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
What are the assets included in the Balance Sheet (Financials)
- Loans (negative)
- Interbank loans
- Trading book assets
- Non Trading Book assets
- Fixed Assets
- Intangible Assets
- Non earning assets
- GoodWill
What are the liabilities on the balance sheet (Financials)
- Deposits
- Wholesale funding
- Debt securities issued
- Trading book activities
- Banking book loan reserve (if it’s not charged under assets)
What is included in the revenue that the company has
- Interest and fees charged to customers
- Net interest income - Income from loans less interest paid on deposits
- Non interest revenue - Income earned from the fees charged from banking book operations. Fees include account fees, commitment fees, transaction fees, asset management fees, insurance fees
- Trading income from trading book - Income related to all the contracts the bank enters as part of it’s trading operations.
What is included as the expenses for the banks
Operational expenses - Largest expenses would be staff costs
Other expenses include marketing, sales, IT and equipment and running of a branch network
Cost of credit/ credit impairments - Represents the value of loans in default that are written off if the repayment seems unlikely
And/or the increase provisions for credit losses
What are the key risks a bank faces
- Credit Risk
- Market Risk
- Operational Risk
-Liquidity Risk - Business Strategy Risk
- Pre Payment Risk
- Model Risk
- Country Risk
- Insurance Risk
Define the credit risk
This is the risk that the bank incurs losses due to the failure of the counterparty to meet it’s obligations
What can be classified as default
- 90 days past due
- In default in another obligation
- In breach of any contractual obligations
What is concentration risk in credit portfolios
Arises through an uneven distribution of bank loans to individual issuers and counterparties or within industry sectors and geographical regions
What are the different types of market risk
- Volatility Risk
- Currency Risk
- Commodity price risk
- Liquidity risk
- Interest rate risk
- Basis Risk
What does operational Risk arise from
The processes, people, systems and external events
Internal Processes - There must be clear, orderly and complete processes to meet responsibilities to clients, manage risks, control payments, protect against fraud and comply with regulations
People - Must communicate and enforce rules, minimise conflict of interest and set up proper incentives to maintain ethical culture
Systems - There must be adequate technology resources that are backed up and protected from security breaches
External Events - There must be the ability to know and monitor clients to guard against fraud and protect people and facilities
What is liquidity Risk
The risk that the firm has insufficient cash to meet it’s obligations and may become insolvent or suffer losses due to selling assets below market price, or paying contractual penalties
What is business Strategy Risk
This is the risk of poor management decisions leading to financial loss
What is prepayment risk
The risk of an earlier expected return of the principal amount.
Acquisition costs may not have been fully recovered and hedging losses are made
What is model risk
This is the risk of models producing incorrect output
What is country risk
This is the risk of the business environment deteriorating after investment
What is insurance risk
This is the risk of claims and expenses exceeding premiums on banks underwritten business
What pieces of regulation do South African Banks follow
- Banks Act
- Companies Act
- National Credit Act
- FICA and FAIS
5.IFRS
