Enterprise Bank - Assets Liabilities Assets Liabilities

• 3 Financial intermediaries or institutions have an ability to create more efficient channels for funds to flow which is counter intuitive to most situations in which there is a direct route. However, large commercial intermediaries have an ability to use leverage and scale to provide a lowest cost route than what would normally occur under direct, small scale.

• 5 Financial intermediation is the process by which lenders and borrowers are married up for the purposes of financial funds flow. Through the process of lending and debting, financial intermediaries are able to increase the amount of fund within the financial system and improve their efficiency with allocation.

• 9 Enterprise Bank utilized their ability as an intermediary to create a tax-free source of income from the municipal bonds and assuming the bonds carry a higher interest rate than that lent to Ted and Sarah, has made a potentially riskless profit assuming the Nashville county doesn’t default. Moreover, ENB is working as an underwriter and many banks are underwriters of municipal securities and carry inventories as dealers. The County of Nashville has financed a capital project by issuing the bonds. Ted and Sarah are using their funds to earn interest income payable over a period of time.

County ENB

Assets Liabilities Assets Liabilities

Cash $10,000 from EBN $10,000 bond to EBN $10,000Bond from county $5,000 CD*2 to Ted and Sarah each

• 14 Money center banks are large banking institutions in a major financial center which borrow from and lend to governments, corporations, and other large institutions but not regular consumers. They were not allowed to engage in investment banking activities after the great depression because The Glass-Steagall Act which prohibited commercial banks from engaging in the investment business. It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression.

• 19 the adverse selection problem is essentially a scenario in theory that if a business, consumer or corporation desires a loan, it is due to adverse financial situation and thus, a front is being put on in order to secure a loan and continue operations. Lenders can reduce its effect through several means, performing adequate due diligence on every debtor as well as not exposing itself to lending in similar areas too frequently and keeping their books balanced.

o CH 2: 3, 4, 9, 13, 17

• 3 The goal of the Federal Reserve Act is to

1. Establish a monetary authority that could/would control the rate of growth of the nation’s money supply.

2. Establish a “Lender-of-Last Resort” that could infuse