A1 - Banking Overview Flashcards
What roles do Banks Play
- The role of financial intermediaries bringing together providers and users of capital
- Develop facilities and financial instruments that make lending possible
- Provide the means by which funds can be transferred from deposit to borrower
- Global nature of banks makes the distribution of valuable economic and business information among customers and capital markets in all countries possible
What are the main types of banks
- Traditional Deposit Taking Banks
- Development Banks
- Reserve/Central Banks
- Investment Banks
- Community Banks
Describe Traditional deposit taking banks
- These are commercial/retail banks
- They provide services such as accepting deposits and providing loans
- They are usually Public companies that are regulated and listed on the major stock exchange, and owned by shareholders
Describe Development Banks
- These are alternative financial institutions that include micro finance and community development institutions
- The play a specific development role in providing credit through higher risk loans
- They are usually government funded or obtain funding from other leaders
Describe Reserve/Central Banks
- The government bank of the country
- The role is to achieve and maintain price stability in the interests of balanced and sustainable economic growth
- It ensures an effective national payments system
- It administers the exchange controls
- It issues banknotes and coinage
- It is the prudential authority supervising the bank and insurance industry
- It acts as the lender of last resort
Describe Investment Banks
- Assist companies and the government with facilitating funding
- Involves activities such as debt finance raising and equity financing for corporations
Describe Community Banks
- Member based, self help organisations
- Credit associations and formalised village banks fall under this
e.g Stokvels
What are the products offered by Retail Banks
- Deposit, investment and loan products
- Transaction accounts with overdraft facilities
- Offer credit card facilities
What are the products offered by corporate banks
- The services of traditional commercial banks, i.e deposits and taking loans and clearing cheques
- Provide merchant and payroll services to businesses
-Offer brokerage services where they are willing to manage portfolios - May do research on securities and provide recommendations on individual assets
-Offer foreign exchange and trade solution services
What is the trading book
The portfolio of financial instruments that are held by a bank and are actively traded and facilitate trading for customers to profit from trading spreads between the bid and ask prices for hedge risk
What is the Banking book
This consists of loans primarily and it is not marked to market daily
How are banking products priced
The banks main products are loans and they are priced linked to the benchmark rates
- The lending rates will differ depending on the credit quality of the customer, whether a loan security is involved and the tenor
- Deposit rates are offered based on their own credit quality
How is the provision for loan losses shown in the banks income statement
The provision for loan losses will be represented as a charge
What is the provision for loan losses and how is it calculated
It’s an estimate of the losses that will be incurred on loans
- It will be increased or decreased periodically, and in some circumstances an overlay reserve will be calculated if there’s a worse than expected performance for the loan book
- For performing loans it’s the present value of the credit losses from default projected over the next 12 months
- For non performing loans it’s the present value of all credit losses projected for the instrument over the lifetime
What are two trends in banking that have been recently observed
- Increasing regulatory requirements for risk management, risk measurement and capital requirements - Also increased regulation relating to provisioning, capital requirements and reporting and disclosure
- Emerging of ‘Fin-Tech’ - Brings Financial services together with technology in order to modernise banking
Includes greater digital and mobile banking experience, Improved use of data, Using artificial intelligence to provide better service and reduce fraud
