Debt, Financial Stability, and Economic Growth: Hearing Before the Subcommittee on Telecommunications, Consumer Protection, and Finance of the Committee on Energy and Commerce, House of Representatives, Ninety-ninth Congress, Second Session, April 23, 1986, Volume 4

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Page 65 - A swap is a financial transaction in which two counterparties agree to exchange streams of payments over time according to a predetermined rule.
Page 66 - The right but not the obligation to buy or sell a specified financial instrument on or up to a certain date in the future at a predetermined price.
Page 24 - ... reduced perceptions of risk. Many smaller or growing companies have long used low or unrated bonds as an important financing technique, and those securities clearly have a legitimate role in finance. But recent innovations, relying on the use of such bonds to finance large takeovers of well established companies, seem to have opened new channels from lenders to borrowers, increasing the flow of credit for particular uses. For intermediaries, the rapid development of secondary markets at home...
Page 16 - ... large volumes of additional debt certainly has not impeded the economic expansion. To some degree, the high levels of borrowing have helped support the spending needed to keep the economy growing. However, at some point a rising debt load is not sustainable. Debt cannot rise without limit relative to income needed to service it, and increased leveraging implies smaller safety margins to deal with economic adversity. Consequently, continuing rapid growth of debt has disturbing implications for...
Page 66 - FRA is an agreement between two counterparties, one wishing to protect itself against a future rise in interest rates and the other against a future fall. Without any commitment to lend or borrow the principal amount, the parties agree to an interest rate for, say, a three-month period beginning six months hence. At maturity, they settle by paying (receiving) only the difference between the interest rate agreed earlier and the then current interest rate. FRAs are used mainly by banks and some non-bank...
Page 63 - ... to expand into new areas of business, and for institutions resident in geographic areas with excess liquidity to seek new ways of deploying it. The interaction of these forces has led to an explosion in the demand for innovative financial instruments - that is, to the desire of economic agents for new vehicles that perform the functions of transferring risk, enhancing liquidity, and generating debt and equity - that help to meet the requirements of the changing financial landscape. These forces...
Page 57 - For a variety of reasons, the large international banks appear to have lost comparative advantage to international securities markets as a channel for credit intermediation with respect to large high-grade borrowers, and in response have themselves moved heavily into certain capital-market (largely off-balance-sheet) activities.
Page 56 - Major new financial instruments - mostly taking the form of off-balance-sheet commitments - have either been created or have dramatically increased their role in the financial structure...
Page 34 - In that connection, it seems to me impera11 tive to clarify and modernize the laws governing the structure of our depository and financial systems. Too often in recent years, old legislation has clashed with new market facts. Accommodation is achieved more by the exploitation of perceived loopholes in existing law than by a well-considered design of how we want the financial system to evolve. Distinctions among banking, other financial institutions, and commercial firms are fast eroding and there...
Page 58 - ... ensure adequate control. Because of the pace of innovation, use of the new instruments may be running ahead of these necessary changes. A further point is that the new instruments transfer price or market risk from one economic agent to another, but do not eliminate that risk. And, in the process ,' they create new credit exposures, and thereby increase the ways in which the default of one borrower can adversely affect others. This problem may be exacerbated by the hitherto untested legal status...

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