Commercial Bank Balance Sheet Less simplistic Assets Liabilities & Capital Cash Money at Fed Investments Loans DEP Other borrowings Retained earnings Paid-in capital 9/17

Capital Adequacy In addition to reserve requirements, a bank must satisfy several capital adequacy ratios, one of which is Tier 1 leverage ratio Capital/Total Assets ≥ 4% Currently, a systemically important financial institution (SIFI) is one with > $100 billion in total assets. Currently, 35 of them. Must pass stress tests or can’t pay dividends or do stock buybacks.

Adverse & Severely Adverse Stress Tests -2.25% GDP growth 7% unemployment 12% drop in housing prices 30% drop in stock market Severely Adverse -7.5% GDP growth 10% unemployment 30% drop in housing prices 65% drop in stock market Must be able to endure these scenarios and still be able to lend to customers.

Fed Funds Market & Fed Funds Rate Fed Funds Market – market where banks can lend and borrow from one another on an overnight basis. Note: Banks do not lend and borrow from the Fed in this market. They only lend and borrow from one another. The FOMC, at its regular meetings, sets a target rate for the interest to be charged in this market, called the Fed Funds Rate. If a bank wants to borrow from the Fed, it goes to the discount window which is a different place where the rate is at least 50 basis points higher. 9/22

Target Rate vs. Actual Sep07 to Sep08 Fed Funds Rate is a key interest rate and affects all other interest rates in the economy. 9/22

Spikes in Fed Funds Rate in January 08 Fed Funds rate spikes down Caused by banking system having too much in reserves Fed sells securities to decrease depository inst bals (thereby reducing reserves) Next night Fed Funds rate rises. in July 08 Fed Funds rate spikes up Caused by banking system having too little in reserves Fed buys securities to increase depository inst bals (thereby increasing reserves) Next night Fed Funds rate drops.

Peak Financial Crisis 03/17/08 Bear Stearns (taken over by JP Morgan Chase) 09/07/08 Fannie Mae / Freddie Mac (conservatorship) 09/15/08 Lehman Brothers (bankruptcy) 09/16/08 AIG (kept alive by US government and Federal Reserve) 09/21/08 Goldman Sachs & Morgan Stanley become bank holding companies 09/25/08 Washington Mutual (receivership by FDIC and then bankruptcy, an S&L that was 6th largest US bank) 12/31/08 Wachovia (at time 4th largest US bank, taken over by Wells Fargo) 01/01/09 Merrill Lynch (saved from failure by being purchased by Bank of America)