banks in many developing countries

have poor records in managing monetary policy. This is often because the monetary authority

in developing countries are mostly not independent of the government, so good monetary policy

takes a backseat to the political desires of the government or are used to pursue other

non-monetary goals. For this and other reasons, developing countries that want to establish

credible monetary policy may institute a currency board or adopt dollarization. This can avoid

interference from the government and may lead to the adoption of monetary policy as carried

out in the anchor nation. Recent attempts at liberalizing and reform of financial markets

(particularly the recapitalization of banks and other financial institutions in Nigeria

and elsewhere) are gradually providing the latitude required to implement monetary policy

frameworks by the relevant central banks. Trends:

Transparency: Beginning with New Zealand in 1990, central

banks began adopting formal, public inflation targets with the goal of making the outcomes,

if not the process, of monetary policy more transparent. In other words, a central bank

may have an inflation target of 2% for a given year, and if inflation turns out to be 5%,

then the central bank will typically have to submit an explanation. The Bank of England

exemplifies both these trends. It became independent of government through the Bank of England

Act 1998 and adopted an inflation target of 2.5% RPI, revised to 2% of CPI in 2003.The

success of inflation targeting in the United Kingdom has been attributed to the Bank of

England's focus on transparency. The Bank of England has been a leader in producing

innovative ways of communicating information to the public, especially through its Inflation

Report, which have been emulated by many other central banks.

The European Central Bank adopted, in 1998, a definition of price stability within the

Eurozone as inflation of under 2% HICP. In 2003, this was revised to inflation below,

but close to, 2% over the medium term. Since then, the target of 2% has become common for

other major central banks, including the Federal Reserve (since January 2012) and Bank of Japan

(since January 2013). Effect on business cycles:

There continues to be some debate about whether monetary policy can (or should) smooth business

cycles. A central conjecture of Keynesian economics is that the central bank can stimulate

aggregate demand in the short run, because a significant number of prices in the economy

are fixed in the short run and firms will produce as many goods and services as are

demanded (in the long run, however, money is neutral, as in the neoclassical model).

However, some economists from the new classical school contend that central banks cannot affect

business cycles. Behavioral monetary policy:

Conventional macroeconomic models assume that all agents in an economy are fully rational.

A rational agent has clear preferences, models uncertainty via expected values of variables

or functions of variables, and always chooses to perform the action with the optimal expected

outcome for itself among all feasible actions – they maximize their utility. Monetary

policy analysis and decisions hence traditionally rely on this New Classical approach. However,

as studied by the field of behavioral economics that takes into account the concept of bounded

rationality, people often deviate from the way that these neoclassical theories assume.

Humans are generally not able to react fully rational to the world around them – they

do not make decisions in the rational way commonly envisioned in standard macroeconomic

models. People have time limitations, cognitive biases, care about issues like fairness and

equity and follow rules of thumb (heuristics). This has implications for the conduct of monetary

policy. Monetary policy is the final outcome of a complex interaction between monetary

institutions, central banker preferences and policy rules, and hence human decision-making

plays an important role. It is more and more recognized that the standard rational approach

does not provide an optimal foundation for monetary policy actions. These models fail

to address important human anomalies and behavioral drivers that explain monetary policy decisions.

An example of a behavioral bias that characterizes the behavior of central bankers is loss aversion:

for every monetary policy choice, losses loom larger than gains, and both are evaluated

with respect to the status quo. One result of loss aversion is that when gains and losses

are symmetric or nearly so, risk aversion may set in. Loss aversion can be found in

multiple contexts in monetary policy. The "hard fought" battle against the Great Inflation,

for instance, might cause a bias against policies that risk greater inflation. Another common

finding in behavioral studies is that individuals regularly offer estimates of their own ability,

competence, or judgments that far exceed an objective assessment: they are overconfident.

Central bank policymakers may fall victim to overconfidence in managing the macroeconomy

in terms of timing, magnitude, and even the qualitative impact of interventions. Overconfidence

can result in actions of the central bank that are either "too little" or "too much".

When policymakers believe their actions will have larger effects than objective analysis

would indicate, this results in too little intervention. Overconfidence can, for instance,

cause problems when relying on interest rates to gauge the stance of monetary policy: low

rates might mean that policy is easy, but they could also signal a weak economy.

These are examples of how behavioral phenomena may have a substantial influence on monetary

policy. Monetary policy analyses should thus account for the fact that policymakers (or

central bankers) are individuals and prone to biases and temptations that can sensibly

influence their ultimate choices in the setting of macroeconomic and/or interest rate targets.

Thanks for watching. Please, subscribe to our channel.

For more infomation >> What is Monetary Policy? | Definition & Explanation of Monetary Policy - Duration: 38:36.

-------------------------------------------

What is Irrational Exuberance? | Definition & Explanation of Irrational Exuberance - Duration: 6:29.

Irrational exuberance is a phrase used by the then-Federal Reserve Board chairman, Alan

Greenspan, in a speech given at the American Enterprise Institute during the dot-com bubble

of the 1990s.

The phrase was interpreted as a warning that the market might be overvalued.

Initial fame: Greenspan's comment was made during a televised

speech on December 5, 1996 (emphasis added in excerpt):

Clearly, sustained low inflation implies less uncertainty about the future, and lower risk

premiums imply higher prices of stocks and other earning assets.

We can see that in the inverse relationship exhibited by price/earnings ratios and the

rate of inflation in the past.

But how do we know when irrational exuberance has unduly escalated asset values, which then

become subject to unexpected and prolonged contractions as they have in Japan over the

past decade?

— "The Challenge of Central Banking in a Democratic Society", 1996-12-05

The Tokyo market was open during the speech and immediately moved down sharply after this

comment, closing off 3%.

Markets around the world followed.

The prescience of the short comment within a rather dry and complex speech would not

normally have been so memorable; however, it was followed about three years later by

major slumps in stock markets worldwide, particularly the Nasdaq Composite, provoking a strong reaction

in financial circles and making its way into colloquial speech.

Greenspan's comment was well remembered, although few heeded the warning.

Origin of the phrase: The phrase was also used by Yale professor

Robert Shiller, who was reportedly Greenspan's source for the phrase.

Shiller used it as the title of his book, Irrational Exuberance, in 2000.

Shiller is associated with the CAPE ratio and the Case-Shiller Home Price Index popularized

during the housing bubble of 2004–2007.

He is frequently asked during interviews whether markets are irrationally exuberant as asset

prices rise.

There was some speculation for many years whether Greenspan borrowed the phrase from

Shiller without attribution, although Shiller later wrote that he contributed "irrational"

at a lunch with Greenspan before the speech but "exuberant" was a previous Greenspan term

and it was Greenspan who coined the phrase and not a speech writer.

Greenspan wrote in his 2008 book that the phrase occurred to him in the bathtub while

he was writing a speech.

