BUSINESS (Banking Systems/Central Bank) Flashcards
Credit score
-use it to evaluate your risk
-lower your score=more risk you are=higher interest rate you will pay
-use past credit to calculate it (ex. credit cards, lines of credit, loans, mortgage payments)
>payments
>how much you have
>how long you have had it
Establish a credit rating
-pay your bills on time
-only borrow what you can afford
-start with one entry level credit card
-start slow (every time you apply for credit it is tracked as a hard hit)
-keep balances low
Economic cycle
-expansion
-contraction (recession)
-business peak and recession trough
Global financial system
-framework of agreements (treaties) and institutions (central banks) that facilitate the flow of capital for investing and trading
Central banks (reserve banks)
-manage currency
-money supply and interest rates for each country
-oversea the commercial banking system
*the bank’s bank: lend money to commercial banks who in turn lend money to businesses and consumers
Supply and demand economy
-Heading into a recession: banks increase supply of money=drops interest rates=more people take out loans to buy goods and services=stimulates economy
-inflation going up fast: raise interest=decrease supply of money=decrease the number of loans
Currency
-money that is used in circulation such as banknotes and coins
Interest
-the payment by a borrower to a lender above the principal sum
-“cost of money”
Principal
-initial size of the loan
Bond
-a contract between 2 parties
-investors buy the bond with the funds going to the issuer (government or company)
-“IOU” between the lender and the borrower
-fixed income investments because they pay at a set rate
bond example
-governments and companies issue bonds when they need large sums of money
Commercial banks
-provide services (deposits, loans, investment products)
-operate as a business
-5 main banks in Canada
3 divisions of commercial banks
- Retail banking
- Commercial or wholesale banking
- Investment banking
Retail banking or consumer banking
-provided to general public vs. companies
commercial or wholesale banking
-for large customers and corporations (mortgage brokers, corporations, real estate developers)
-commercial banking is an activity of a commercial bank
investment banking
-division of banks that provides advice to individuals, corporations and governments
Ex. a company wants to raise money via. Initial public offering (IPO) would consult in investment bankers
Central (reserve) banks
-Bank of Canada
-Governor of Canada
-controls Monetary Policy
Monetary Policy
-central banks actions and communications used to manage supply of money
-specifically it “prints money” also known as QUANTITATVIE EASING
1. QE (not routine)
2. Overnight rate (set around 8 times a year)
Quantitative easing
-how central banks manage supply of money
-printing money spurs borrowing and investing=ECONOMIC GROSTH
>print more money when they see a recession coming (ex. 2020)
*all about increasing liquidity
-follows supply and demand curve
>prints too much money=value of money goes down, which can lead to inflation, or hyperinflation
-not done on a routinely basis
Quantitative easing steps
- Central bank creates money
- Central bank buys bonds from financial institutions
- Reduces the interest rates (more money leads to decreased prices)
- Leads to business and people borrowing more
- They spend more and create jobs
- Boost the economy
Theory of quantitative easing
-put more money into the hands of banks so they can lend out more money to the consumers and corporations
Fiscal Policy
-controlled by Ministry of Finance (government)
Control money supply
-Central banks do that on a day-to-day basis by adjusting interest rates
>use the country’s rate of inflation as a barometer for the health of the economy
Inflation
-measure of rate at which average price of basket of goods and services increase over time (consumer price index)
Deflation
-dropping of consumer price index to below 0%
-signals that economy is shrinking or contracting
>lack of money supply (need for QE) or people aren’t buying goods
>lack of demand or oversupply of goods=dropping price
-associated with severe recessions
Overnight rate
-interest rate that banks borrow and lend one day funds to each other
-only lent for one day
Deposit and bank rate
-banks can deposit money with BOC at the deposit rate for one night or borrow at the bank rate for one night
Target overnight rate set by BOC
-usually referred to as the Bank’s policy interest rate
Prime rate
-each bank sets its own prime lending rate but 5 big banks in Canada invariably have the same prime rate
*when BOC changes overnight rate, then it is signalling which way it wants the prime rate to move
-what financial institutions base all their lending rates
*only the very best, credit worth clients can borrow money at the prime rate
