Question

Please write a short response to each of the paragraphs below:

1.

Define eurodollar and eurocurrency.

Eurocurrency is defined as any currency that is deposited into a different country’s bank. For example, if someone were to deposit Canadian currency into a U.S. bank, that currency would be considered eurocurrency. Eurocurrency is highly used for international trade and to apply for international loans. Eurocurrency is largely used by the wealthy and large corporations as a way to avoid regulations, tax laws, and high interest rates.

“The term eurodollar refers to U.S. dollar-denominated deposits at foreign banks or foreign branches of American banks (“Eurodollar” 2018).” The advantage to the eurodollar is being able to avoid regulations of the Federal Reserve. The disadvantage is the high interest these deposits could incur due to having no regulations. Banking outside of the country offers a potential for higher profits due to the banks being unregulated; however, the instability of these offshore banks is at a higher risk.  

2.

What is the Glass-Steagall Act? Where and when was it enacted? What are its 3 provisions? When was it repealed?

The Glass-Steagall Act (also known as the Banking Reform Act of 1933) was responsible for separating commercial and investment banking activities. This was enacted in the United States in 1932 during the Great Depression. The Glass-Steagall Act created the Federal Deposit Insurance Corporation (FDIC) and enforced bank reforms, provided stability and reduced risks in the banking industry, and prohibited bank-holding companies from owning other financial companies. Basically, commercial banks were only allowed to take deposits and make loans and investment banks were only allowed to underwrite and deal with securities. The Glass-Steagall Act was repealed in 1999 by President Clinton. Many people believe that the repeal of the Glass-Steagall Act lead to the 2008 financial crisis in the United States.

3.

Indirect finance- Is where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary. This is different from direct financing where there is a direct connection to the financial markets as indicated by the borrower issuing securities directly on the market.

Debt- Something, typically money, that is owed or due. (The state of owing money)

Equity- A stock or any other security representing an ownership interest. (The value of the shares issued by the company)

Answer 1

1. Eurocurrency and Eurodollars: Both the terms have been rightly defined in the mabove mentioned paragraph citing differences between the two. A eurocurrency is something which is deposited in a different country whereas a eurodollar refers to US Dollar dominated deposits done in the foreign branches of American banks.

2. Th Glass Steagall Act which created a lot commotion at the time of repelling the Act which is rumoured to be the main reason for the 2008 depression. This Act was responsible for seperating commercial and investment banking activities. Enacted in the year 1932 ant the time of the Great Depression, it helpe in overcoming economic challenges and bring the national economy to a normal phase. It provided stability and reduced risks in the banking industry and also restricted bank holding companies to own other financial companies. Finally, under the leadership of President Clinton, the Act was repelled thereby causing 2008 financial crisis in the United states.

3. Indirect Finance : Indirect Finance as the word suggests is an indirect channel of procuring finance. The aprtis involved through which the finance is being taken are indirect channels and do not directly relate to the financial market. These are financial intermediaries who act as a channel for finances.