Banking

Question 1

What do retail banks do

Answer 1

They are the banks on high streets typically that try to attract deposits form individuals (aka retail individuals) and then use these deposits to make loans to other individuals

Question 2

What does the term commercial bank mean

Answer 2

In US, used as a term that captured all the banks that are doing what has thus far been referred to as the activities of a bank (attracting deposits and making loans)

In other parts of world, used to isolate those banks that specialise in providing banking facilities (deposits and loans) to commerical entities rather than individuals
This 2nd definition is alternatively described as corporate banking since clients are typically corporate entities like companies

Question 3

Why can it be a little misleading to refer to banks as retail or commercial?

Answer 3

In reality, many banks do both e.g. Lloyds and HSBC have both retail and corporate clients catered to

Question 4

Retail borrowing - from banks

Answer 4

Loans, mortgages and overdrafts:

Loans Standard features:
- for a set period generally less than 5 yrs
- at a set interest rate
- with a defined repayment schedule e.g. per month
- these are unsecured typically meaning that the bank doesn’t require any security like a car to be handed over while the loan is outstanding

Mortgages - typically secured so is the individual fails to make a scheduled payment, the bank can take the house in order to repay the loan
- typically 25 years set period
- typically at variable rate of interest
- has a defined repayment schedule e.g. monthly

Overdraft:
- flexible
- at a variable rate of interest
- unsecured and repayable on demand

Question 5

Other forms of borrowing (not from retail banks)

Answer 5

Pawnbrokers - borrower gives something of value to pawnbroker as secuity, then pawnbroker gives them money - higher risk so higher interest ( more expensive)

Payday loans - loans to help people with cash before payday, typically require payment at nexts payday and are very expensive - UK has laws preventing their interest from exceeding 0.8% per day

Question 6

Credit cards 2.2

Answer 6

Successful applicants have a credit limit that they can borrow
Use card for purchases
Have to pay off a minimum amount at end of each month but better to pay off all money borrowed at end of the month to avoid higher interest payments ( typically 20% pa)

Question 7

Student loans 2.4