APOK Flashcards
What does a trading book do?
Includes the investments the bank has made in securities such as bonds, equities and commodities. The trading book is Chiefly exposed to market risk
What is the banking book?
Refers to the loans that banks have made.primary risk to the baking book is credit risk. Interest rate risk is also a major consideration.
Bank liabilities
Consist of deposit and it’s borrowings.
How does a bank work out it’s equity?
Assets - liabilities = equity
Valuing assets in the trading book - how is this done
Assets in the trading book are usually held for sale, and their value on the balance sheet of the bank should reflect what these assets would fetch on the financial markets, this is, their value on the balance sheet must reflect a fair market value. The fair market value is the price the asset would bring if sold immediately on the market to a willing buyer.
Value of assets in the banking book?
Assets held on the banking book, mostly loans, are usually not made available for sale. As such they are difference from assets held in the trading book that, as already noted, are usually held for sale.
Non performing loan
If a bank does not expect full or partial repayment of a loan on time, it must be classed as a non performing loans and adjustments must be made to the recorded value of the loan in the banks financial statements.
What is liquidity risk?
Defined by the Basel committee as the ability of a bank to find increases in assets and meet obligations at they come due, without incurring unacceptable losses.
What happens when the bank lacks funds to repay its depositors on demand?
The bank is in liquidity crisis
When solvency or liquidity crisis is limited to one bank what is this considered as?
Represents nonsystemic risk- it is not expected to have a wide spread effect. Generally limited to that banks customers or local economy.
What is a bank panic?
A rumour of a liquidity problem that can spread and cause depositors at other banks to rush and withdraw funds
What is a systematic risk?
If an individual bank doesn’t deal with their liquidity problem properly or it is not avoided and this leads to panic among other banks.
What is contagion?
Shocks that have broader spillover effects onto other regions, countries, or markets (systematic risk as it has a risk of collapse of the entire banking system or financial market)