The irony of the phrase and its aftermath lies in Greenspan's widely held reputation

as the most artful practitioner of Fedspeak, often known as Greenspeak, in the modern televised

era.

The speech coincided with the rise of dedicated financial TV channels around the world that

would broadcast his comments live, such as CNBC. Greenspan's idea was to obfuscate the

Fed Chairman's true opinion in long complex sentences with obscure words so as to intentionally

mute any strong market response.

Precisely because he was considered to be so good at this, an uncharacteristically clear

statement such as "irrational exuberance" was viewed as a strong signal to the markets

and its meaning was widely discussed by financial journalists at the time of the speech.

The further irony was that if it was indeed his intended purpose to "talk markets down"

he was later ignored as stock valuations three years later dwarfed the levels at the time

of the speech.

This phrase is arguably the most famous example of Greenspeak, albeit perhaps an atypical

one.

Continued popularization: It had become a catchphrase of the boom to

such an extent that, during the economic recession that followed the stock market collapse of

2000, bumper stickers reading "I want to be irrationally exuberant again" were sighted

in Silicon Valley and elsewhere.

By the mid-to-late 2000s the dot-com losses were recouped and eclipsed by a combination

of events, including the 2000s commodities boom and the United States housing bubble.

However, the recession of 2007 onward wiped out these gains.

The second market slump brought the phrase back into the public eye, where it was much

used in hindsight, to characterize the excesses of the bygone era.

In 2006, upon Greenspan's retirement from the Federal Reserve Board, The Daily Show

with Jon Stewart held a full-length farewell show in his honor, named An Irrationally Exuberant

Tribute to Alan Greenspan.

The term gained new currency after the collapse of the US housing market in 2008 that led

to a worldwide financial panic.

Shiller was the co-creator of the Case-Shiller index that tracks US residential housing prices.

He is frequently interviewed as an expert on home prices and shared the Nobel prize

in economics in 2013 for his work on asset prices.

Greenspan's 1996 speech and Shiller's 2000 book are often viewed as harbingers of future

frenzy whether or not they specifically predicted the bubbles and subsequent crashes that followed.

This combination of events caused the phrase at present to be most often associated with

the 1990s dot-com bubble and the 2000s US housing bubble although it can be linked to

any financial asset bubble or social frenzy phenomena, such as the tulip mania of 17th

century Holland.

The phrase is often cited in conjunction with criticism of Greenspan's policies and debate

whether he did enough to contain the two major bubbles of those two decades.

It is also used in arguments about whether capitalist free markets are rational.

Nobel Prize Laureate and author of seminal Irrational Exuberance (book), Robert J. Shiller,

called Bitcoin the best current example of a speculative bubble.

Author Dan Pink also used the phrase in 2009 in his book "Drive: The Surprising Truth About

What Motivates Us" in the chapter discussing how extrinsic motivation can encourage short-term

thinking at the cost of long-term health: "This is the nature of economic bubbles: What

seems to be irrational exuberance is ultimately a bad case of extrinsically motivated myopia"

Thanks for watching.

Please, subscribe to our channel.

For more infomation >> What is Irrational Exuberance? | Definition & Explanation of Irrational Exuberance - Duration: 6:29.

-------------------------------------------

What is Market Value? | Definition & Explanation of Market Value - Duration: 11:27.

Market value or OMV (Open Market Valuation) is the price at which an asset would trade

in a competitive auction setting.

Market value is often used interchangeably with open market value, fair value or fair

market value, although these terms have distinct definitions in different standards, and may

or may not differ in some circumstances.

Definition: International Valuation Standards defines

market value as "the estimated amount for which a property should exchange on the date

of valuation between a willing buyer and a willing seller in an arm's-length transaction

after proper marketing wherein the parties had each acted knowledgeably, prudently, and

without compulsion".

Market value is a concept distinct from market price, which is "the price at which one

can transact", while market value is "the true underlying value" according to theoretical

standards.

The concept is most commonly invoked in inefficient markets or disequilibrium situations where

prevailing market prices are not reflective of true underlying market value.

For market price to equal market value, the market must be informationally efficient and

rational expectations must prevail.

Recently, Mocciaro Li Destri, Picone & Minà (2012) have underscored the subtle but important

difference between the firms' capacity to create value through correct operational choices

and valid strategies, on the one hand, and the epiphenomenal manifestation of variations

in stockholder value on the financial markets (notably on stock markets).

In this perspective, they suggest to implement new methodologies able to bring strategy back

into financial performance measures.

Market value is also distinct from fair value in that fair value depends on the parties

involved, while market value does not.

For example, IVS currently notes fair value "requires the assessment of the price that

is fair between two specific parties taking into account the respective advantages or

disadvantages that each will gain from the transaction.

Although market value may meet these criteria, this is not necessarily always the case.

Fair value is frequently used when undertaking due diligence in corporate transactions, where

particular synergies between the two parties may mean that the price that is fair between

them is higher than the price that might be obtainable in the wider market.

In other words "special value" may be generated.

Market value requires this element of "special value" to be disregarded, but it forms part

of the assessment of fair value.

Real estate: The term is commonly used in real estate appraisal,

since real estate markets are generally considered both informationally and transactionally inefficient.

Also, real estate markets are subject to prolonged periods of disequilibrium, such as in contamination

situations or other market disruptions.

Appraisals are usually performed under some set of assumptions about transactional markets,

and those assumptions are captured in the definition of value used for the appraisal.

Commonly, the definition set forth for U.S. federally regulated lending institutions is

used, although other definitions may also be used under some circumstances:

"The most probable price (in terms of money) which a property should bring in a competitive

and open market under all conditions requisite to a fair sale, the buyer and seller each

acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.

Implicit in this definition is the consummation of a sale as of a specified date and the passing

of title from seller to buyer under conditions whereby: the buyer and seller are typically

motivated; both parties are well informed or well advised, and acting in what they consider

their best interests; a reasonable time is allowed for exposure in the open market; payment

is made in terms of cash in United States dollars or in terms of financial arrangements

comparable thereto; and the price represents the normal consideration for the property

sold unaffected by special or creative financing or sales concessions granted by anyone associated

with the sale."

In the USA, Licensed or Certified Apppraisers may be required under state, federal, or local

laws to develop appraisals subject to USPAP Uniform Standards of Professional Appraisal

Practice.

The Uniform Standards of Professional Appraisal Practice requires that when market value is

the applicable definition, the appraisal must also contain an analysis of the highest and

best use as well as an estimation of exposure time.

All states require mandatory licensure of appraisers.

It is important to note that USPAP does not require that all real estate appraisals be

performed based on a single definition of market value.

Indeed, there are frequent situations when appraisers are called upon to appraise properties

using other value definitions.

If a value other than market value is appropriate, USPAP only requires that the appraiser provide

both the definition of value being used and the citation for that definition.

