Banks and money Flashcards
two types of banks?
- commercial
- investment
role of commercial banks
- accept savings
- lend to individuals + firms
- move funds from lenders to borrowers (financial intermediaries)
retail banking?
- just high street banks, provide services to individuals and smaller firms
- mortgages, savings accounts etc
commercial/wholesale banking?
help firms grow by providing loans and advice, also by facilitating overseas trade
role of investment banks?
- arrange share and bond issues
- offer advice on raising finance (and on mergers)
- buy and sell securities on behalf of their clients
- act as market makers to make trading in securities easier (so don’t have to use stock exchange)
risk of investment banks
- they sometimes use own money to buy shares and then sell them
- riskier
commercial banks operating as investment banks? explain + downsides
commercial banks can operate as both types of bank eg Barclays and HSBC
- creates a systemic risk (risks whole market/ financial system collapsing) as they could use deposits to fund investment and then lose the money (depositors money at risk)
shadow banking system (who, how, recent context) + disadvantages
- includes unregulated financial intermediaries + unregulated actions of otherwise regulated institutions
-has become larger in recent years but hard to tell how large (as its not regulated)
- hedge funds + private equity firms often considered part of it
The risk of it causing a financial crisis is high due to:
- lack of regulation
- absence of emergency support available to normal banks
- large but unknown size
- also private equity firms often accused of cutting jobs and selling firm’s assets (to maximise profit)
liquidity meaning + examples of liquid/illiquid
how easily something can be spent
- houses are illiquid
- notes and coins are very liquid
narrow money meaning
refers to notes, coins and balances held at central bank (eg financial instruments that are very liquid)
broad money
includes assets that are less liquid + ALL OF THE THINGS MAKING UP NARROW MONEY
why don’t banks tend to want too many liquid assets
rate of return on illiquid assets (eg corporate bonds) is generally higher than liquid ones (eg deposits)
why do banks NEED liquid assets
they tend to lend over the long term, meaning loans are paid back over long period of time.
- however depositors expect to be able to withdraw savings immediately
banks need enough liquidity to repay depositors, but not too much that they become unprofitable. So they calculate their liquid reserves carefully.
credit creation
Commercial banks create credit and money
When loan is granted, bank creates a deposit in the customer’s account
- this is new money, so money supply increases
The customer becomes a debtor of the bank (they must repay + interest)
- the loan is an asset for the bank (anything owed to or by bank is asset)
- customer’s deposit is a liability (anything bank owes)
What is interbank lending
- lending between banks (occurs in money markets). Loans given are very short term (overnight to a week)
- at any point, some banks will have excess liquidity while others have a shortage (received more or less than expected in payments)
- so those with a temporary shortage of liquidity can borrow to meet customers needs.
- Banks with excess earn interest from lending. The rate charged is called the overnight rate
what is a bank’s balance sheet + what should be balanced
snapshot of its assets and liabilities on a particular date
- total assets should always equal total liabilities
what is a bank’s capital made up of?
- total of its share capital (gains when its shares were first issued) and its reserves (made from retained profits)
