Banking Flashcards
What are the roles of banks? (4)
- Providing liquidity to the financial system
- Playing role of financial intermediaries (btwn depositor and borrower)
- Distribution of valuable economic & business information
- Serves as worldwide barometer of economic health and business trends
List the different types of banks (5)
- Traditional deposit taking banks
- Development bank
- Reserve/central banks
- Investment banks
- Community banks
Describe Traditional deposit-taking banks
Also known as Commercial or Retail banks
Provide services such as: 1. Accepting deposits 2. Providing loans 3. Mortgage lending 4, Basic investment products eg savings accounts
Describe Development banks
Also known as Development Financial Institutions (DFIs)
> These are alternative financial institutions, which include microfinance and community development institutions
Provide credit through higher risk loans to public and private sector initiatives
Usually State supported
Describe the Reserve (or central) banks
This is the government bank of the country
Main role is to achieve and maintain price stability in the interests of balanced & sustainable economic growth - through inflation targeting monetary policy ie
- Issuing bank notes and coinage
- Assists in supervising the domestic banking system
- Ensures effective functioning of the national payments system
- Acts as lender of last resort
Describe Investment banks
Investment banking refers to financial market activities eg debt raising & equity financing for corporations or governments.
Includes:
- Originating securities
- Underwriting them
- Placing them with investors
Describe Community banks
Membership-based, decentralised and self-help financial institutions eg:
- Credit associations such as Stokvels
- Formalised village banks
- Very formalised institutions registered under the Mutual Banks Act
List Products offered by Retail banks
Retail banks offer to Individuals the following: 1. Deposits 2. Loans (vehicle, mortgage, personal) 3. Investments 4, Transactional accounts 5. Overdrafts 6. Credit cards
List Products offered by Corporate banks
Corporate banks offer to Business the following:
- Deposits
- Loans
- Clearing cheques
- Merchant and payroll services
- Asset based finance
- Cash solutions
- Transactional accounts
List additional Services offered by Corporate banks
- Brokerage + trust services => manage clients’ portfolios
- Economic departments => study economic trends
- Research securities => recommend stocks
- Investment banking
- Trading financial instruments (“trading book”)
Defines
- Trading book
- Banking book
- Trading book is a portfolio of financial instruments held by a bank which are actively traded
- Banking book consists of everything not included in the trading book - ie the “loan book”
How are banking products priced?
Bank’s main products are Loans
> Priced relative to a benchmark => prime in SA
Add premium for credit risk (also allows for profit)
How do banks reserve for Loans?
Banks reserve for loan losses => reserve increase/decreased periodically
> Overlay reserve created if anticipating worse than expected performance of the loan book
> Provisions amount = PV of credit losses from default events, projected over 12 months
List 2 banking trends recently observed
- Increasing regulatory requirements for risk management, risk measurement, and capital holdings
- Fintech brings together financial services and technology to modernise banking
What are the components of Revenue for banks?
- Net interest income = interest on issued loans – interest on deposits
- Non-interest revenue = fees charged from banking book operations
- Trading income from the trading book
What are the components of Expenses for banks?
- Operational expenses = staff costs, marketing and sales, IT and equipment, running a branch network
- Cost of credit = non-performing loans write offs (where it’s clear that interest and capital will not be repaid)
What is a Non-performing loan?
If payments due from the borrower are more than 90 days past due, the loan is then usually classified as non-performing
What items make up the Assets of a bank?
Assets => Loan book (majority)
Other assets:
- Loans and advances to other banks
- trading securities and derivatives (trading book)
- Securities, debt, equity
Non-earning assets
- Cash & amounts due from banks
- Fixed assets
- Goodwill
What items make up the Liabilities of a bank?
Liability => Customer deposits (majority)
Other liabilities
1. Reserve set against Loan book to cover expected loan losses
2. Deposits & cash-collateralised instruments from other banks
3, Short and long term debt issued in the wholesale markets for funding purposes
4. Liabilities associated with derivatives
5. Regulatory capital
List the key risk in banking
- Credit risk
- Market risk
- Operational risk
- Liquidity risk
Other risks
- Business strategic risks
- Currency risk
- Pre-payment risk
- Model risk etc
Describe Credit risk in the context of banks
Credit risk is the risk of loss caused by the failure of a counterparty or issuer to meet its obligations
The most common objective definition of default is when the borrower is:
- 90 days past due on payments
- In default on another obligations
- In breach of any contractual condition (technical default eg breach of covenants, failure to submit audit statements on time)
Give sub-divisions of Market risk
- Volatility risk
- Currency risk
- Basis risk => where one risk exposure is hedged with an offsetting exposure in another instrument that behaves in a similar but not identical manner
- Interest rate risk
- Liquidity risk
- Commodity price risk => risk of an adverse price movement in the value of a commodity
