Gearing and Unconventional monetary policy: Difference between pages

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imported>Doug Williamson
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'''1.''' <br />
(UMP).
<i>Financial gearing</i> measures the relative amount of debt in a firm's capital structure.<br />
Gearing is sometimes also known as <i>leverage</i>.


Monetary policy is central government or other policy to stimulate or otherwise influence economic activity by influencing money supply or interest rates.


Gearing and leverage ratios can be calculated in several different ways, so consistency of approach is important.
Historically, mechanisms for influencing the money supply have included the use of open market operations, the central bank discount rate and reserve requirements.




Two essential bases to define are:
'Unconventional' monetary policy includes:
*Quantitative easing (asset purchase programmes)
*Forward guidance
*Negative interest rates
*New lending operations


i. The use of book or market values.<br />
ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D / (D+E).


== See also ==
* [[Forward guidance]]
* [[Lending operations]]
* [[Negative interest rate policies]]
* [[Quantitative easing ]]
* [[Reserve requirements]]
* [[Sterling Monetary Framework]]
* [[Supply side policy]]
* [[Zero lower bound]]
* [[ZLB problem]]


<span style="color:#4B0082">'''Example 1: Calculation of gearing'''</span>
[[Category:Accounting,_tax_and_regulation]]
 
[[Category:The_business_context]]
<i>Gearing</i><br />
Assume the values of debt and equity are equal, say USD 1m each.<br />
D/E = 1/1 = 100%.<br />
This is usually known as 'gearing'.
 
 
<span style="color:#4B0082">'''Example 2: Calculation of leverage'''</span>
 
<i>Leverage</i><br />
Using the other calculation with the same inputs (D = 1 and E = 1):<br />
D / (D+E) = 1/2 = 50%.<br />
This is usually known as 'leverage'.
 
 
<b>Adjustments to D and E figures</b><br />
With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions.<br />
Practitioners may also adjust the Equity figure, for example to exclude intangible assets.
 
 
<b>Bank supervision</b><br />
In the banking context, the calculation of the regulatory [[Leverage Ratio]] is strictly specified, following [[Basel III]].
 
 
<b>Expression of gearing figures</b><br />
Gearing may be expressed as a percentage (eg 100%), a number (eg 1) or a proportion (eg 1:1).
 
 
'''2.''' <br />
<i>Operational gearing</i> relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.
 
 
'''3.''' <br />
'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation.<br />
The intention of gearing up is to improve expected net results.  <br />
A consequence of gearing up is normally to increase risk, and the cost of equity capital.
 
 
Many financial disasters have been a consequence of gearing up (or leveraging) excessively in this way in earlier periods.
 
 
==See also==
* [[Balance sheet ratio]]
* [[Basel III]]
* [[Cost of equity]]
* [[Debt equity ratio]]
* [[Debt to equity ratio]]
* [[Geared beta]]
* [[Guide to risk management]]
* [[Intangible assets]]
* [[Interest cover]]
* [[Leverage]]
* [[Leverage Ratio]]
* [[Leveraged]]
* [[Leveraged takeover]]
* [[Levered]]
* [[Levered beta]]
* [[Long-term solvency ratio]]
* [[Off balance sheet finance]]
* [[Tax shield]]
* [[Ungeared]]
* [[Ungeared cash flow]]
 
 
===Other links===
[http://www.treasurers.org/node/8012 Masterclass: Measuring financial risk, Will Spinney, The Treasurer]
 
[[Category:Corporate_finance]]
[[Category:Corporate_finance]]
[[Category:Investment]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Financial_products_and_markets]]
[[Category:Liquidity_management]]

Revision as of 20:27, 8 June 2020

(UMP).

Monetary policy is central government or other policy to stimulate or otherwise influence economic activity by influencing money supply or interest rates.

Historically, mechanisms for influencing the money supply have included the use of open market operations, the central bank discount rate and reserve requirements.


'Unconventional' monetary policy includes:

  • Quantitative easing (asset purchase programmes)
  • Forward guidance
  • Negative interest rates
  • New lending operations


See also