A Money View of the FCIC Report: Part Two 2-2-11

The video discusses the shadow banking system's funding of mortgage-backed securities through repurchase agreements (RP) held by money market mutual funds. As concerns about collateral values arose, sponsors intervened to stabilize the system by issuing commercial paper. When sponsors could no longer support the system, the Federal Reserve stepped in, initially lending through the primary dealer credit facility and eventually holding mortgage-backed securities on its balance sheet, issuing excess reserves to stabilize the international monetary system.

What financial instrument do shadow banks use to fund their holdings of mortgage-backed securities?

• Commercial paper

• Repurchase agreements (RP)

• Treasury bills

• Corporate bonds

In the context of money market mutual funds, what role does the sponsor play?

• Acts as a direct lender to shadow banks

• Holds excess reserves

• Serves as an intermediary between the fund and the shadow banking system

• Issues mortgage-backed securities

What financial instrument did sponsors issue to reassure money market mutual funds?

• Treasury bonds

• Commercial paper

• Certificates of deposit

• Equity shares

How did the Federal Reserve intervene when sponsors could no longer support money market mutual funds?

• By selling government bonds

• By increasing interest rates

• By holding mortgage-backed securities and issuing excess reserves

• By issuing new commercial paper

What can the excess reserves issued by the Federal Reserve be used as in the international system?

• Payment for imports

• Collateral for loans

• Investment in stocks

• Money