Chapter 1

Question 1

What are the four pillars in the bank act

Answer 1

-banks
-trust companies
-insurance
-investment banking

Question 2

What happens if there are no financial institutions?

Answer 2

-Less liquidity (stagnant economy)
-low level of fund flows (harder to get loans)
-Information costs (no info being recorded)
-Price risk (higher interest charged)

Question 3

Explain how the inclusion of a financial institution creates a flow of cash

Answer 3

Through deposits (money coming in contribute to reserves) , loans (interest being paid = profit for bank) payments (paying interest to depositors) and investments. This creates a circular cash flow, stimulates economic growth

Question 4

why are no mortgage payments are less prioritized

Answer 4

most people dont know that banks will come for your house after 60days, they think they can get away with it

Question 5

What is a brokerage function in FI’s

Answer 5

acts as a middleman between buyers and sellers
has to do with anything not driven by interest rates, makes up for 50%

Question 6

What is an asset transformation in FI’s

Answer 6

takes a liability and turns it into an asset (taking deposits (liability) and turning it into a loan (asset))

Question 7

How would you differ an interest expense to an interest revenue

Answer 7

interest expense - interest paid to customers (liability)
interest revenue - interest paid by customer (asset)

Question 8

what is NIM (net interest margin)

Answer 8

the profit the bank makes from its deposits compared to its loans

Question 9

if a customer deposits money into a bank, explain if its an asset or liability to the bank

Answer 9

For the bank: Liability
Customer: Asset

Question 10

How do FI’s make money?

Answer 10

through interest generating assets like mortgages (interest revenue)

Question 11

if the bank takes the deposit and lends it out, explain if its an asset or liability to the bank

Answer 11

For the bank: Asset
Customer: Liability

Question 12

What is the calculation for NII in $$ (net interest income)

Answer 12

interest rev-interest exp

Question 13

What is the calculation for NIM in %

Answer 13

NII / Earning assets

Question 14

what are non interest income

Answer 14

fees, commission, and service charges

Question 15

what are non interest expenses

Answer 15

salaries, property, overhead

Question 16

How do you calculate Net non interest revenue (Burden in $)

Answer 16

Burden = noninterest expenses - non interest revenue

Question 17

How do you calculate Burden in %

Answer 17

Burden/ Total Assets

Question 18

What are banks objective with burden

Answer 18

to have a negative burden, when expenses are less than revenue for interest

Question 19

What is provision for Loan loss

Answer 19

money put aside to counter act potential loan loss/bad loans

Question 20

What is the net operating income formula

Answer 20

Net interest income - Burden - PLL

Question 21

How to have a negative burden

Answer 21

increase non interest income or decrease non interest expenses

Question 22

what is the efficiency ratio

Answer 22

a relative measure that allows banks to compare to competitors, the lower the ratio the better, it shows how much it costs to generate 1$ of revenue

Question 23

How to calculate efficiency ratio

Answer 23

= (non interest operating costs) / (net interest income + non interest income - provision losses)

Question 24

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

Answer 24

financial asset: contract that promises a payment in the future (securities)
real asset: provide a benefit based on their characteristics (inventory)

Question 25

what is the difference between depository institutions and non-financial firms

Answer 25

depository inst = financial inst, most assets are financial
non financial firm= PPE, most assets are real assets

Question 26

what is a mortgage backed security

Answer 26

bank piles up mortgages into a bond, sells these to investors, as homeowners make payments , a % gets paid to investors

Question 27

How much can a borrowers own of a company

Answer 27

not more than 15% in us
and not more than 25% in canada

Question 28

How does Canada raise money

Answer 28

goes to central bank who prints bonds to sell. Bank of canada receives money and pays interest to those who bought the bonds

Question 29

Why cant we just print money

Answer 29

dollar will lose value, economy will go bad and inflation goes up

Question 30

what is outside money vs inside money

Answer 30

outside money = controlled by bank of canada
inside moeny= bulk of money supply is controlled by FIs