Other definitions: Market value is the most commonly used type

of value in real estate appraisal in the United States because it is required for all federally

regulated mortgage transactions, and because it has been accepted by US courts as valid.

However, real estate appraisers use many other definitions of value in other situations.

Liquidation value: Liquidation value is the most probable price

that a specified interest in real property is likely to bring under all of the following

conditions: 1.

Consummation of a sale will occur within a severely limited future marketing period specified

by the client.

2.

The actual market conditions currently prevailing are those to which the appraise property interest

is subject.

3.

The buyer is acting prudently and knowledgeably.

4.

The seller is under extreme compulsion to sell.

5.

The buyer is typically motivated.

6.

The buyer is acting in what he or she considered his or her best interest.

7.

A limited marketing effort and time will be allowed for the completion of the sale.

8.

Payment will be made in cash in U.S. dollars or in terms of financial arrangements comparable

thereto.

9.

The price represents the normal consideration for the property sold, unaffected by special

or creative financing or sales concessions granted by anyone associated with the sale.

Orderly liquidation value: This value definition differs from the previous

one in that it assumes an orderly transition, and not "extreme compulsion".

Federal land acquisition: For land acquisitions by or funded by U.S.

federal agencies, a slightly different definition applies:

"Fair market value is defined as the amount in cash or terms reasonably equivalent to

cash, for which in all probability the property would be sold by a knowledgeable owner willing

but not obligated to sell to a knowledgeable purchaser who desired but is not obligated

to buy.

In ascertaining that figure, consideration should be given to all matters that might

be brought forward and reasonably be given substantial weight in bargaining by persons

of ordinary prudence, but no consideration whatever should be given to matters not affecting

market value."

Going concern value: When a real estate appraiser works with a

business valuation appraiser (and perhaps an equipment and machinery appraiser) to provide

a value of the combination of a business and the real estate used for that business, the

specific market value is called "going concern value".

It recognizes that the combined market value may be different from the sum of the separate

values: "The market value of all the tangible and intangible assets of an established operating

business with an indefinite life, as if sold in aggregate."

Use value: Use value takes into account a specific use

for the subject property and does not attempt to ascertain the highest and best use of the

real estate.

For example, the appraisal may focus on the contributory value of the real estate to a

business enterprise.

Some property tax jurisdictions allow agricultural use appraisals for farmland.

Also, current IRS estate tax regulations allow land under an interim agricultural use to

be valued according to its current use regardless of development potential.

Economic value and Investor confidence: Stability and economic growth are two factors

that international investors are seeking when considering investment options.

A country offering economic value amongst its other incentives attracts investment funds.

A political unrest situation can be the cause of not only loss of confidence, but a reduced

value in currency, creating transfer of capital to other and more stable sources.

In the event of a government printing currency to discharge a portion of a significant amount

of debt, the supply of money is increased, with an ultimate reduction in its value, aggravated

by inflation.

Furthermore, should a government be unable to service its deficit by way of selling domestic

bonds, thereby increasing the supply of money, it must increase the volume of saleable securities

to foreigners, which in turn creates a decrease in their value.

A significant debt can prove a concern for foreign investors, should they believe there

is a risk of the country defaulting on its obligations.

They will be reluctant to purchase securities subject to that particular currency, if there

is a perceived, significant risk of default.

It is for this reason that the debt rating of a country; for example, as determined by

Moody's or Standard & Poor's is a crucial indicator of its exchange rate.

Currency values and exchange rates play a crucial part in the rate of return on investments.

Value for an investor, is the exchange rate of the currency which, contains the bulk of

a portfolio, determining its real return.

A declining value in the exchange rate has the effect of decreasing the purchasing power

of income and capital gains, derived from any returns.

In addition, other income factors such as interest rates, inflation and even capital

gains from domestic securities, are influenced by the influential and complex factors, of

the exchange rate.

Legal Interpretation: The case of Luxmoore-May and Another v. Messenger

May Baverstock [1990] 1 W.L.R. 1009 shows us the legal interpretation of market value:

"The measure of damage in this case is, I conclude, the difference between what the

foxhounds in fact realised consequent on the defendants' breach of contract and what was

their true open market value at that time.

What better guide could there be to that value than the price at which these paintings happened

to be knocked down at Sotheby's so shortly afterwards?

The price which the international art market was willing to pay was surely prima facie

the best evidence of the foxhounds' value."

Also the equilibrium of the qualibrium is hard to distinguish between.

Thanks for watching.

Please, subscribe to our channel.

For more infomation >> What is Market Value? | Definition & Explanation of Market Value - Duration: 11:27.

-------------------------------------------

What is Minority Interest or Non-Controlling Interest? - Duration: 3:09.

In accounting, minority interest (or non-controlling interest) is the portion of a subsidiary corporation's

stock that is not owned by the parent corporation.

The magnitude of the minority interest in the subsidiary company is generally less than

50% of outstanding shares, or the corporation would generally cease to be a subsidiary of

the parent.

It is, however, possible (such as through special voting rights) for a controlling interest

requiring consolidation to be achieved without exceeding 50% ownership, depending on the

accounting standards being employed.

Minority interest belongs to other investors and is reported on the consolidated balance

sheet of the owning company to reflect the claim on assets belonging to other, non-controlling

shareholders.

Also, minority interest is reported on the consolidated income statement as a share of

profit belonging to minority shareholders.

The reporting of 'minority interest' is a consequence of the requirement by accounting

standards to 'fully' consolidate partly owned subsidiaries.

Full consolidation, as opposed to partial consolidation, results in financial statements

that are constructed as if the parent corporation fully owns these partly owned subsidiaries;

except for two line items that reflect partial ownership of subsidiaries: net income to common

shareholders and common equity.

The two minority interest line items are the net difference between what would have been

the common equity and net income to common, if all subsidiaries were fully owned, and

the actual ownership of the group.

All the other line items in the financial statements assume a fictitious 100% ownership.

Some investors have expressed concern that the minority interest line items cause significant

uncertainty for the assessment of value, leverage and liquidity.

A key concern of investors is that they cannot be sure what part of the reported cash position

is owned by a 100% subsidiary and what part is owned by a 51% subsidiary.

Minority interest is an integral part of the enterprise value of a company.

The converse concept is an associate company.

Accounting treatment: Under the International Financial Reporting

Standards, the non-controlling interest is reported in accordance with IFRS 5 and is

shown at the very bottom of the Equity section on the consolidated balance sheet and subsequently

on the statement of changes in equity.

Under US GAAP minority interest can be reported either in the liabilities section, the equity

section, or the mezzanine section of the balance sheet.

The Mezzanine section is located between liabilities and equity.

FASB FAS 160 and FAS 141r significantly alter the way a parent company accounts for non-controlling

interest (NCI) in a subsidiary.

It is no longer acceptable to report minority interest in the mezzanine section of the balance

sheet.

Thanks for watching.

Please, subscribe to our channel.

