Banking Overview Flashcards
What are the main roles of banks? (4)
Providing liquidity to the financial system
Deposit and loan facilities
Intermediary for providers and users of capital
Develop financial instruments (to facilitate lending and borrowing)
What are the main types of banks? (5)
Traditional deposit-taking banks (retail and commercial) Development banks Reserve/central banks Investment banks Community banks
What are the main services retail banks provide?
How does the ownership worK?
Accept deposits
Provide loans
Mortgage loans
Basic investment products, e.g. savings account
Public companies which are listed on major stock exchanges and owned by the shareholders.
What are the main services development banks provide?
How does the ownership work?
Provide credit through high risk loans to public and private sector initiatives.
Usually supported by the government of a country, e.g. Development Bank of Southern Africa which focuses on large infrastructure projects.
What are the main roles of central banks (5)?
Maintain price stability in the interests of balanced economic growth, through inflation targeting and monetary policy (in SA)
Issues bank notes and coins.
Supervises the domestic banking system.
Ensures effective national payments system.
Acts as lender of last resort.
What is the prudential authority?
The PA, together with SARB, is responsible for banking regulation and supervision in South Africa.
What are the main services of investment banks?
Debt raising and equity financing for corporations and/or governments.
- Originating securities
- Underwriting securties
- Placing securities
(Note these could all be seen as one point)
What is the broad definition of community banks? Give examples of community banks? (2)
Membership-based, decentralised and self-help institutions.
Credit associations (stokvels) - informal
Village banks - formal (registered under the Mutual Banks Act)
What are the main services corporate banks provide? (9)
Deposits
Loans
Clearing cheques
Merchant and payroll services
Provide research on securities
Provide brokerage services
Provide economic information and forecasts
Investment banking activities
Banking book and trading book activities
What is the trading book and what are its three main uses? What is the banking book?
Portfolio of financial instruments which are actively traded.
Facilitate trading for customers.
Profit from trading spreads between bid/offer prices.
Hedge against various types of risk.
The banking book is everything which is not in the trading book (non-tradeable assets)
What are the main things banks need to price, and how is this done?
Lending/deposit rates:
- Linked to a benchmark rate (prime lending rate in SA)
- Add premium to this rate related to credit risk of bank/customer
- Credit risk depends on quality of bank/customer, loan security involved, tenor (term) of the loan.
- Premium acts to cover expected loan losses and allow bank to make a profit.
Fees and commissions:
- Amount of value added and specialism involved in the product offered
- Also related to cost of product
Why do banks create provisions? What is an overlay reserve?
To cover for expected loan losses. An overlay reserve is created when performance of the loan book will be worse than anticipated previously when reserves were set.
What are the main retail banking products? (8)
Transactional accounts Savings accounts Credit cards Overdrafts Mortgage loans Vehicle finance loans Unsecured personal loans Insurance products
What are the main products offered to businesses by banks? (10)
Transactional accounts Overdrafts Asset based finance Unsecured loans Merchant services Foreign exchange and trade solution services Cash solutions Savings and investment products Portfolio managements
Discuss the three main sources of revenue for banks.
Net interest income:
- Difference between interest earned from loans and interest paid on deposits
Non-interest revenue:
- Income earned from fees charge from banking book operations such as account, commitment, transaction, asset management and insurance fees.
Trading income:
- Income earned on the trading book (through trading operations)
- These contracts are MTM daily
Discuss the three main costs for banks.
Largest liability is interest payments on deposits
Operational expenses:
- Staff costs (the largest)
- Marketing and sales
- IT systems and hardware
- Running a branch network
Cost of credit
- Loan losses on non-performing loans
What is the major liability for traditional banks?
Customer deposits
What are the three key risks for banks when determine required capital for regulators?
What are four other risks faced by banks?
Credit risk
Market risk
Operational risk
Liquidity risk
Business strategic risk
Pre-payment risk
Model risk
What is credit risk?
How is default defined commonly?
What are the two main kinds of concentration risk?
Risk of loss due to failure of counter-party in a transaction to meet their obligations.
Definition of default:
- 90 days past due
- Default on another obligation
- Breach of contractual condition
Concentration risk is when there is an uneven demographic distribution of bank loans. Could be to individuals, know as single-name concentration, or within industry sectors or geographical regions, known as sector concentration.
How can market risk be subdivided? (5)
Volatility risk - Price movements more uncertain than usual
Currency risk - adverse movements in exchange rates
Basis risk - when a hedge is not identical to its exposure
Interest rate risk - adverse movements in interest rates
Liquidity risk - Not being able to trade in a market or obtain desired/fair price on a product (see p.10 for more info on liquidity risk)
What are the four main sources which operational risk stems from?
Internal processes
People
Systems
External events
Discuss the main legislative acts/standards which banks in South Africa must comply with? (6)
Banks Act
- All forms of deposit-taking banks
- Basel risk accord management standards
- Improve disclosure, reporting and strengthen banking system
Companies Act
National Credit Act
- Established by National Credit Regulator
- Regulates the credit industry, as well as several other functions
FICA
- Financial Intelligence Centre Act
- Money laundering control obligations
FAIS
- Financial Advisory and Intermediary Services
- Regulation of Financial Service Providers
- Twin peaks (banks and insurers)
IFRS
- International Financial Reporting Standards
- Accounting and solvency standards
