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Professional Banker Certificate > 1. Banks and Banking > Flashcards

1. Banks and Banking Flashcards

0
Q

Name 3 typical types of banking.

A

Commercial

Investment

Bancassurance

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1
Q

What is banking?

A

Business conducted, and services offered by, a bank

Origins: 18th century BC Mesopotamia

Italian ‘banco’ 1200-1500AD

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2
Q

What is Commercial banking?

A

Taking deposits and making loans

Two types:

1) retail (individuals and companies)
2) wholesale (banks and governments through money markets)

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3
Q

What is investment banking?

A

Advising corporates on how to raise finance

Managing mergers and acquisitions

Buying and selling shares

Managing customers’ investments

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4
Q

What is bancassurance?

A

Providing pensions and insurance

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5
Q

What is the purpose of a bank for depositors?

A

Reduce or bear risk of payments

Keep money safe and available

Invest to generate a modest return

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6
Q

What is the purpose of a bank for credit customers?

A

Make finance available affordably

Lend responsibly

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7
Q

Why is a bank’s role as intermediary important?

A

Ensures more efficient use of funds within the wider economy

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8
Q

What are the major functions of a retail/clearing bank?

A

Accept deposits

Grant loans

Process payments

Provide other services

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9
Q

What are three ways a bank makes money as a business?

A

Lending at higher rates than they borrow/accept deposits

Charging fees for products and services

Investing deposited funds

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10
Q

Describe the tension between liquidity and profitability.

A

Liquidity-ability to pay debts as they fall due. Requires reserves of cash.

Profitability- invest some deposits to make money. Requires lending out cash reserves.

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11
Q

Name the types of assets typically held by banks.

A

Notes and coin

BoE balances

Loans and advances to banks

Bills (treasury and others)

Investments (stocks and shares)

Advances (loans to customer- likely biggest asset)

Premises and equipment

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12
Q

What is liquidity?

A

Ability to convert assets into cash quickly and without loss.

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13
Q

What is a bank’s role in society?

A

Financial intermediary

Creates money

Products and services for customers

Money transfer mechanisms

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14
Q

What was the significance of the 1708 act?

A

Established BoE monopoly as joint stock bank

Most banks small, local and unregulated

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15
Q

What was the significance of the 1826 country bankers act?

A

Response to over 60 private bank failures in 1825

Milestone- joint stock banks could be formed and issue notes outside 65 mile radius of London

Broke BoE monopoly

Bigger banks could better spread risks

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16
Q

What was the significance of the 1833 Bank Charter Act?

A

Joint stock banks could open branches within 65mile radius of London, but not issue notes

Led to rise in number and size of joint stock banks

Private banks merged and taken over

E.g. Barclays 1896 onwards

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17
Q

What were the major benefits of bank mergers in the 1960s?

A

Strengthening balance sheets

Cost savings

More funds for investment in technology

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18
Q

Give a brief overview of the history of Scottish banking.

A

BOS 1695

RBS 1727

Clydesdale 1838

No limit on joint stock banks

By 19th century, most major towns and cities had joint stock banks

Amalgamations reduced numbers to 8 by 1907

Further mergers in 50s and 60s reduced to 3

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19
Q

Name 5 innovations that were pioneered by Scottish Banking.

A

Overdrafts

Branch banking

Joint stock banking

The clearing house

Chartered Banker Institute

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20
Q

What is the deposit guarantee threshold?

A

Amount of a depositor’s money the government will guarantee if the bank fails

2008- raised from 31,700 to 50k

2010- raised to 85k

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21
Q

What form does the competition between clearing banks take?

A

Range of services

Delivery channel (e.g. Online and telephony)

Interest rates

Fees

Additional services

Stability and trustworthiness

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22
Q

What are primary and secondary banks?

A

Primary- form part of the payments system

Secondary- do not form part of the payments system

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23
Q

Other than banks, what kind of institutions accept deposits?

A

Building societies

Credit unions

NS&I

Some finance houses

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24
Q

Name 4 types of non deposit taking financial institutions.

A

Investment trusts

Unit trusts

Insurance companies

Pension funds

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25
Q

How do economies of scale benefit the major clearing banks?

A

Reach- through large branch network

Risk Spread - through big and diverse customer base

Specialisation- departments and expertise

Liquidity - withdrawals more predictable

Technology

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26
Q

What were the interim Vickers report/ICB?

