A1 : Banking Overview Flashcards
Roles of Banks
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Provide liquidity to financial system- lending funds
> They take deposits from savers which allows them to lend money to individuals and institutions. Who in turn use the funds to make purchase good and services, invest in projects and growth their operations. This increases the circulation of money in the economy thus increasing liquidity in the economy. -
Financial intermediarises
- Bring together providers and users of capital
- develop facilities and financial instruments which make lending and borrowing possible. provide means for funds to be transferred from lender to borrower
NB. Def: Intermediary - individuals or companies that behave as middlemen between parties for agreements/ deals. - Makes possible distribution of economic and business information among customer and capital market of all countries
- Barometer of economic health and business trends
(BLID)
Def:
Intermediary - individuals or companies that behave as middlemen between parties for agreements/ deals.
Roles as distributor of valuable economic and business information
Research and Analysis:
* Banks employ teams of economists, analysts, and researchers to do studies and analysis on various economic and business-related topics.
* This research often includes market trends, industry developments, macroeconomic indicators, and investment opportunities.
* The findings and insights disseminated to bank customers and investors through reports, newsletters, and other publications,
* Thereby contributing to the distribution of economic and business information.
Market Research and Intelligence:
* Banks gather market intelligence from various sources, including proprietary data, industry reports, regulatory filings, and news sources.
* To provide market research services to clients, helping them understand market dynamics, competitive landscapes, and emerging trends.
* By disseminating relevant market intelligence, banks empower investors and businesses to make informed decisions about their financial activities.
Banks as a barometer for economic health and business trends. discuss two ways
Banking activity
1. lending &Deposit activity (economic health)
* When economic conditions are favorable, businesses tend to borrow more to expand operations, invest in new projects, or purchase equipment.
* Conversely, during economic downturns, lending activity tends to decrease as businesses become more cautious about taking on debt.
* Banks also reflect consumer confidence and spending habits through deposit activity.
* Conversely,during periods of economic uncertainty, consumers may increase savings and deposit funds into banks as a precautionary measure.
* During economic booms, consumers may spend more and keep fewer funds in savings accounts.
2.Business Performance (business trends)
* Banks often provide financial services to businesses, including cash management, payroll processing, and business loans.
* By analyzing banks’ business clients and loan portfolios, one can gain insights into various industries’ performance and overall economic health.
Types of banks & their roles
( try to link with roles of banks )
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Traditional deposit-taking banks:
* Aka commercial/retail banks -
Development banks:
* Aka DFI - Development financial institutions. usually supported by government e.g. microfinance , community development institution. Developmement bank of southern africa which focuses on infrustracture. -
Reserve/Central bank:
* central banks play a crucial role in maintaining price stabilty for sustainable economic growth. By Overseeing inflationary and monetary policy. they also regulating financial institutions and issue currency -
Investment bank:
* Debt raising and equity financing for
corporations / governments
* Originating securities, underwriting
them, and placing them with investors -
Community Bank:
* decentralized, membershi-based and self-help institututions.
* owned by members
* e.g stokvel, village banks and institutiosn registered under Mutual Banks Act
underwiting - help companies issue new securities at a guaranteed amount. The risk of not selling the securities at guaranteed prices is transfered to the banks.
Development banks
DFI (development financial institutions )
Development financial institutions (DFIs) are specialized financial institutions that provide long-term financing for projects aimed at promoting economic development and growth, particularly in developing countries. These institutions are typically established or supported by governments, international organizations, or regional development banks.
How ?
1. Long-Term Financing: DFIs offer long-term loans, equity investments, guarantees, and other financial instruments to support infrastructure projects, small and medium-sized enterprises (SMEs), agriculture, renewable energy, and other sectors crucial for economic development.
- Risk Capital: DFIs often provide risk capital to projects that may be deemed too risky or unattractive to commercial banks or traditional investors. By taking on higher risks, DFIs help mobilize private sector investment and facilitate economic development in underserved areas.
DFIs play a critical role in financing sustainable development, promoting inclusive growth, and addressing infrastructure gaps in emerging and developing economies
Banking products and activities
- Retail banks : for individuals
* Deposit
* Investment
* Loans
* Savings products
* Loans - Corporate banks: For Businesses
* deposits, making loans, clearing cheques
* Offer merchant (credit card processing) and payroll
services to businesses
* Conduct research on securities and offer recommendations on individual stocks
* Brokerage services and trust services
* Consider economic trends and actions likely to be taken by central banks
* Investment bank activities: debt raising and equity financing - Books : Banking and trading books
- Trading Books: Portfolio Assets held by bank. Are actively traded/ facilitate trading with the intention of generating short-term profits from bid-offer spread and to hedge risks.
