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

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Page 74 - A swap is a financial transaction in which two counterparties agree to exchange streams of payments over time according to a predetermined rule.
Page 75 - An option is a contract conveying the right, but not the obligation, to buy or sell a specified financial instrument at a fixed price before or at a certain future date.
Page 15 - ... 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 75 - 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 66 - 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 78 - The moves by the financial authorities in the national markets toward increased liberalisation can be seen as an aspect of the diffusion of innovations generated by the global integration of markets . The integration of national financial markets is related to, and supported by, the broader force of the global integration of overall economic structures. These linkages through increased trade, investment and travel are a long-lasting process, working not only among the industrial nations but between...
Page 72 - ... 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 65 - 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 33 - Reserve, working in concert with other regulators of depository institutions, has stepped up its examination of banks and bunk holding companies, tightened capital standards, and proposed keying those standards to the risk profile of the banks. We and the other bank regulators are also acting to deal with present points of strain, particularly in the agricultural and energy areas, through a variety of techniques. We have also joined with the other regulators in requesting that Congress extend and...
Page 31 - ... also depreciating toward levels more consistent with restoring the international competitive position of US products. Concrete actions to implement the law will provide a constructive background for financial markets over coming years, partly by its direct effects and partly by reducing the chances of a resurgence in inflationary pressures. Beyond that step, I believe the time has come for Congress to also address those elements of our tax code that so strongly favor debt finance. While that...

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