For more infomation >> What is Minority Interest or Non-Controlling Interest? - Duration: 3:09.

-------------------------------------------

What is Investment Bank? - Duration: 31:37.

An investment bank is typically a private company that provides various financial-related

and other services to individuals, corporations, and governments such as raising financial

capital by underwriting or acting as the client's agent in the issuance of securities.

An investment bank may also assist companies involved in mergers and acquisitions (M&A)

and provide ancillary services such as market making, trading of derivatives and equity

securities, and FICC services (fixed income instruments, currencies, and commodities).

Unlike commercial banks and retail banks, investment banks do not take deposits.

From the passage of Glass–Steagall Act in 1933 until its repeal in 1999 by the Gramm–Leach–Bliley

Act, the United States maintained a separation between investment banking and commercial

banks.

Other industrialized countries, including G7 countries, have historically not maintained

such a separation.

As part of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd–Frank

Act of 2010), the Volcker Rule asserts some institutional separations of investment banking

services from commercial banking.

The two main lines of business in investment banking are called the sell side and the buy

side.

The "sell side" involves trading securities for cash or for other securities (e.g. facilitating

transactions, market-making), or the promotion of securities (e.g. underwriting, research,

etc.).

The "buy side" involves the provision of advice to institutions that buy investment services.

Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds are

the most common types of buy-side entities.

An investment bank can also be split into private and public functions with a Chinese

wall separating the two to prevent information from crossing.

The private areas of the bank deal with private insider information that may not be publicly

disclosed, while the public areas, such as stock analysis, deal with public information.

An advisor who provides investment banking services in the United States must be a licensed

broker-dealer and subject to U.S. Securities and Exchange Commission (SEC) and Financial

Industry Regulatory Authority (FINRA) regulation.

History: Early history:

The Dutch East India Company (VOC) was first company to issue bonds and shares of stock

to the general public.

It was also the first publicly traded company, being the first company to be listedon an

official stock exchange.

The Dutch also helped lay the foundations of the modern practice of investment banking.

Further developments: Investment banking has changed over the years,

beginning as a partnership form focused on underwriting security issuance, i.e. initial

public offerings (IPOs) and secondary market offerings, brokerage, and mergers and acquisitions,

and evolving into a "full-service" range including securities research, proprietary trading,

and investment management.

In the 21st century, the SEC filings of the major independent investment banks such as

Goldman Sachs and Morgan Stanley reflect three product segments: (1) investment banking (mergers

and acquisitions, advisory services and securities underwriting), (2) asset management (sponsored

investment funds), and (3) trading and principal investments (broker-dealer activities, including

proprietary trading ("dealer" transactions) and brokerage trading ("broker" transactions)).

In the United States, commercial banking and investment banking were separated by the Glass–Steagall

Act, which was repealed in 1999.

The repeal led to more "universal banks" offering an even greater range of services.

Many large commercial banks have therefore developed investment banking divisions through

acquisitions and hiring.

Notable large banks with significant investment banks include JPMorgan Chase, Bank of America,

Credit Suisse, Deutsche Bank, UBS, Barclays, and Wells Fargo.

After the financial crisis of 2007–08 and the subsequent passage of the Dodd-Frank Act

of 2010, regulations have limited certain investment banking operations, notably with

the Volcker Rule's restrictions on proprietary trading.

The traditional service of underwriting security issues has declined as a percentage of revenue.

As far back as 1960, 70% of Merrill Lynch's revenue was derived from transaction commissions

while "traditional investment banking" services accounted for 5%.

However, Merrill Lynch was a relatively "retail-focused" firm with a large brokerage network.

Organizational structure: Core investment banking activities:

Investment banking is split into front office, middle office, and back office activities.

While large service investment banks offer all lines of business, both "sell side" and

"buy side", smaller sell-side investment firms such as boutique investment banks and small

broker-dealers focus on investment banking and sales/trading/research, respectively.

Investment banks offer services to both corporations issuing securities and investors buying securities.

For corporations, investment bankers offer information on when and how to place their

securities on the open market, an activity very important to an investment bank's reputation.

Therefore, investment bankers play a very important role in issuing new security offerings.

Front office: Front office is generally described as a revenue

generating role.

There are two main areas within front office: investment banking and markets:

 Investment banking involves advising organizations on mergers and acquisitions, as well as a

wide array of capital raising strategies.

 Markets is divided into "sales and trading" (including "structuring"), and "research".

Corporate finance: Corporate finance is the traditional aspect

of investment banks, which involves helping customers raise funds in capital markets and

giving advice on mergers and acquisitions (M&A); this may involve subscribing investors

to a security issuance, coordinating with bidders, or negotiating with a merger target.

A pitch book of financial information is generated to market the bank to a potential M&A client;

if the pitch is successful, the bank arranges the deal for the client.

The investment banking division (IBD) is generally divided into industry coverage and product

coverage groups.

Industry coverage groups focus on a specific industry—such as healthcare, public finance

(governments), FIG (financial institutions group), industrials, TMT (technology, media,

and telecommunications), P&E (power & energy), consumer/retail, food & beverage, corporate

defense and governance—and maintain relationships with corporations within the industry to bring

in business for the bank.

Product coverage groups focus on financial products—such as mergers and acquisitions,

leveraged finance, public finance, asset finance and leasing, structured finance, restructuring,

equity, and high-grade debt—and generally work and collaborate with industry groups

on the more intricate and specialized needs of a client.

Sales and trading: On behalf of the bank and its clients, a large

investment bank's primary function is buying and selling products.

In market making, traders will buy and sell financial products with the goal of making

money on each trade.

Sales is the term for the investment bank's sales force, whose primary job is to call

on institutional and high-net-worth investors to suggest trading ideas (on a caveat emptor

basis) and take orders.

Sales desks then communicate their clients' orders to the appropriate trading rooms, which

can price and execute trades, or structure new products that fit a specific need.

Structuring has been a relatively recent activity as derivatives have come into play, with highly

technical and numerate employees working on creating complex structured products which

typically offer much greater margins and returns than underlying cash securities.

In 2010, investment banks came under pressure as a result of selling complex derivatives

contracts to local municipalities in Europe and the US.

Strategists advise external as well as internal clients on the strategies that can be adopted

in various markets.

Ranging from derivatives to specific industries, strategists place companies and industries

in a quantitative framework with full consideration of the macroeconomic scene.

This strategy often affects the way the firm will operate in the market, the direction

it would like to take in terms of its proprietary and flow positions, the suggestions salespersons

give to clients, as well as the way structurers create new products.

Banks also undertake risk through proprietary trading, performed by a special set of traders

who do not interface with clients and through "principal risk"—risk undertaken by a trader

after he buys or sells a product to a client and does not hedge his total exposure.

Banks seek to maximize profitability for a given amount of risk on their balance sheet.

