HW check RB pp Banking – the bare essentials

HW check: → MK, p 74, task 2 charge interestdo business give adviceissue bonds issue stocks or sharesmake loans offer adviceoffer services pass lawspay interest provide servicesraise capital receive depositsshare profits make lawsmake profitsoffer loans pay a depositprovide capital provide loans

HW check: Banking – the bare essentials (RB, p 26) 1 bank account 12 goes bust 2 cash 13 payments 3 in 14 debit 4 deposits 15 credit 5 interest (rate) 16 transaction 6 loans 17 financial services 7 interest 18 foreign currency 8 depositors 19 securities 9 shortages 20 investments 10 borrow 21 payment system 11 central bank 22 cartels 23 regulators

Banking – the bare essentials (RB, p 27) take depositsgo bust pay interestmake payments make loansoffer financial services charge interestgive financial advice misuse depositors’ moneyexchange foreign currency make losses manage investments borrow money underwrite securities & derivatives

Liquidity vs. solvency The state of having enough money to pay one’s debts. ____________ The state of having enough assets that are easily turned into cash. ___________ HINT: Remember: Governments help banks cope with cash shortages! Which term refers to the opposite of cash shortage?

Liquidity vs. solvency The state of having enough money to pay one’s debts. solvency The state of having enough assets that are easily turned into cash. liquidity

Liquidity vs. solvency The state of having enough money to pay one’s debts. solvency The state of having enough assets that are easily turned into cash. liquidity liquidationsolvency insolvent liquidity liquid 1.He is technically _________. He can’t pay his debts. 2.It’s important that banks are ______ so that people can withdraw money any time they want. 3.An immediate __________ could produce huge losses for shareholders. 4.A typical _________ crisi is when a business does not have enough cash to pay short-term expenses. 5.__________ is important to avoid bankruptcy.

Liquidity vs. solvency The state of having enough money to pay one’s debts. SOLVENCY The state of having enough assets that are easily turned into cash. LIQUIDITY 1.He is technically INSOLVENT. He can’t pay his debts. 2.It’s important that banks are LIQUID so that people can withdraw money any time they want. 3.An immediate LIQUIDATION could produce huge losses for shareholders. 4.A typical LIQUIDITY crisis is when a business does not have enough cash to pay short-term expenses. 5.SOLVENCY is important to avoid bankruptcy.

Banking cont.

Vocabulary focus 1 subprime borrowers A failure to repay a loan 2 credit ratingB investment fund that combines safe & risky investments 3 default C clients who may not be able to repay their loans 4 hedge fund D assets you promise to give if you cannot repay a loan 5 security E estimates of people’s ability to fulfill their financial commitments 6 forecloseF to take possession of one’s property because they failed to continue paying a loan

Vocabulary focus 1 subprime borrowers C clients who may not be able to repay their loans 2 credit rating E estimates of people’s credit standing ability to fulfill their credit worthinessfinancial commitments 3 default A failure to repay a loan 4 hedge fund B investment fund that combines safe & risky investments 5 security D assets you promise to give to the lender if you cannot repay a loan 6 foreclose F to take possession of one’s property because they failed to continue paying a loan

MK, p 75 – Reading: The subprime crisis and the credit crunch INTRO: Subprime meltdown...?... a financial crisis that arose... 1 Where? 2 When? 3 What happened? A numerous institutional lenders and hedge funds collapsed B the mortgage market C after a sharp increase in mortgage foreclosures (mainly subprime)

MK, p 75 – Reading: The subprime crisis and the credit crunch INTRO: Subprime meltdown...?... a financial crisis that arose... 1 Where? B In the mortgage market. 2 When? C After a sharp increase in mortgage foreclosures (mainly subprime). 3 What happened? A Numerous institutional lenders & hedge funds collapsed.

Subprime meltdown is a financial crisis that arose in... the mortgage market after a sharp increase in.... mortgage foreclosures (mainly subprime) collapsed... numerous mortgage lenders and hedge funds.

Credit crunch credit crunch = credit squeeze = credit crisis: - ________ in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. increase reduction Causes: -often caused by a sustained period of ________ and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debts becomes known.debtbad debts careless careful Investor in debt?Loan turns sour?

Credit crunch credit crunch = credit squeeze = credit crisis: - ________ in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. increase reduction Causes: -often caused by a sustained period of ________ and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debts becomes known.debtbad debts careless careful Investor in debt?Loan turns sour?

Who is to blame? The sharp increase in foreclosures and the problems in the mortgage market were largely blamed on: – loose lending practices –low interest rates –a housing bubble –excessive risk taking by lenders and investors.

How did the subprime crisis lead to the credit crunch/crisis/squeeze? Read: MK, p 75 Put the sentences below in the right order → Vocabulary: 1B2C3E 4D 5A Watch: Crisis of Credit credit-visualized-on-vimeo

HW: Watch the Crisis of credit video and answer the questions Following the tech bubble and the events of September 11, the Federal Reserve stimulated a struggling economy …HOW?... by ________________________________________ WHAT WAS THE RESULT ON THE HOUSING MARKET? _____________________________________________ WHAT WAS THE CONSEQUENCE FOR BORROWERS? ______________________________________________ This left mortgage lenders with property that was worth … HOW MUCH? ______________________________________ WHAT HAPPENED TO SEVERAL LENDERS ______________________________________________ In the wake of the meltdown, …WHAT DID CENTRAL BANKS DO?