Chapter 1 Flashcards
What are the four pillars in the bank act
-banks
-trust companies
-insurance
-investment banking
What happens if there are no financial institutions?
-Less liquidity (stagnant economy)
-low level of fund flows (harder to get loans)
-Information costs (no info being recorded)
-Price risk (higher interest charged)
Explain how the inclusion of a financial institution creates a flow of cash
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
why are no mortgage payments are less prioritized
most people dont know that banks will come for your house after 60days, they think they can get away with it
What is a brokerage function in FI’s
acts as a middleman between buyers and sellers
has to do with anything not driven by interest rates, makes up for 50%
What is an asset transformation in FI’s
takes a liability and turns it into an asset (taking deposits (liability) and turning it into a loan (asset))
How would you differ an interest expense to an interest revenue
interest expense - interest paid to customers (liability)
interest revenue - interest paid by customer (asset)
what is NIM (net interest margin)
the profit the bank makes from its deposits compared to its loans
if a customer deposits money into a bank, explain if its an asset or liability to the bank
For the bank: Liability
Customer: Asset
How do FI’s make money?
through interest generating assets like mortgages (interest revenue)
if the bank takes the deposit and lends it out, explain if its an asset or liability to the bank
For the bank: Asset
Customer: Liability
What is the calculation for NII in $$ (net interest income)
interest rev-interest exp
What is the calculation for NIM in %
NII / Earning assets
what are non interest income
fees, commission, and service charges
what are non interest expenses
salaries, property, overhead
How do you calculate Net non interest revenue (Burden in $)
Burden = noninterest expenses - non interest revenue
How do you calculate Burden in %
Burden/ Total Assets
What are banks objective with burden
to have a negative burden, when expenses are less than revenue for interest
What is provision for Loan loss
money put aside to counter act potential loan loss/bad loans
What is the net operating income formula
Net interest income - Burden - PLL
How to have a negative burden
increase non interest income or decrease non interest expenses
what is the efficiency ratio
a relative measure that allows banks to compare to competitors, the lower the ratio the better, it shows how much it costs to generate 1$ of revenue
How to calculate efficiency ratio
= (non interest operating costs) / (net interest income + non interest income - provision losses)
What is the difference between a financial asset and a real asset
financial asset: contract that promises a payment in the future (securities)
real asset: provide a benefit based on their characteristics (inventory)
what is the difference between depository institutions and non-financial firms
depository inst = financial inst, most assets are financial
non financial firm= PPE, most assets are real assets
what is a mortgage backed security
bank piles up mortgages into a bond, sells these to investors, as homeowners make payments , a % gets paid to investors
How much can a borrowers own of a company
not more than 15% in us
and not more than 25% in canada
How does Canada raise money
goes to central bank who prints bonds to sell. Bank of canada receives money and pays interest to those who bought the bonds
Why cant we just print money
dollar will lose value, economy will go bad and inflation goes up
what is outside money vs inside money
outside money = controlled by bank of canada
inside moeny= bulk of money supply is controlled by FIs