The necessity for numerical ability in sales and trading has created jobs for physics,

computer science, mathematics and engineering Ph.D.s who act as quantitative analysts.

Research: The securities research division reviews companies

and writes reports about their prospects, often with "buy", "hold" or "sell" ratings.

Investment banks typically have sell-side analysts which cover various industries.

Their sponsored funds or proprietary trading offices will also have buy-side research.

While the research division may or may not generate revenue (based on policies at different

banks), its resources are used to assist traders in trading, the sales force in suggesting

ideas to customers, and investment bankers by covering their clients.

Research also serves outside clients with investment advice (such as institutional investors

and high-net-worth individuals) in the hopes that these clients will execute suggested

trade ideas through the sales and trading division of the bank, and thereby generate

revenue for the firm.

Research also covers credit research, fixed income research, macroeconomic research, and

quantitative analysis, all of which are used internally and externally to advise clients

but do not directly affect revenue.

All research groups, nonetheless, provide a key service in terms of advisory and strategy.

There is a potential conflict of interest between the investment bank and its analysis,

in that published analysis can impact the performance of a security (in the secondary

markets or an initial public offering) or influence the relationship between the banker

and its corporate clients, thereby affecting the bank's profitability .

Front and middle office: Risk management:

Risk management involves analyzing the market and credit risk that an investment bank or

its clients take onto their balance sheet during transactions or trades.

Credit risk focuses around capital markets activities, such as syndicated loans, bond

issuance, restructuring, and leveraged finance.

Market risk conducts review of sales and trading activities utilizing the VaR model and provide

hedge-fund solutions to portfolio managers.

Other risk groups include country risk, operational risk, and counterparty risks which may or

may not exist on a bank to bank basis.

Credit risk solutions are key part of capital market transactions, involving debt structuring,

exit financing, loan amendment, project finance, leveraged buy-outs, and sometimes portfolio

hedging.

Front office market risk activities provide service to investors via derivative solutions,

portfolio management, portfolio consulting, and risk advisory.

Well-known risk groups in JPMorgan Chase, Morgan Stanley, Goldman Sachs and Barclays

engage in revenue-generating activities involving debt structuring, restructuring, syndicated

loans, and securitization for clients such as corporates, governments, and hedge funds.

J.P. Morgan IB Risk works with investment banking to execute transactions and advise

investors, although its Finance & Operation risk groups focus on middle office functions

involving internal, non-revenue generating, operational risk controls.

Credit default swap, for instance, is a famous credit risk hedging solution for clients invented

by J.P. Morgan's Blythe Masters during the 1990s.

The Loan Risk Solutions group within Barclays' investment banking division and Risk Management

and Financing group housed in Goldman Sach's securities division are client-driven franchises.

However, risk management groups such as operational risk, internal risk control, and legal risk

are restrained to internal business functions including firm balance-sheet risk analysis

and assigning trading cap that are independent of client needs, even though these groups

may be responsible for deal approval that directly affects capital market activities.

Risk management is a broad area, and like research, its roles can be client-facing or

internal.

Middle office: This area of the bank includes treasury management,

internal controls, and internal corporate strategy.

Corporate treasury is responsible for an investment bank's funding, capital structure management,

and liquidity risk monitoring.

Internal control tracks and analyzes the capital flows of the firm, the finance division is

the principal adviser to senior management on essential areas such as controlling the

firm's global risk exposure and the profitability and structure of the firm's various businesses

via dedicated trading desk product control teams.

In the United States and United Kingdom, a comptroller (or financial controller) is a

senior position, often reporting to the chief financial officer.

Internal corporate strategy tackling firm management and profit strategy, unlike corporate

strategy groups that advise clients, is non-revenue regenerating yet a key functional role within

investment banks.

This list is not a comprehensive summary of all middle-office functions within an investment

bank, as specific desks within front and back offices may participate in internal functions.

Back office: The back office data-checks trades that have

been conducted, ensuring that they are not wrong, and transacts the required transfers.

Many banks have outsourced operations.

It is, however, a critical part of the bank.

Technology: Every major investment bank has considerable

amounts of in-house software, created by the technology team, who are also responsible

for technical support.

Technology has changed considerably in the last few years as more sales and trading desks

are using electronic trading.

Some trades are initiated by complex algorithms for hedging purposes.

Firms are responsible for compliance with local and foreign government regulations and

internal regulations.

Other businesses:  Global transaction banking is the division

which provides cash management, custody services, lending, and securities brokerage services

to institutions.

Prime brokerage with hedge funds has been an especially profitable business, as well

as risky, as seen in the bank run with Bear Stearns in 2008.

 Investment management is the professional management of various securities (stocks,

bonds, etc.) and other assets (e.g., real estate), to meet specified investment goals

for the benefit of investors.

Investors may be institutions (insurance companies, pension funds, corporations etc.) or private

investors (both directly via investment contracts and more commonly via investment funds e.g.,

mutual funds).

The investment management division of an investment bank is generally divided into separate groups,

often known as private wealth management and private client services.

 Merchant banking can be called "very personal banking"; merchant banks offer capital in

exchange for share ownership rather than loans, and offer advice on management and strategy.

Merchant banking is also a name used to describe the private equity side of a firm.

Current examples include Defoe Fournier & Cie. and JPMorgan Chase's One Equity Partners.

The original J.P. Morgan & Co., Rothschilds, Barings and Warburgs were all merchant banks.

Originally, "merchant bank" was the British English term for an investment bank.

Industry profile: There are various trade associations throughout

the world which represent the industry in lobbying, facilitate industry standards, and

publish statistics.

The International Council of Securities Associations (ICSA) is a global group of trade associations.

In the United States, the Securities Industry and Financial Markets Association (SIFMA)

is likely the most significant; however, several of the large investment banks are members

of the American Bankers Association Securities Association (ABASA), while small investment

banks are members of the National Investment Banking Association (NIBA).

In Europe, the European Forum of Securities Associations was formed in 2007 by various

European trade associations.

Several European trade associations (principally the London Investment Banking Association

and the European SIFMA affiliate) combined in November 2009 to form the Association for

Financial Markets in Europe (AFME).

In the securities industry in China (particularly mainland China), the Securities Association

of China is a self-regulatory organization whose members are largely investment banks.

Global size and revenue mix: Global investment banking revenue increased

for the fifth year running in 2007, to a record US$84 billion, which was up 22% on the previous

year and more than double the level in 2003.Subsequent to their exposure to United States sub-prime

securities investments, many investment banks have experienced losses.

As of late 2012, global revenues for investment banks were estimated at $240 billion, down

about a third from 2009, as companies pursued less deals and traded less.

Differences in total revenue are likely due to different ways of classifying investment

banking revenue, such as subtracting proprietary trading revenue.

