Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FINA 481 > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Name some people who compete with CEO’s of banks

A

-third party lenders
-insurance companies
-other bank CEO’s
-credit card companies
-government

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Who wins in the banking “game”

A

The one with the best balance sheet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Name the four pillars in FI and explain what each one does

A

1) chartered banks: take in and lend money
2) trust companies: provide advice to high level customers
3) insurance companies: life insurance, property casualty
4) investment dealers: advisory, fund, growth, acquisitions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is a universal bank?

A

A bank able to offer all four pillars to their customers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

True or false: Almost all banks in the world are universal banks

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Explain how the inclusion of financial institutions creates a flow of cash in society

A

Equity and debt goes from the corporations (net borrowers) to households (net savers) where cash is then passed back to the corporations. Another simple word for this is intermediation where the bank stands in the middle collecting from one side and lend on the other, which is a critical role of all financial institutions. Without these financial institutions, all liquidity freezes where people stop buying goods, service or even expand their business, etc which stops the flow of cash, making everything stagnant in the economy.
-(easier just to draw the diagram)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the three things that would happen without FI’s

A

-Low level of fund flows: less liquidity
-Information cost: economies of scale reduce costs for FI’s to screen and monitor borrowers
-Substantial price risk: think TVM where not everyone is charged the same interest rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the two functions of FI’s

A

1) Brokers
2) Asset transformers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are brokers or brokerage function. Give an example

A

-Anything that is not driven by interest (non-interest revenue)
Ex: buying insurance, buying a mutual fund

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are asset transformers

A

-Derived by interest where money comes into the bank which they then loan out to customers
-Where money comes into the bank which is a liab for the bank knowing they will pay it back and they convert this liab into an asset by lending out the money, allowing them to make money on interest payments etc

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How do I know if it is on the brokerage side or the asset transformation side of the FI?

A

Ask yourself: “do I have to pay interest or am I getting interest?”. If you don’t have to pay interest then it goes on the brokerage side.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Give an example of something that can be both a brokerage and a asset transformation

A

A credit card. If there is a yearly fee (brokerage) AND a balance on that credit card where interest is paid (asset transformation)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What percentage does brokerage function and asset transformers play in FI’s

A

Each make up about 50%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

*What does the bank call deposits that are made? Why do they call it this? When does it become an asset

A

They call it a LIABILITY because the bank will have to repay this deposit. It becomes an asset once the money is lent out because that’s when the FI can keep getting payments (assets) from these loans.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What do banks call loans?

A

Assets, since they will be collecting money from these loans which is an asset on their balance sheet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

*Where is the interest exp for a FI

A

On the deposits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

*Where is the interest revenue for a FI

A

On the loans

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

How “sticky” is a deposit in the bank? What is the average age for a $1 to come in and to then go out of that FI?

A

7 years

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is net interest income (NII)? Give an example

A

It is the difference the FI makes on the interest between the deposit and the loan
-Ex: Bank pays 5% interest on all deposits but charge 10% on a loan, the NII is 5% (10-5).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How does asset transformation work? (2 steps)

A

1) customers deposit $$ into the bank: This is an asset for the customer but a liab for the bank
2) bank lends out money: bank takes the money coming from deposits and loan this money to customers which is an asset for the bank and a liab for the customer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is the number one and two expenses for a FI

A

1) Salaries
2) IT

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

How do FI’s make $

A

-50% comes from interest generating assets (asset transformation)
-50% comes from bokerage which is any revenues generated by non-interest generating assets (ex: life insurance, insurance, etc)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is NII or Net Interest Income? What is the formula to calculate it?

A

It is the spread in $ generated by interest
NII = Int rev. - int exp.

Int Rev = money made on interest from loans mortgages etc
Int Exp = money earned by customers for depositing money

24
Q

How do you calculate NIM or spread in %?

A

NIM = NII/Earning assets

Earning assets are anything that generates interest (not buildings, PPE, etc)

25
Q

Net non-interest revenue in $ is called…?

A

Burden

26
Q

What is burden?

A

It is a measure of expense control and profitability

27
Q

What is the goal of banks with burden?

A

To have negative burden, where expenses < revenues. The negative burden referes also to the formula used

28
Q

What is the formula for burden

A

Burden = Noninterest expenses - noninterest revenues

So the idea of negative burden makes sense because the banks want to have higher non interest revenues compared to noninterest expenses

29
Q

How do you calculate burden %

A

Burden % = Burden/Total assets

30
Q

What are provision for loan losses or PLL?

A

-It is money put aside (write-off) to act as a buffer for potential bad loans or people who don’t pay you back
-It is intended to cover loss of interest income or loss of capital (total loss)

31
Q

What happens if a bank writes off 9 million in Q1 in PLL but end up collecting 7 million of that 9 that was written off?

