Banking Flashcards
How much do banks supply to investment every year
10 trillion daras
What is a banks sources of funds
Its liabilities aka deposits
What are a banks assets
Its uses if funds so liabilities plus capital
Give examples of bank assets
Securities and loans
What are the two main types of deposits
Checkable deposits and non transaction deposits
What are checkable deposits
Deposits that are payable on demand that have low interest rates however can be expensive for banks to serve
What are non transaction deposits
Savings accounts and time deposits that pay higher interest
What is the difference between savings accounts and time deposits
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
Who can banks obtain funds by borrowing
Yes from the central and other banks overnight if they meet the reserve requirements
How much are the required bank reserves
10% more are excesses reserves
What is vault cash
Physical currency held by the bank
Why would banks want to hold excess reserves
Because they are peak liquid wich comes in handy on large withdrawals
Are commercial banks allowed to hold stocks
No only debt instruments
About how much do banks hold in securities
25% of assets which represents 10% of revenues
What are secondary revenues
Government securities which are very liquid
What are the pros and cons of loans for a bank
Lucrative but not very liquid and has high default risk
What is asset transformation in banking
How banks make profit by selling liabilities and buying assets with the proceeds that have different characteristics
What happens when someone withdraws 100$ from a checkable account to another account
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
What happens to a banks reserves when they gain deposits
They increase
What are the four concerns of a bank manager
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
When is there no need to change the balance sheet upon a withdrawal
If there are ample reserves
What can a bank do if withdrawal exceed reserves
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
How do banks seek high returns and reduce risk
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
What is liability management
A banks way to grow by obtaining more deposits, overnight markets to obtain funds quickly when needed
Why do banks maintain capital
To decrease the chance that they become insolvent ones someone defaults in their debt
What is the equity multiplier
Assets divided by equity to see the relationship between roa and roe. Roe = roa * em
What is the cost of bank capital
That they are assets not used to increase roe
Why was there a credit crunch after 2008
Because banks lost a lot of their assets they had to restrict lending to maintain adequate capital