In terms of total revenue, SEC filings of the major independent investment banks in

the United States show that investment banking (defined as M&A advisory services and security

underwriting) only made up about 15–20% of total revenue for these banks from 1996

to 2006, with the majority of revenue (60+% in some years) brought in by "trading" which

includes brokerage commissions and proprietary trading; the proprietary trading is estimated

to provide a significant portion of this revenue.

The United States generated 46% of global revenue in 2009, down from 56% in 1999.

Europe (with Middle East and Africa) generated about a third while Asian countries generated

the remaining 21%.:8 The industry is heavily concentrated in a small number of major financial

centers, including City of London, New York City, Frankfurt, Hong Kong and Tokyo.

According to estimates published by the International Financial Services London, for the decade

prior to the financial crisis in 2008, M&A was a primary source of investment banking

revenue, often accounting for 40% of such revenue, but dropped during and after the

financial crisis.:9 Equity underwriting revenue ranged from 30% to 38% and fixed-income underwriting

accounted for the remaining revenue.:9 Revenues have been affected by the introduction

of new products with higher margins; however, these innovations are often copied quickly

by competing banks, pushing down trading margins.

For example, brokerages commissions for bond and equity trading is a commodity business

but structuring and trading derivatives has higher margins because each over-the-counter

contract has to be uniquely structured and could involve complex pay-off and risk profiles.

One growth area is private investment in public equity (PIPEs, otherwise known as Regulation

D or Regulation S).

Such transactions are privately negotiated between companies and accredited investors.

Banks also earned revenue by securitizing debt, particularly mortgage debt prior to

the financial crisis.

Investment banks have become concerned that lenders are securitizing in-house, driving

the investment banks to pursue vertical integration by becoming lenders, which is allowed in the

United States since the repeal of the Glass–Steagall Act in 1999.

Top 10 banks: According to the Financial Times, in terms

of total advisory fees for the whole of 2016, the top ten investment banks were:

The above list is just a ranking of the advisory arm (M&A advisory, syndicated loans, equity

capital markets and debt capital markets) of each bank and does not include the generally

much larger portion of revenues from sales and trading and asset management.

Mergers and acquisitions and capital markets are also often covered by The Wall Street

Journal and Bloomberg.

Financial crisis of 2007–2008: The 2008 financial credit crisis led to the

collapse of several notable investment banks, such as the bankruptcy of Lehman Brothers

(one of the largest investment banks in the world) and the hurried sale of Merrill Lynch

and the much smaller Bear Stearns to much larger banks, which effectively rescued them

from bankruptcy.

The entire financial services industry, including numerous investment banks, was rescued by

government loans through the Troubled Asset Relief Program (TARP).

Surviving U.S. investment banks such as Goldman Sachs and Morgan Stanley converted to traditional

bank holding companies to accept TARP relief.

Similar situations occurred across the globe with countries rescuing their banking industry.

Initially, banks received part of a $700 billion TARP intended to stabilize the economy and

thaw the frozen credit markets.

Eventually, taxpayer assistance to banks reached nearly $13 trillion, most without much scrutiny,

lending did not increase and credit markets remained frozen.

The crisis led to questioning of the business model of the investment bank without the regulation

imposed on it by Glass–Steagall.

Once Robert Rubin, a former co-chairman of Goldman Sachs, became part of the Clinton

administration and deregulated banks, the previous conservatism of underwriting established

companies and seeking long-term gains was replaced by lower standards and short-term

profit.

Formerly, the guidelines said that in order to take a company public, it had to be in

business for a minimum of five years and it had to show profitability for three consecutive

years.

After deregulation, those standards were gone, but small investors did not grasp the full

impact of the change.

A number of former Goldman Sachs top executives, such as Henry Paulson and Ed Liddy were in

high-level positions in government and oversaw the controversial taxpayer-funded bank bailout.

The TARP Oversight Report released by the Congressional Oversight Panel found that the

bailout tended to encourage risky behavior and "corrupt the fundamental tenets of a market

economy".

Under threat of a subpoena, Goldman Sachs revealed that it received $12.9 billion in

taxpayer aid, $4.3 billion of which was then paid out to 32 entities, including many overseas

banks, hedge funds and pensions.

The same year it received $10 billion in aid from the government, it also paid out multimillion-dollar

bonuses; the total paid in bonuses was $4.82 billion.

Similarly, Morgan Stanley received $10 billion in TARP funds and paid out $4.475 billion

in bonuses.

Criticisms: The investment banking industry, and many

individual investment banks, have come under criticism for a variety of reasons, including

perceived conflicts of interest, overly large pay packages, cartel-like or oligopolic behavior,

taking both sides in transactions, and more.

Investment banking has also been criticised for its opacity.

Conflicts of interest: Conflicts of interest may arise between different

parts of a bank, creating the potential for market manipulation, according to critics.

Authorities that regulate investment banking, such as the Financial Conduct Authority (FCA)

in the United Kingdom and the SEC in the United States, require that banks impose a "Chinese

wall" to prevent communication between investment banking on one side and equity research and

trading on the other.

However, critics say such a barrier does not always exist in practice.

Independent advisory firms that exclusively provide corporate finance advice argue that

their advice is not conflicted, unlike bulge bracket banks.

Conflicts of interest often arise in relation to investment banks' equity research units,

which have long been part of the industry.

A common practice is for equity analysts to initiate coverage of a company in order to

develop relationships that lead to highly profitable investment banking business.

In the 1990s, many equity researchers allegedly traded positive stock ratings for investment

banking business.

Alternatively, companies may threaten to divert investment banking business to competitors

unless their stock was rated favorably.

Laws were passed to criminalize such acts, and increased pressure from regulators and

a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following

the 2001 stock market tumble after the dot-com bubble.

Philip Augar, author of The Greed Merchants, said in an interview that, "You cannot simultaneously

serve the interest of issuer clients and investing clients.

And it's not just underwriting and sales; investment banks run proprietary trading operations

that are also making a profit out of these securities."

Many investment banks also own retail brokerages.

During the 1990s, some retail brokerages sold consumers securities which did not meet their

stated risk profile.

This behavior may have led to investment banking business or even sales of surplus shares during

a public offering to keep public perception of the stock favorable.

Since investment banks engage heavily in trading for their own account, there is always the

temptation for them to engage in some form of front running – the illegal practice

whereby a broker executes orders for their own account before filling orders previously

submitted by their customers, thereby benefiting from any changes in prices induced by those

orders.

Documents under seal in a decade-long lawsuit concerning eToys.com's IPO but obtained by

New York Times' Wall Street Business columnist Joe Nocera alleged that IPOs managed by Goldman

Sachs and other investment bankers involved asking for kickbacks from their institutional

clients who made large profits flipping IPOs which Goldman had intentionally undervalued.

Depositions in the lawsuit alleged that clients willingly complied with these demands because

they understood it was necessary in order to participate in future hot issues.

