Banking Flashcards
What does core banking consist of?
Traditional services offered by a bank: taking deposits, making loans and providing a payment system
What does collecting deposits mean?
A deposit is a liability for the bank that they are borrowing from the depositor (being loaned to the bank). The depositor gets a return in the form of interest.
What does making a loan mean for a bank?
They are lending out deposits for an interest. Banks can make profit from this by borrowing at a low interest rate and lending at a high interest rate. Banks lend to households and corporations.
What is the formula for a bullet loan structure?
Amount borrowed x interest ^ years borrowed for
What is an interest only loan structure?
Only pay the interest each year and the full amount at the end of the final year
What is a mortgage style loan?
Distributes the whole loan in equal payments. What is owed each year is borrowed every year and only repaid at the end. It must have the same value as a bullet loan
What is a balloon style loan?
Each successive payment is larger than the previous and the last payment is the largest. The first 3 payments are fixed arbitrarily and to calculate the final payment you must ensure the value equals the bullet loan value
What are the 6 main payment systems?
- Cheque
- Giro (like a cheque but money transferred electronically)
- Standing order/direct debit
- Bank cards
- Phone payments
- Internet
What is a clearing system?
Processing and executing the transfer of money from one bank to another
What is commercial banking?
Activity that specialises in providing services to businesses. Banks can offer services to businesses facilitating international trade and general admin tasks.
What do commercial banks provide advice on?
- Cash management
- Guarantees (guarantee a payment on behalf of the business)
- Overseas trade
- Foreign exchange risk and interest risk management
- Asset management
- Insurance and Pensions
How do you calculate return on assets?
net profit after tax / total assets
What does a return on assets calculation show?
It is a measure of a bank’s profitability. States how much a bank earns on each asset it holds. It essentially shows their efficiency
How do you calculate return on equity?
net profit after tax / equity capital
What does a return on equity calculation show?
Tells you how much money is earned by the bank for every pound invested by shareholders.
