Banks And Facilitating Lending

Question 1

What are long term financing

Answer 1

Finances whole business over many years

Question 2

What is medium term financing

Answer 2

Finances major projects or assets with a long life

Question 3

What is short term financing

Answer 3

Finances day to day trading of the business

Question 4

Examples of long term financing

Answer 4

Share capital
Retained profits
Venture capital
Mortgages
Long-term bank loans

Question 5

Examples of medium term financing

Answer 5

Bank loans
Leasing
Hire purchase
Government grants

Question 6

Examples of short term financing

Answer 6

Bank overdraft
Trade creditors
Short-term bank loans
Factoring

Question 7

How do modern commercial banks create credit

Answer 7

By extending loans to businesses and households - the do not need to attract deposits from savers to do this

Question 8

What happens when a bank makes a loan

Answer 8

It credits the person/business’s bank account with a bank deposit if the size of the loan/mortgage - new money is created

Question 9

The benefit to a bank attracting fresh deposits

Answer 9

May attracting new deposits, the commercial bank can increase its lending without running down its reserved

Question 10

Where is there competition between

Answer 10

Banks and building societies for the retail deposits of individuals and businesses

Question 11

Average interest rate on savings despises recently

Answer 11

Has been historically low and usually less than the rate of consumer price inflation (i.e. real interest rates on savings have been negative)

Question 12

What deposits do commercial banks prefer to attract

Answer 12

Stable deposits - deposits that cannot be withdrawn immediately as this helps them to control their ‘liquidity risk’

Question 13

Benefits of longer-term savings deposits to savers (because banks prefer them)

Answer 13

They offer a higher rate of interest for savers, a reward for the inconvenience of sacrificing some of their liquidity

Question 14

What are assets of a bank

Answer 14

Reserves and deposits

They are ‘owned’ by the banks

Question 15

What are the liabilities of a bank

Answer 15

Consumer deposits
Money owed to bond holders and other banks
They are ‘owed’ by the bank

Question 16

Examples of assets

Answer 16

Cash
Cash balances
Loans
Securities
Fixed assets including property

Question 17

What is the main funding source of UK retail commercial banks

Answer 17

Retail funding

Question 18

What gives banks a more secure source of funds

Answer 18

Retail deposits that are saved with a bank for a longer period of time- banks will typically pay a higher interest on these

Question 19

Limitations to money creation by commercial banks

Answer 19

• market forces (scale of profitable lending opportunities)
• regulatory policies
• behaviour of consumers and businesses e.g. Decisions about how much debt to repay
• monetary policy