CH1-The Business of Banking and the Economic Environment Flashcards
What are the three core bank functions?
1) Accepting deposits
2) Granting loans
3) Acting as an agent for payments
What are five important roles that banks play in society and the economy?
1) Financial Intermediary - Bridge between savers (surplus of funds) and borrowers (require funds)
2) Money creation - Expand the supply of money through deposit and loan transactions
3) Create financial products/services that benefit customers
4) Mechanisms for transferring money and making payment
5) All of the above contribute to the development of the economy.
What are the five chief parties that make up the Australian financial system?
1) Authorised deposit-taking institutions (ADIs)
2) Insurance companies
3) Superannuation funds
4) Financial markets (debt, equity and derivative markets)
5) Payment systems
What is financial intermediation?
It is when banks act as an intermediary between entities who have a surplus of funds (depositors) and those who want to borrow funds (borrowers), by pooling funds from depositors. Depositors act as creditors to the bank, in exchange banks pay an interest for these deposits. Borrowers act as debtors and pay a premium to the bank to cover interest and any additional charges for the bank to take on the risk of making the loan.
What is retail banking?
Taking of deposits from and lending to individuals through a range of channels.
What is investment banking?
Investment banking is a specific division of banking related to the creation of capital for other companies, governments, and other entities.
KEY TAKEAWAYS
- Investment banking deals primarily with the creation of capital for other companies, governments, and other entities.
- Investment banking activities include underwriting new debt and equity securities for all types of corporations, aiding in the sale of securities, and helping to facilitate mergers and acquisitions, reorganizations, and broker trades for both institutions and private investors.
- Investment bankers help corporations, governments, and other groups plan and manage the financial aspects of large projects.
What are five functions of investment banking?
1) Debt capital markets - Large entities want to expand and need to finance through a bond issuance that would be managed by an investment bank
2) Underwriting Deals - Investment bank buys the securities then sell to the public or institutions with an appropriate spread/margin
3) Equity Capital Markets - Large entities want to expand and need to finance through an IPO (Initial Public Offering) and therefore a wider pool of investors.
4) Private placements - Large entities offer bonds directly to an institutional investor like an insurance company or retirement fund. Lower regulatory requirements so can be faster.
5) Mergers and acquisitions - Where a company is looking to buy another company
Which of the following are different types of commercial banks that operate in Australia?
Investment banks, retail banks, foreign owned banks
What Key Economic Indicator is an indicator of Consumption?
Retail Sales
What are key areas that macroeconomics considers?
Unemployment, GDP, Inflation, Exports and Imports
What is microeconomics?
Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources, and prices at which they trade goods and services. It considers taxes, regulations, and government legislation on supply and demand.
What is macroeconomics?
Macroeconomics, on the other hand, studies the behaviour of a country and how its policies impact the economy as a whole. It analyses entire industries and economies, rather than individuals or specific companies, which is why it’s a top-down approach. It tries to answer questions such as “What should the rate of inflation be?” or “What stimulates economic growth?”
Macroeconomics analyzes how an increase or decrease in net exports impacts a nation’s capital account, or how gross domestic product (GDP) is impacted by the unemployment rate.
What is the role of financial markets?
Bring together buyers and sellers of financial products in order to trade.
Within financial markets there are different types, what are four types?
1) Primary market - New issues of shares or other securities for when companies/governments are seeking funding for a large project.
2) Secondary market - Like a ‘second hand’ market. Existing shares or securities are traded. Examples is the ASX.
3) Exchange traded market - Standardized trading, licensed with business rules on relationships, products and conventions. Examples are equities and derivatives on the ASX.
4) OTC (Over the Counter) - Non-standard and negotiated between parties.
What are the major financial market products or asset classes in Australia?
1) Equities
2) Foreign Exchange
3) Interest rate or debt
4) Derivatives - Value of contract derived from an underlying asset/instrument.
5) Commodities
Aside from banks what are examples of ADI, Authorised Deposit Taking Institutions?
1) Credit unions are like early building societies, members share a common bond.
2) Building societies, mutual institutions are where customs are members and each member has a vote on how the organization is run
What are the differences between banks, building societies and credit unions?
- Banks are listed on the stock market, building societies and credit unions are owned by members
- Banks have access to a broader foreign funding market, others are limited on where they can raise funds
- Banks return dividends to shareholders, BS and CU reinvest back into business
What are examples of financial service providers that are non-ADI (Non deposit taking)?
1) Money market corporations assets (excludes those with assets <$50M). Provide loans to large corporations or government. Advisory, corporate finance, capital markets, foreign exchange and investment management.
2) Finance companies assets (excludes those with assets <$50M). Provide loans to households, small - medium businesses.
3) Securitisation vehicles - Issue securities back
What are five examples of financial market participants other than banks?
- Insurance companies
- Superannuation and Approved Deposit Funds
- Unit trusts and managed funds
- Cash management trusts
- Trustee companies
- Friendly societies
What are trends in the Australian Banking Industry?
FinTech disruptors, Bitcoin, blockchain, AI, Robotics, Big data customer analytics
What are two main ways that banks make money?
1) Lending
2) Charging fees - Credit card fees are the largest component of household fees