A1. Banking overview Flashcards
1
Q
What are the types of banks?
A
CRICT RD
- Corporate banks – traditional commercial banking activities + merchant and payroll services; conduct market research and give stock recommendations
- Retail banks – offer deposit, investment, and loan products to customers; include long- and short-term savings, secured and unsecured loans
- Investment banks – involved in debt raising and equity financing for corporations and governments
- Community banks – membership-based, decentralised, self-help financial institutions (e.g., stokvels, mutual banks)
- Traditional deposit-taking banks – commercial or retail banks
- Reserve (central) banks – achieve and maintain price stability for balanced and sustainable economic growth
- Development banks – provide credit through higher-risk loans to public and private sector initiatives
2
Q
What is a trading book and a banking book?
A
- Trading book – consists of instruments actively traded and marked-to-market daily
- Banking book – primarily consists of loans and is not marked-to-market daily
3
Q
What is the role of banks?
A
- Provide liquidity
- Act as financial intermediaries
- Distribute valuable economic and business information to customers and global capital markets
4
Q
What is a financial intermediary?
A
- Business entity that brings together providers and users of capital
- Develops facilities and financial instruments for lending and borrowing
5
Q
What are three things that influence the lending rate?
A
- Credit quality of the customer
- Presence or absence of security
- Tenor (duration) of the loan
6
Q
How do banks make a profit?
A
- Profit on the positive spread between earnings from loans and cost of deposits and other funding
7
Q
How are loans priced?
A
- Typically priced relative to a benchmark rate (e.g., prime)
- Credit risk premium added to benchmark rate
- Premium covers expected loan losses and allows profit
8
Q
What is provisioning for banks?
A
- Provisions (reserves) created for potential loan losses
- Charged on the income statement
- It is stimate of expected loan losses to be incurred
- Overlay reserve created if worse-than-expected scenarios are anticipated
- Follows IFRS 9
- Provision amount is present value of projected credit losses from default events over the next 12 months
9
Q
What are two current banking trends?
A
- Increasing regulatory requirements for risk management, risk measurement, and capital holdings
- Growth of fintech integrating financial services and technology
10
Q
What are seven typical retail banking products?
A
- Transactional accounts
- Savings accounts
- Credit cards
- Overdraft facilities
- Mortgage loans
- Vehicle finance loans
- Unsecured personal loans (revolving or term)
11
Q
What are nine typical business banking products?
A
- Transactional accounts
- Overdrafts
- Asset-based finance
- Unsecured loans
- Merchant services
- Foreign exchange and trade solutions
- Cash management solutions
- Savings and investment products
- Portfolio management
12
Q
What are the main sources of revenue for a typical bank?
A
- Net interest income – earned from lending at higher rates than paid on deposits
- Non-interest income – fees earned from banking book operations
- Trading income – earnings from trading book contracts
13
Q
What are the main costs for a typical bank?
A
- Operational expenses – staff costs, marketing, IT, systems, equipment
- Cost of credit – loans are classified as non-performing after 3 months and may be written off
14
Q
What are the different types of loans on the loan book?
A
- Retail secured loans
- Retail unsecured loans
- Corporate loans
- Commercial loans
15
Q
What are the key risks faced by banks?
A
- Credit risk – loss due to counterparty failure; primary risk; loan not repaid as agreed
- Market risk
- Operational risk
- Liquidity risk
16
Q
What are six types of market risk?
A
- Volatility risk – affects all priced instruments
- Currency risk
- Basis risk
- Interest rate risk
- Liquidity risk
- Commodity price risk