Reuters Wall Street correspondent Felix Salmon retracted his earlier, more conciliatory,

statements on the subject and said he believed that the depositions show that companies going

public and their initial consumer stockholders are both defrauded by this practice, which

may be widespread throughout the IPO finance industry.

The case is ongoing, and the allegations remain unproven.

Compensation: Investment banking is often criticized for

the enormous pay packages awarded to those who work in the industry.

According to Bloomberg Wall Street's five biggest firms paid over $3 billion to their

executives from 2003 to 2008, "while they presided over the packaging and sale of loans

that helped bring down the investment-banking system."

The highly generous pay packages include $172 million for Merrill Lynch & Co. CEO Stanley

O'Neal from 2003 to 2007, before it was bought by Bank of America in 2008, and $161 million

for Bear Stearns Co.'s James Cayne before the bank collapsed and was sold to JPMorgan

Chase & Co. in June 2008.

Such pay arrangements have attracted the ire of Democrats and Republicans in the United

States Congress, who demanded limits on executive pay in 2008 when the U.S. government was bailing

out the industry with a $700 billion financial rescue package.

Writing in the Global Association of Risk Professionals, Aaron Brown, a vice president

at Morgan Stanley, says "By any standard of human fairness, of course, investment bankers

make obscene amounts of money."

Thanks for watching.

Please, subscribe to our channel.

For more infomation >> What is Investment Bank? - Duration: 31:37.

-------------------------------------------

EastEnders spoilers: A big secret is revealed about Ted after Joyce dies - Duration: 1:59.

EastEnders spoilers: A big secret is revealed about Ted after Joyce dies

Ted Murray is about to have an awkward and unsettling reunion with his estranged daughter Judith in EastEnders – after his beloved wife Joyce dies in her sleep.

But as relations between the pair quickly sour and only get worse, Judith airs her grievances with her dad and then takes hurtful action.

Ted is numb with grief after coming home and finding Joyce dead and when Judith turns up without the grandchildren, she voices his fears that he was a bad husband to his wife.

It soon becomes clear that the relationship between Judith and Ted has not been good for a long time and she refuses to let him offer her any comfort.

However, after they finally talk, they eventually go to the café to talk things through.

However, Judith is infuriated when Ted spends some time playing chess with Bernie Taylor and she sees a parental affection that she doesn't feel she ever got.

    Lashing out, she reveals the fact that Ted tried to ruin her wedding before she then makes a callous phone call that could make things even worse for an already grieving Ted.

But will she regret her action And when she then clashes with her distraught dad over funeral arrangements, is there no way for this pair to restore peace?.

For more infomation >> EastEnders spoilers: A big secret is revealed about Ted after Joyce dies - Duration: 1:59.

-------------------------------------------

What is Leverage? | Definition & Explanation of Leverage - Duration: 15:33.

In finance, leverage (sometimes referred to as gearing in the United Kingdom and Australia)

is any technique involving the use of borrowed funds in the purchase of an asset, with the

expectation that the after tax income from the asset and asset price appreciation will

exceed the borrowing cost.

Normally, the finance provider would set a limit on how much risk it is prepared to take

and will set a limit on how much leverage it will permit, and would require the acquired

asset to be provided as collateral security for the loan.

For example, for a residential property the finance provider may lend up to, say, 80%

of the property's market value, for a commercial property it may be 70%, while on shares it

may lend up to, say, 60% or none at all on some shares.

Leveraging enables gains and losses to be multiplied.

On the other hand, there is a risk that leveraging will result in a loss — i.e., it actually

turns out that financing costs exceed the income from the asset, or because the value

of the asset has fallen.

Sources: Leverage can arise in a number of situations,

such as:  individuals leverage their savings when

buying a home by financing a portion of the purchase price with mortgage debt.

 individuals leverage their exposure to financial investments by borrowing from their

broker.

 securities like options and futures contracts are bets between parties where the principal

is implicitly borrowed/lent at very short T-bill rates.

 equity owners of businesses leverage their investment by having the business borrow a

portion of its needed financing.

The more it borrows, the less equity it needs, so any profits or losses are shared among

a smaller base and are proportionately larger as a result.

 businesses leverage their operations by using fixed cost inputs when revenues are

expected to be variable.

An increase in revenue will result in a larger increase in operating income.

 hedge funds may leverage their assets by financing a portion of their portfolios

with the cash proceeds from the short sale of other positions.

Risk: While leverage magnifies profits when the

returns from the asset more than offset the costs of borrowing, leverage may also magnify

losses.

A corporation that borrows too much money might face bankruptcy or default during a

business downturn, while a less-leveraged corporation might survive.

An investor who buys a stock on 50% margin will lose 40% if the stock declines 20%.

Risk may be attributed to a loss in value of collateral assets.

Brokers may require the addition of funds when the value of securities hold declines.

Banks may fail to renew mortgages when the value of real estate declines below the debt's

principal.

Even if cash flows and profits are sufficient to maintain the ongoing borrowing costs, loans

may be called.

This may happen exactly when there is little market liquidity and sales by others are depressing

prices.

It means that as things get bad, leverage goes up, multiplying losses as things continue

to go down.

This can lead to rapid ruin, even if the underlying asset value decline is mild or temporary.

The risk can be mitigated by negotiating the terms of leverage, by maintaining unused room

for additional borrowing, and by leveraging only liquid assets.

On the other hand, the extreme level of leverage afforded in forex trading presents relatively

low risk per unit due to its relative stability when compared with other markets.

Compared with other trading markets, forex traders must trade a much higher volume of

units in order to make any considerable profit.

For example, many brokers offer 100:1 leverage for investors, meaning that someone bringing

$1,000 can control $100,000 while taking responsibility for any losses or gains their investments

incur.

This intense level of leverage presents equal parts risk and reward.

There is an implicit assumption in that account, however, which is that the underlying levered

asset is the same as the unlevered one.

If a company borrows money to modernize, or add to its product line, or expand internationally,

the additional diversification might more than offset the additional risk from leverage.

Or if an investor uses a fraction of his or her portfolio to margin stock index futures

and puts the rest in a money market fund, he or she might have the same volatility and

expected return as an investor in an unlevered equity index fund, with a limited downside.

Or if both long and short positions are held by a pairs-trading stock strategy the matching

and off-setting economic leverage may lower overall risk levels.

So while adding leverage to a given asset always adds risk, it is not the case that

a levered company or investment is always riskier than an unlevered one.

In fact, many highly levered hedge funds have less return volatility than unlevered bond

funds, and public utilities with lots of debt are usually less risky stocks than unlevered

technology companies.

Measuring: A good deal of confusion arises in discussions

among people who use different definitions of leverage.

The term is used differently in investments and corporate finance, and has multiple definitions

in each field.

Investments: Accounting leverage is total assets divided

by the total assets minus total liabilities.

Notional leverage is total notional amount of assets plus total notional amount of liabilities

divided by equity.

Economic leverage is volatility of equity divided by volatility of an unlevered investment

in the same assets.