A

Because they wrote off 9 million in Q1, they get to add it back to the income of Q2.
If too much PLL is written off (which is the case here) then the bank can take that excess money and put it in their net income in the future

32
Q

How do you calculate total net operating income

A

Net operating income = net interest income - Burden - PLL

33
Q

ReeCorp bank has earning assets of $1 billion which earn an average rate of 10%. The Bank also has liab of $1 billion with an average cost of 5%. Noninterest income is $20 million and noninterest expense of $30 million. There are no provisions for loan losses.

Calculate the Net interest income (NII)

A

NII = int rev - int exp
= (1 billion x 10%) - (1 billion x 5%)
= $50 000 000

34
Q

Use the same scenario as above

What is the burden?

A

Burden = noninterest exp - noninterest rev
= 30 million - 20 million
= 10 million

35
Q

Use the same scenario as above

What is the Net operating income?

A

NOI = net interest income - burden - PLL
= $50 million - 10 million - 0
=$40 million

36
Q

Use the same scenario as above

What is the Efficiency ratio?

A

Efficiency ratio = Non int opeating cost / (NII + Non-int inc + PLL)
= $30 million / ($50 million + $20 million - 0)
=0.4286 meaning it costs them this much to make $1 of REVENUE

37
Q

How does burden increase the earnings of a bank?

A

The more the bank can drive down their burden, the more they can improve their earnings. This is an absolute measure that each bank can monitor for improvement

38
Q

What is the efficiency ratio?

A

-It is how efficient a bank can be at making a dollar (revenue) versus spending to earn that dollar. Ex: If one bank spends $0.70 to make a dollar but another bank spend $0.30 to make a dollar then the second bank is far more efficient compared to the first one.
-This ratio allows each bank to compare themselves to other players in the industry

39
Q

**What is the difference between a financial asset and a real asset

A

A financial asset is a contract that offers a promise of payment in the future from the party that issued the contract (ex: loans, securities, etc). A real asset are assets expected to provide benefits based on their fundamental qualities (ex: inventory, real estate, etc)

40
Q

Do banks have both financial and real assets? Give an example

A

Yes. They have loan repayments as well as chairs in the office

41
Q

If you look at the assets on the balance sheet of a financial institution and a non financial institution, how do you know which is which?

A

-Financial institution assets show: financial assets such as interest earnings assets (loans, investments, etc)

-Non-financial institutions show: PPE, inventory, accounts receivables

42
Q

As a bank what do you want to do in terms of assets and liab to be as efficient as possible

A

You want to try and match (money in = money out) them as much as possible to make the bank as efficient as possible. If you have deposits that have not been given out as loans well then the bank is paying the depositer interest on their deposit without going to get the extra revenue that could be made on lending out that money through loans.

43
Q

What is the difference in terms of “financing of the firm” between a depositary institution (financial firm) and a non-financial firm is…

A

Financial institution: High leverage which is normal because of their revenue model (lending out money, not keeping much money on hand) and it is advantageous. Banks want the highest leverage possible

Non-financial firms: Moderate financial leverage is normal, high is dangerous. High financial leverage affects their profitability

44
Q

What is the difference in terms of Asset Liquidity of the firm between a depositary institution (financial firm) and a non-financial firm is..

A

Financial institution: Very high. Their business is based off of cash which is the most liquid

Non-financial firms: Moderate liquidity. Inventory, PPE, supplies are less liquid

45
Q

What is the difference in terms of Liability Liquidity of the firm between a depositary institution (financial firm) and a non-financial firm is..

A

Financial institution: Quite high. Liability for the bank is a deposit

Non-financial firms: More moderate

46
Q

What is more risky for the bank, a credit card balance or a mortgage? Why?

A

A credit card balance is more risky because for a mortgage, the house is not going anywhere so it can be more easily sold by the bank compared to a credit card

47
Q

What is a mortgage back security or MBS?

A

Packaged mortgages that had lower interest rates and issue a certificate (bond) backed by mortgages. Someone then buys this security and then when households make payments to their mortgage it goes to that someone who bought the bond. To get that bond, the person had to buy it from the bank which the bank will then use to hand out loans at a higher interest rate than the interest rate was on those mortgages

48
Q

How does a bank price risk?

A

Through the interest rate that they charge the borrower

49
Q

What are liquidity costs?

A

When liab > assets. So, the bank is incurring int exp but not making int revenue basically not making that asset transformation. This is an inefficiency

50
Q

What are Information costs?

A

FI can also be the information producer by looking at patterns. Ex: looking at the spending during the holidays, summer, valentines, back to school, etc.

51
Q

What are negative externalities

A

Things that happen outside the bank

52
Q

If you are in the USA, what is the max amount you can lend a single borrower? Why is this done?

A

No more than 15% of the equity to a single borrower. This is done to protect against the risk of bank failure

53
Q

What is the bank act? How often are they updated?

A

It is a set of determined rules that are in banking. They are updated every 5 years

54
Q

Why is printing money bad?

A

It increases inflation and lowers the value of the dollar

55
Q

In CANADA what is the most one person can borrow

A

No more than 25% of equity funds can go to one company or borrower

FINA 481 (15 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions