Banking

Question 1

How much do banks supply to investment every year

Answer 1

10 trillion daras

Question 2

What is a banks sources of funds

Answer 2

Its liabilities aka deposits

Question 3

What are a banks assets

Answer 3

Its uses if funds so liabilities plus capital

Question 4

Give examples of bank assets

Answer 4

Securities and loans

Question 5

What are the two main types of deposits

Answer 5

Checkable deposits and non transaction deposits

Question 6

What are checkable deposits

Answer 6

Deposits that are payable on demand that have low interest rates however can be expensive for banks to serve

Question 7

What are non transaction deposits

Answer 7

Savings accounts and time deposits that pay higher interest

Question 8

What is the difference between savings accounts and time deposits

Answer 8

You can add or withdraw money at any time from a savings account but time deposits have a fixed maturity and severe penalty for early withdrawal

Question 9

Who can banks obtain funds by borrowing

Answer 9

Yes from the central and other banks overnight if they meet the reserve requirements

Question 10

How much are the required bank reserves

Answer 10

10% more are excesses reserves

Question 11

What is vault cash

Answer 11

Physical currency held by the bank

Question 12

Why would banks want to hold excess reserves

Answer 12

Because they are peak liquid wich comes in handy on large withdrawals

Question 13

Are commercial banks allowed to hold stocks

Answer 13

No only debt instruments

Question 14

About how much do banks hold in securities

Answer 14

25% of assets which represents 10% of revenues

Question 15

What are secondary revenues

Answer 15

Government securities which are very liquid

Question 16

What are the pros and cons of loans for a bank

Answer 16

Lucrative but not very liquid and has high default risk

Question 17

What is asset transformation in banking

Answer 17

How banks make profit by selling liabilities and buying assets with the proceeds that have different characteristics

Question 18

What happens when someone withdraws 100$ from a checkable account to another account

Answer 18

It transforms reserves assets to cash items in process of collection and deposits its check at the central bank in exchange for cash and the central bank then collects funds from the depositing bank

Question 19

What happens to a banks reserves when they gain deposits

Answer 19

They increase

Question 20

What are the four concerns of a bank manager

Answer 20

Liquidity management aka make sure there is cash when people want it, asset management aka gain low risk high profit assets, liability management aka acquire funds at low cost and capital adequacy management aka maintain the capital

Question 21

When is there no need to change the balance sheet upon a withdrawal

Answer 21

If there are ample reserves

Question 22

What can a bank do if withdrawal exceed reserves

Answer 22

Borrow from other banks, sell securities, borrow from central or reduce aka call in loans or sell them to other banks. All alternatives cost more than using excess reserves would

Question 23

How do banks seek high returns and reduce risk

Answer 23

Screen borrowers for those who can pay high interest and are unlikely to default. Also diversify borrowers so a shock to one sector wont disturb the entire portfolio

Question 24

What is liability management

Answer 24

A banks way to grow by obtaining more deposits, overnight markets to obtain funds quickly when needed

Question 25

Why do banks maintain capital

Answer 25

To decrease the chance that they become insolvent ones someone defaults in their debt

Question 26

What is the equity multiplier

Answer 26

Assets divided by equity to see the relationship between roa and roe. Roe = roa * em

Question 27

What is the cost of bank capital

Answer 27

That they are assets not used to increase roe

Question 28

Why was there a credit crunch after 2008

Answer 28

Because banks lost a lot of their assets they had to restrict lending to maintain adequate capital