- Banking Book: Everything not in trading book. Asset held for purpose of earnig income over the long term.
merchant services gives financial products and services designed to help businesses accept and process payments from customers
brokerage acativities- facilitate the buying and selling of securities
trust services- they manage the portfolio of assets for clients
Pricing
- Loans
* price linked to benckmark rate. In SA prime lending rate.
* bank lending rate = prime + premium
* premium= covers credit risk. To cover expected loss + make profit.
* premium depends on credit quality of customer , type of loan, term of loan. - Deposits
* rates depends on quality of bank. - Fees and commisions
* depend on cost of product
* values added
* how specialized the product is
Provisioning
- Reserve for Loan losses
* estimation on losses to be incurred
* Charge in income statement
* Overlay reserve- created when anticipate worse experience than expected. - IFRS- guidelines for impairments of finacial assets /loans
* if well perfoming,
provision= ECL over 12 next months
* if increased credit risk,
Provision= ECL over the lifetime of the loan.
Financial assets impairment - recognition of a loss in the value of an asset on a company’s balance sheet due to a decrease in its recoverable amount or fair value.
Banking Trends
developments in the banking industry
- Increasing regulatory requirements for
- Risk management
- Risk measurement
- Capital holdings
These are updates to Basel II that created Basel III - Fintech (financial technology) : brings together financial services and technology to modernise banking. e.g digital banking, improved use of data and AI.
Types of Banking products
- Retail products
* Transactional accounts
* Savings accounts
* Credit cards
* Overdrafts
* Mortgage loans
* Vehicle finance loans
* Unsecured personal loans - revolving and term - Business products
* Transactional accounts
* Overdrafts
* Asset based finance
* Unsecured loans
* Merchant services
* Foreign exchange and trade solution services
* Cash solutions
* Savings and investment products
* Portfolio management - other
* Transactional, investment, loan, and insurance products
Transactional products- allow day to day movement of funds between individuals, businesses etc
Revenue and costs
- Interest : Borrow(deposits) at low rates and lend at high rates.
- banking book : Income earned from fees charged from
banking book operations. e.g commitment fees, transaction fees and asset management fees??????????? I DO NOT UNDERSTAND - trading book: income from all contracts that the bank enters into as part of trading operations.
- Costs
* Operational expenses- mostly staff cost. others include: marketing and sales, IT systems and equipment , branch network.
* Cost of credit
Balance Sheet
- Assets
* Majority assets = loan book (banking book)
* loans subdivison : secured, retail unsecured , corporate, commercial
* Other earning assets : Loans and advances to other banks and trading books
* Trading books: trading securities and derivates - Liabilities
* Majority liability = customer deposits
* Other libailities : deposits and cash instruments from other banks and liabilties associated with derivates and trading books.
* Regulatory capital : allows for credit, market and operational risk.
- Balance sheet
* Majority assets = loans
* loans subdiviison : secured, retail unsecured , corporate, commercial
* loan book (banking book)
Key Risks
- Credit risk
- Market risk
- Operational risk
- Liquidity risk
Credit risk
Def: counterparty doesnt meet its obliagtion
objective defintion in banks:
* 90 days past due on payment
* or breach of contractual conditions ( restrictions and obligations) : they must keep a certain level of financial health and behaviour. .e.g. financial ratios or can not borow elsewhere during term.
Credit risk; strongly linked to amount of free capital and ability to absord losses
Concentration risk: Uneven distributions of loans to individuals, institutions,sectors or regions
def, objetive def in bank, concentratin risk
Market risk
subdivions
1. volatility : uncertainty in price movements
2. currency : Adverse movements in exchange rates
3. basis: risk exposure hedges by a similar but not identical offseeting exposure
4. interest rate: adverse movements in interest rates. affecting the fixed income securities, loans , future, options and forwards.
5. liquidity : risk of loss through not being able to trade in marketor obtain price on product when required
6. Commodity price risk: price risk of commodity differs considerably from other market risk driverd. Most comodities traded in markets.
