4.4 - Banks Flashcards
What are the key features of bank loans?
Fixed time period
Fixed or variable interest
Lender sets repayments
What are the main functions of a commercial bank?
Provide retail banking services
Licensed deposit takers
Licensed lenders
Profit making firms
What is the business model of a bank based upon?
Interest spreads
Charging higher interest on loans than the interest offered on deposits
How do banks generate profit?
Interest rate spreads
Service fees
Brokerage fees
What is liquidity?
Rate at which an asset can be sold/converted into ready cash without influencing market price
What is the liquidity risk?
Inability to meet short term financial commitments due to lack of cash + liquid assets
How can banks fail?
Run on the bank
Credit Crunch
Bad Debt
What is a Run on the Bank?
Depositors withdraw assets in panic
Banks require emergency funding
Creates liquidity crisis
What is a Credit Crunch?
Contraction in credit availability
Banks unable to borrow money
Heavy losses + capital collapse
What is bad debt?
Borrower unable to repay debt
Defaulting risk
Bank credit rating declines
Harms share price
What is the Credit risk?
Risk of lending to borrowers with inability to repay
Controlled by research + capital reserves
What are the limits to credit creation?
Regulation
Consumer + business behaviour (Repayments)
Monetary policy/policy IR
What is credit?
Receival of money or valued asset for repayment to lender at later date