A

Make banks better able to absorb losses

Make it easier to sort out troubled banks

Curb excessive risk taking

Delivered through two mechanisms:

1) hold more capital
2) ring fence retail from wholesale and investment

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27
Q

Name some financial institutions other than banks.

A

Building societies

Credit unions

NS&I

Merchant banks

Insurance companies

Pensions Companies

Investment trust companies

Unit trust companies

Central banks

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28
Q

What does it mean for a building society to be mutual?

A

Savers and borrowers are ‘members’ and therefore have voting rights.

One member one vote rather than one share one vote

Society run for members rather than shareholders

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29
Q

What are two types of building society?

A

Terminating - when all members where housed, wind up the society. Historical.

Permanent- continue once founders are housed. Modern.

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30
Q

Why has there been a decline in number of building societies since the early 20th century?

A

Closure of many small permanent societies

Amalgamation by mergers

31
Q

What is the significance of the building societies act 1986?

A

Allows building societies to demutualise

Generally removed restrictions

Allowed them to extend range of services

Convert to bank:

1) Abbey national 1989
2) Halifax, Woolwich, Alliance and Leicester 1997

32
Q

Why were building societies less prevalent in Scotland?

A

Dominance of commercial and savings banks

Relative poverty of working class

Availability of social housing

Tradition of renting

Lack of suitable housing stock

33
Q

How are shares and deposits handled by building societies?

A

Savings account = a share

Savers = members

Mortgage borrowers = borrowing members

1986 act says:

funding must be 50% from retail sources

Commercial assets must be 75% loans secured on land for residential use

34
Q

Give a brief overview of credit unions.

A

Mutual savings and loan societies

Members have a social bond: e.g. church, community, employer etc.

Small, so managers know borrowers personally

Governed by credit unions act 1979

35
Q

Give a brief overview of the post office savings bank (POSB)

A

Established 1861

National coverage through PO network

Deposits and interest state guaranteed

Deposits held at BoE and invested in government s securities

36
Q

Why did POSB decline in the 50s and 60s?

A

Uncompetitive services- e.g. no payment service or investment account

Uncompetitive interest rate- more aggressive competitors

37
Q

What developments in the POSB took place in the 60s?

A

Headquarters moved from London to Glasgow

Investment accounts

Name changed to National Savings Bank (NSB)

Absorbed into NS&I 2000

38
Q

Name 6 activities of modern merchant banks

A

Accept deposits - corporate sector

Finance - issue bills for customers

New share issues - pricing and underwriting

Financial advice - mergers, acquisitions and takeovers

Investment management

Currency and Commodity trade

39
Q

What are the main activities of insurance companies?

A

General insurance- spread risks between parties

Life assurance- spread risk over time

40
Q

Describe General Insurance.

A

Cover certain agreed risks which may happen during a specific period of time

Large pools with historic data so high degree of accuracy in predicting likely claims

Spread risks across all who wish to insure against it

Collect a fee or premium driven by risk contributed by the individual

41
Q

Describe Life Assurance.

A

Pay out on occurrence of an event that will happen but at an uncertain time

Premiums fixed over time-higher than necessary early on, but lower than necessary later on when risk is higher

Premiums held in a fund and invested

42
Q

Describe 4 types of assurance policies.

A

Term assurance- pay out if event occurs within specified period. Cheap, because most policies don’t generate claims.

Whole of life- pay out on death. All result in claims.

Endowment- pays out lump sum or annual amount on earlier of death or specified date

Annuities-lump sum or guaranteed income for life on survival to a specified age

43
Q

What are four means of early withdrawal from a life assurance policy?

A
  1. Convert to a paid up policy
  2. Surrender policy for cash
  3. Sell the policy
  4. Use policy as security for a loan
44
Q

Compare bancassurance in the UK and Europe over the recent past.

A

Europe- ‘one stop shop’ model of integrated financial services

UK- fragmented until the deregulation of the 1980s

45
Q

What constitutes income for a pension fund?

A

Contributions from employees and employers

Earnings from invested funds

46
Q

What constitutes expenditure for a pension fund?

A

Payments to pensioners

Administration

47
Q

What are the two man types of funded pension scheme?

A

Insured- risk borne managed by an assurance company. Attractive to small firms.

Self administered- risk borne by fund itself. Run by trustees.

48
Q

What are the limits on pension benefits?

A

Maximum pension: 2/3 final salary

Lump sum: 1.5 final salary

May have changed with 2015 budget

49
Q

What is an investment trust?