To understand the differences, consider the following positions, all funded with $100

of cash equity:  Buy $100 of crude oil with money out of

pocket.

Assets are $100 ($100 of oil), there are no liabilities, and assets minus liabilities

equals owners' equity.

Accounting leverage is 1 to 1.

The notional amount is $100 ($100 of oil), there are no liabilities, and there is $100

of equity, so notional leverage is 1 to 1.

The volatility of the equity is equal to the volatility of oil, since oil is the only asset

and you own the same amount as your equity, so economic leverage is 1 to 1.

 Borrow $100 and buy $200 of crude oil.

Assets are $200, liabilities are $100 so accounting leverage is 2 to 1.

The notional amount is $200 and equity is $100, so notional leverage is 2 to 1.

The volatility of the position is twice the volatility of an unlevered position in the

same assets, so economic leverage is 2 to 1.

 Buy $100 of crude oil, borrow $100 worth of gasoline, and sell the gasoline for $100.

The seller now has $100 cash and $100 of crude oil, and owes $100 worth of gasoline.

Your assets are $200, and liabilities are $100, so accounting leverage is 2 to 1.

You have $200 in notional assets plus $100 in notional liabilities, with $100 of equity,

so your notional leverage is 3 to 1.

The volatility of your position might be half the volatility of an unlevered investment

in the same assets, since the price of oil and the price of gasoline are positively correlated,

so your economic leverage might be 0.5 to 1.

 Buy $100 of a 10-year fixed-rate treasury bond, and enter into a fixed-for-floating

10-year interest rate swap to convert the payments to floating rate.

The derivative is off-balance sheet, so it is ignored for accounting leverage.

Accounting leverage is therefore 1 to 1.

The notional amount of the swap does count for notional leverage, so notional leverage

is 2 to 1.

The swap removes most of the economic risk of the treasury bond, so economic leverage

is near zero.

Abbreviations:  EBIT means Earnings before interest and

taxes.

 DOL is Degree of Operating Leverage  DFL is Degree of Financial Leverage

 DCL is Degree of Combined Leverage  ROE is Return on equity

 ROA is Return on assets Corporate finance:

Accounting leverage has the same definition as in investments.

There are several ways to define operating leverage, the most common.

Financial leverage is usually defined as: For outsiders, it is hard to calculate operating

leverage as fixed and variable costs are usually not disclosed.

In an attempt to estimate operating leverage, one can use the percentage change in operating

income for a one-percent change in revenue.

The product of the two is called Total leverage, and estimates the percentage change in net

income for a one-percent change in revenue.

There are several variants of each of these definitions, and the financial statements

are usually adjusted before the values are computed.

Moreover, there are industry-specific conventions that differ somewhat from the treatment above.

Bank regulation: After the 1980s, quantitative limits on bank

leverage were rare.

Banks in most countries had a reserve requirement, a fraction of deposits that was required to

be held in liquid form, generally precious metals or government notes or deposits.

This does not limit leverage.

A capital requirement is a fraction of assets that is required to be funded in the form

of equity or equity-like securities.

Although these two are often confused, they are in fact opposite.

A reserve requirement is a fraction of certain liabilities (from the right hand side of the

balance sheet) that must be held as a certain kind of asset (from the left hand side of

the balance sheet).

A capital requirement is a fraction of assets (from the left hand side of the balance sheet)

that must be held as a certain kind of liability or equity (from the right hand side of the

balance sheet).

Before the 1980s, regulators typically imposed judgmental capital requirements, a bank was

supposed to be "adequately capitalized," but these were not objective rules.

National regulators began imposing formal capital requirements in the 1980s, and by

1988 most large multinational banks were held to the Basel I standard.

Basel I categorized assets into five risk buckets, and mandated minimum capital requirements

for each.

This limits accounting leverage.

If a bank is required to hold 8% capital against an asset, that is the same as an accounting

leverage limit of 1/.08 or 12.5 to 1.

While Basel I is generally credited with improving bank risk management it suffered from two

main defects.

It did not require capital for all off-balance sheet risks (there was a clumsy provisions

for derivatives, but not for certain other off-balance sheet exposures) and it encouraged

banks to pick the riskiest assets in each bucket (for example, the capital requirement

was the same for all corporate loans, whether to solid companies or ones near bankruptcy,

and the requirement for government loans was zero).

Work on Basel II began in the early 1990s and it was implemented in stages beginning

in 2005.

Basel II attempted to limit economic leverage rather than accounting leverage.

It required advanced banks to estimate the risk of their positions and allocate capital

accordingly.

While this is much more rational in theory, it is more subject to estimation error, both

honest and opportunitistic.

The poor performance of many banks during the financial crisis of 2007–2009 led to

calls to reimpose leverage limits, by which most people meant accounting leverage limits,

if they understood the distinction at all.

However, in view of the problems with Basel I, it seems likely that some hybrid of accounting

and notional leverage will be used, and the leverage limits will be imposed in addition

to, not instead of, Basel II economic leverage limits.

Financial crisis of 2007–2009: The financial crisis of 2007–2009, like

many previous financial crises, was blamed in part on "excessive leverage".

 Consumers in the United States and many other developed countries had high levels

of debt relative to their wages, and relative to the value of collateral assets.

When home prices fell, and debt interest rates reset higher, and business laid off employees,

borrowers could no longer afford debt payments, and lenders could not recover their principal

by selling collateral.

 Financial institutions were highly levered.

Lehman Brothers, for example, in its last annual financial statements, showed accounting

leverage of 31.4 times ($691 billion in assets divided by $22 billion in stockholders'

equity).

Bankruptcy examiner Anton R. Valukas determined that the true accounting leverage was higher:

it had been understated due to dubious accounting treatments including the so-called repo 105

(allowed by Ernst & Young).

 Banks' notional leverage was more than twice as high, due to off-balance sheet transactions.

At the end of 2007, Lehman had $738 billion of notional derivatives in addition to the

assets above, plus significant off-balance sheet exposures to special purpose entities,

structured investment vehicles and conduits, plus various lending commitments, contractual

payments and contingent obligations.

 On the other hand, almost half of Lehman's balance sheet consisted of closely offsetting

positions and very-low-risk assets, such as regulatory deposits.

The company emphasized "net leverage", which excluded these assets.

On that basis, Lehman held $373 billion of "net assets" and a "net leverage ratio" of

16.1.

This is not a standardized computation, but it probably corresponds more closely to what

most people think of when they hear of a leverage ratio.

Use of language: Levering has come to be known as "leveraging",

in financial communities; this may have originally been a slang adaptation, since leverage was

a noun.

However, modern dictionaries (such as Random House Dictionary and Merriam-Webster's Dictionary

of Law) refer to its use as a verb, as well.

It was first adopted for use as a verb in American English in 1957.

Thanks for watching.

Please, subscribe to our channel.