8.2 Commercial and investment banks Flashcards
What are commercial banks?
These are known as high street or retail banks
Their main customers are members of the general public
What are the 3 core functions of commercial banks?
- accepting deposits
- lending money to different economic agents who wish to borrow
- providing an efficient means of payment and transferring funds between different economic agents
What is are the 3 objectives of commercial banks?
Profitability - like any large public limited company with shareholders
Liquidity - commercial banks must ensure that they have enough liquidity to meet the legitimate demands of their depositors
Security - commercial banks seek to ensure that their assets are as secure as possible
What are the key functions of investment banks?
The key function of investment banks is to help companies, the government and other financial institutions e.g. insurance companies and pension funds raise finance by giving advice, arranging the new issues of shares or corporate bonds and helping them to manage the risk in doing so
How do investment banks make profit?
These services command large fees, and often they will guarantee to purchase any unsold shares in a stock market floatation to remove uncertainty and risk for the client
What is the difference between assets and liabilities?
A £10 note is an asset to the person owning it, since it gives the person £10 worth of spending power. However it is a liability for the Bank of England which issue it.
What are the main conflicts of objectives for commercial banks?
Profitability v Liquidity - Higher loans are more profitable however more illiquid
Profitability v Security - loans with higher interest and return rates mean more profit however more risk from the banks as they may never see it paid off
Globally how much of the money actually exists?
Globally, only around 3% of all money actually exists as notes and coins, the remainder is held in electronic form by banks
How is credit created?
Step 1 – Customer X deposits £1,000 in Bank A
Step 2 – Bank A loans £900 (remember it must hold 10%) to customer Y who deposits the money in Bank B
Step 3 – The deposits of Bank B have now increased by £900, and after holding its 10%, is now free to lend £810 to customer Z
Step 4 – Customer Z now purchases goods worth £810 from a company who banks with Bank C
Step 5 – Bank C now has new deposits of £810 so is free to lend £729 and so on
Overall liabilities - £2,710
Original amount - £1,000