A

Public limited company

Raised funds by issuing shares

Pass profits back to shareholders as a dividend

Closed fund- fixed number of shares only added to by share issue

50
Q

What is a unit trust?

A

Trustees control investors’ money

Delegate to Fund manager

Investor has a certificate showing number of units held

‘Open-ended’ since new units created as and when new investors join

51
Q

When and by whom was the Bank of England founded?

A

1694

William Paterson

52
Q

Describe the original charter of the Bank of England.

A

BoE authorised to:

  1. Accept deposits and make loans
  2. Discount bills
  3. Issue notes

BoE required to:
1. Loan £1.2m to government at 8%

53
Q

How did the Bank of England differ from other commercial banks at the time of its creation?

A
  1. joint stock company
  2. limited liability
  3. Banker to government and other banks
54
Q

Describe the 1844 bank charter act.

A

Aim to control money supply

Regulated note issue

Pegged notes to gold at £3.87 per ounce

55
Q

When did the Bank of England first act as a lender of last resort?

A

During the panic of 1866

56
Q

When was the Bank of England nationalised?

A

1946

57
Q

What are the three deputy governors of the Bank of England responsible for?

A
  1. Monetary policy
  2. Financial stability
  3. Prudential regulation
58
Q

Who sits on the Bank of England court of directors?

A

The governor, the deputy governors, and a number of non-executive directors

59
Q

What are the three core purposes of the Bank of England?

A
  1. Currency integrity and value
  2. Financial system stability
  3. Financial services regulation
60
Q

Name 8 functions of the Bank of England.

A
  1. Government banker
  2. Bankers’ banker
  3. Note issue
  4. Monetary policy
  5. Lender of last resort
  6. International relations
  7. Exchange equalisation account (EEA)
  8. Private banking
61
Q

What are the main provisions of the Bank of England act 1998?

A
  1. Maintain price stability and support government policy
  2. MPC established
  3. Increased accountability and transparency
  4. Supervision transferred to FSA
62
Q

Name four common government macro-economic policy objectives.

A
  1. Inflation low and stable
  2. Employment high and stable
  3. Economic growth
  4. Favourable balance of international payments
63
Q

What is fiscal policy?

A

Government spending, taxation and borrowing.

Taxation can reduce purchasing power

64
Q

What is monetary policy?

A

Control of the money supply.

Levers include interest rates and quantitative easing.

65
Q

What is the Bank of England base rate?

A

The interest rate that the BoE charges to banks for secured overnight lending.

66
Q

Define inflation.

A

A general increase in price level over time

67
Q

Describe the difference between RPI and CPI.

A

CPI- Consumer Prices Index. Basis of BoE 2% inflation target.

RPI- Retail Price Index. Includes housing.

68
Q

What are three potential effects of high inflation on savers?

A
  1. Save less and hold in value retaining assets
  2. Savers ‘for a rainy day’ may top up savings to ensure they remain adequate
  3. Savers to buy something specific may buy now rather than wait for their savings to deteriorate in value
69
Q

There is a tension between government objectives of low inflation and high employment. How has this played out in recent UK history?

A

Governments committee to full employment until 1977

1970s crisis of conpetitiveness, industrial and social unrest, and rising inflation

Inflation peaked at 32% in 1973

Inflation target at the expense of full employment due to 1975-1977 economic crisis

70
Q

How is the government focus on maintaining inflation relevant to financial services?

A

Main government/central bank lever is the control of interest rates

Many products are priced on variable rates

UK more likely to have variable rates than Europe. This would be a risk of joining the Eurozone.

71
Q

Name 9 indicators of economic performance

A
  1. Unemployment
  2. Payroll - full time, part time. Zero hours etc
  3. Industrial production
  4. Retail sales
  5. House building
  6. Trade deficit
  7. Budget deficit
  8. Consumer confidence
  9. Business confidence
72
Q

What is GDP?

A

Gross Domestic Product.

The total value of all goods and services produced within a country in a year.

73
Q

What is the distinction between primary and secondary financial markets?

A

Primary- new issues of shares. initial public offerings (IPO).

Secondary- trade of existing securities

74
Q

What is the FSAP and what are its three primary objectives?

A

Financial Services Action Plan

European initiative

Objectives:

  1. Create a single EU wholesale market
  2. Open and secure retail markets
  3. State-of-the-art Prudential rules and supervision

Professional Banker Certificate (7 decks)

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