ch1 banking theories

Question 1

WHAT IS THE BANK?

Answer 1

financial institution
make loans to borrowers
collect deposits from savers

bank is an institution that
deals with money

banks act as intermediaries between
borrowers and lenders in an indirect way

Question 2

two essential functions of banks:

Answer 2

1) Accepting deposits from the public
2) Lending or investing the same

Question 3

The majority of lenders plan to lend their liquid assets
for ………………of time with the………… possible return.

all borrowers demand their financial
needs for……………. of time at the ……………… possible cost.

Answer 3

short periods , highest

long periods, lowest

Question 4

THE ROLE OF BANKS

Answer 4

First: size transformation role
lends large loans from small loans
**
Second: maturity transformation role
borrow short and lend long

Third: Risk Transformation Role
diversificate investment and buy credit reports to know customers history

Question 5

BANKING THEORIES

Answer 5

1) delegated monitoring

(intermediate monitoring between borrowers and Depoisters to pay the money on them (monitor on behalf of depositers)

2) information production

(Banks create and sell information about borrowers to reduce costs and risks for lenders.)

3) liquidity transformation
Banks turn short-term deposits into long-term loans,

**4) consumption smoothing
**
Banks help people balance spending now with saving for the future.

**5) commitment mechanism
**
Banks play a crucial role in the economy by taking deposits and lending money.

Question 6

Delegated Monitoring theory

Answer 6

Banks act as monitors for borrowers on behalf of depositors.

Monitoring borrowers is costly, so depositors let banks do it because they’re experts and can do it cheaper.

Banks can diversify loans and get economies of scale in monitoring, making it cheaper and safer for depositors.

Banks must monitor themselves to ensure they’re doing their job properly.

Question 7

……………………………. refer to a situation where the joint costs
of producing two complementary products are less than the
combined costs of producing the two outputs separately

Answer 7

economic of scale

Economies of scale determine the optimal level of output.

Question 8

An ………. bank is operating at the lowest cost per dollar of assets or loans.

Answer 8

Effecient

Question 9

the average gap
between long-term (interest income) and short-term rates
(interest expenses), that is, to earn the…………

Answer 9

term premium

Question 10

unexpected increase in the short rate (for depositer), banks became in…….

Answer 10

interest rate risk

Question 11

liquidity risk is……

Answer 11

risk of not having enough liquid
funds to meet one’s liabilities

Question 12

immediate profit or loss =
(maturity transformation rule)

Answer 12

short term banks lending - short term banks deposit

or

P or L = IRSA - IRSL

IRSA = Interest on risk-sensitive assets
IRSL = interest on risk-sensitive liabilities

Question 13

collateral means

Answer 13

proved asset to assure paying the borrower the money he owes

Question 14

sucess of bank in having lower cost than direct borrowning or saving (delegated monitoring(

Answer 14

Diversification among different investment projects.

. The size of the delegated bank that can finance a
large number of borrowers.

Question 15

Without intermediaries like banks, there would be duplication of information production costs, leading to burdensome search costs for individual lenders and knowing people credit risk. what role of bank is that

Answer 15

Information Production

Question 16

what is liquidity run problem

Answer 16

occurs when the savers
withdraw their deposits from banks at the same time based
on the panic that the bank will become insolven

banks will use up their
cash reserves and end up defaulting.التوقف عن السداد

Question 17

what are the key measures to minimize the effects
of the liquidity run problem?

Answer 17

Temporary shutdown
of the bank branches.
* Use the cash reserves.
* Quickly borrow from
other institutions.
* Insure deposits by the government.

Question 18

THE GRUBEL-LLOYD INDEX

Answer 18

to determine how much ratio we import and export the same product

GLI = 1 − (𝑋𝑖,𝑀𝑖 / 𝑋𝑖 + 𝑀𝑖)
Xi denotes the export and
Mi the import of good i.

pure inter industry= 0
pure intra industry =1
middle between = 0.5

inter mean its exported product differs from its imported ones
intra they both in same industry and same product

Question 19

.what is Information Production theory ?

Answer 19

Banks create and sell information about borrowers to reduce costs and risks for lenders

Without banks, lenders would have to spend a lot to find borrowers. (information cost, search cost)

Depositors trust banks to use their money wisely without needing to pay for information themselves.

Question 20

what is Liquidity Transformation?

Answer 20

Banks turn short-term deposits into long-term loans, managing the risk of depositors withdrawing all their money at once.** liquidity run problem**

Banks balance their assets and liabilities to ensure they can meet depositors’ needs even if many want to withdraw at once.

Measures like temporary closures, using reserves, borrowing, or government insurance help banks manage liquidity problems
(Temporary shutdown
of the bank branches.
* Use the cash reserves.
* Quickly borrow from
other institutions.
* Insure deposits by the government.)

Question 21

what is Consumption Smoothing

Answer 21

Banks help people balance spending now with saving for the future.

People want to maintain a stable standard of living even when their income changes.

Banks offer loans and savings options that allow people to smooth out their spending over time, even if they have uncertain incomes

Question 22

Commitment Mechanisms:

Answer 22

Banks play a crucial role in the economy by taking deposits and lending money.

Deposits in banks are like money, so changes in bank deposits affect the amount of money circulating in the economy.

Banks are heavily regulated and supervised because their actions affect the country’s money supply and economy.

Question 23

income < consumption =

income > consumption=

income < consumption =

Answer 23

borrowing
savings
dissaving or retirment (use saving from ur account not borrowing)

Question 24

Banks are …………… institutions (DTIs) and are
also known as ………..institutions(MFIs)

Answer 24

deposit-taking

monetary financial

Question 25

The monetary
function of bank deposits justifies why DTIs are subjected
to hard regulation and supervision than their** non-deposittaking institution (NDTI**) such as insurance companies,
pension funds, investment companies, finance houses, etc

Answer 25

just info

Question 26

Banks collect data
about their clients
and convert them
into information and
may add the
provided information
to their product list.

(information production role)

Answer 26

info