2. Commercial Banks

Question 1

Source of funds for a commercial bank

Answer 1

• Current account deposits – highly liquid funds, in cheque account
• Call or demand deposits – funds in savings accounts and withdrawn on demand
• Loan capital and shareholders’ equity
• Tern deposits – funds invested for pre-determined period of time e.g. 3 5 10 years and bank either pays periodic interest or at the end of a term
• Bill acceptance liabilities – security issued at less than face value and prepaid to holder at maturity
• Debt Liabilities and foreign currency liabilities

Question 2

Uses of funds of a commercial bank

Answer 2

• A personal and housing finance – e.g. home loans (mortgages that are securitized) credit cards, car loans
• Commercial lending – e.g. overdraft facilities (take account into negative); bills of exchange and lease financing
• Government lending – e.g. treasury notes; bonds – these are low return and low risk.
• ‘Other’ investing in companies, shares.

Question 3

2. A bank’s loans portfolio can follow a policy of either asset management or liability management. What does each policy involve, and what policy do the majority of banks follow today?

Answer 3

Asset management – banks can only used funds received from deposit base to provide loans (e.g.) only 10 mil in deposits, only pay 10mil in loans

Liability management – is adopted by all banks in Australia today – actively forecast loan demand, and not restricted to deposit base.

Question 4

asset management

Answer 4

banks can only used funds received from deposit base to provide loans (e.g.) only 10 mil in deposits, only pay 10mil in loans

Question 5

liability managment

Answer 5

is adopted by all banks in Australia today – actively forecast loan demand, and not restricted to deposit base.

Question 6

the three types of risk under Pillar 1 Basel II Capital Accord– Capital Adequacy

Answer 6

• Market Risk – specific risk (market risk specific to that institution) and general market risk – inflation, interest rates, commodity prices)
• Credit Risk – risk of default (eg. Customer does no repay loan)
• Operational Risk – fraud system failure, fires, poor management. Need to develop contingency plans

Question 7

Which of the following is NOT true of liability management?
A) A bank may obtain funds from its deposit base to meet loan demand
B) A bank may obtain funds from sources other than its deposit base to meet loan demand
C) Most banks have adopted the policy of liability management
D) Most banks have not adopted the policy of liability management

Answer 7

A

Question 8

Which of the following forms of OBS business involves a commercial bank providing a guarantee to a third party on behalf of their client to repay any financial obligations if the client defaults?
A) Trade and performance-related items
B) Direct credit substitutes
C) Foreign exchange, interest rate and other market rate-related contracts
D) Commitments

Answer 8

B

Question 9

What is the second pillar of Basel II referred to as?
A) Supervisory review 
B) Mutual assurance
C) Capital adequacy
D) Enhanced disclosure

Answer 9

C