Chapter 1: Overview of Banking Flashcards
Core banking activities WIT DIC
i. Wealth management
ii. Insurance
iii. Transaction services
iv. Deposit taking
v. Investment
vi. Credit
Investment banking activities SARR
i. Security trading
ii. Risk management services
iii. Advice on mergers and acquisitions
iv. Raise equity and debt capital
How APIs can benefit banks DATE C
i. Data sharing – credit scoring, ORM, sales and marketing, fraud detection, customer onboarding,
ii. Transacting
iii. Customer verification – a single digital identity
iv. Additional services: Insurance, wealth management
v. Embedded banking
Factors to consider when raising provisions STERT
ii. Smoother loss recognition and financial results
iii. Timing of recognizing losses managed
iv. Ensure financial strength of bank
v. Reduces carrying value of the asset/advances of the bank
vi. Tax benefit – this might not be legal
iv. Effect of interest rate changes on the banking book BOM (Market risk)
- Basis risk – A/L linked to different reference rates
- Option risk – early withdrawal/repayment
- Mismatch risk – Different repricing dates of assets and liabilities
Components of operational risk SPEC FC
i. System failures
ii. Process management
iii. Employee practices
iv. Conduct – mis-selling, money laundering, unfair pricing
v. Fraud
vi. Cyber risk
Actuarial techniques applied in banking CAR UP
Capital adequacy
ALM
Reserving and provisioning
Underwriting
Pricing for risk
Factors considered underwriting credit 5 Cs
- Capacity – affordability
- Conditions – external conditions + contractual conditions
- Character – credit score
- Collateral – security on the loan/guarantee by government
- Capital – Financial position
- Exclusions: Credit policies and covenants
Factors to consider when pricing a loan PROF CR
- Profitability
- Riskiness of customer
- Operating costs
- Funding costs
- Cost of capital – capital held to cater for risk taken on
- Regulations and competition (NCA)
Factors of cashflow matching CANT C
- Currency
- Amount
- Nature
- Term
- Certainty
Role of banks in the economy STICS
a. Savings products
b. Trade enabled through payments rails
c. Investments that unlock productivity and innovation
d. Credit products
e. Start up capital to support new business growth
b. Bank performance economic chain reaction GRID ACA
i. Growth and production rates
ii. Revenue/Employment
iii. Income/profit
iv. Default rates
v. Appetite for lending
vi. Cost of credit
vii. Asset prices
The difference between Wholesale and Retail banks CLICS MER
i. Credit losses are lower
ii. Large corporate customers vs small retail
iii. Interest rate margins are smaller
iv. Collateral provided is of high quality
v. Security of clients are higher
vi. Due diligence done is more thorough
vii. Manual vs. Automated solutions
viii. Economies of scale not a target
ix. Running costs lower
Activities of Investment banks RUD MAT
i. Raise equity and debt capital
ii. Underwrite shares and bonds
iii. Documents and processes
iv. Meetings with investors
vi. Assist with acquisitions and mergers
v. Trade and invest in secondary markets – proprietary trading
Why challenger banks are more competitive REAL
Regulation – Payment Services Directive 2
Ease of data transfers between parties
APIs is standardised
Lowered barriers to entry: Online banking
How development banks grant credit to higher risk classes HERS
- High risk loans
- Equity investment
- Risk guarantees
- Syndicated loans to spread risk
Responsibilities of the SARB FRIL LIMPS
- Foreign reserve management
- Regulation and supervision of banks
Capital buffers - Issue debt to banks
- Lender of last resort to failing banks
- Liquidity management and treasury borrowing
- Issue new money
- Monetary policy – interest rate setting and money market operations
- Payment processes management
- Statistics issued to market
Factors that place pressure on NII LEM:
- Low interest rates: No room for interest margin
- Economic growth: Increased competition puts pressure on interest spread
- Mismatch in assets and liabilities:
Terms of deposits and liabilities
Fixed vs variable interest rate pricing
A bank’s cost base COCT
a. Operational expenses
b. Cost of credit
c. Cost of capital – minimum return investors expect on their capital investment (WACC)
d. Tax – 28% corporate tax rate in SA
Financial ratio analysis to measure bank performance FBI CLERP
i. Funding stability: Loan/Deposit ratio
ii. Build of loan portfolio: NPL and Stage 2 ratios
iii. Income stability: NII/Total income
iv. Capital strength: CET1/RWAs
v. Liquidity strength: LCR
vi. Efficiency: Cost to income - efficiency and business mix
vii. Return on Equity: Retained Earnings/CET1
viii. Profitability: Net interest margin
Basel I Tiered capital requirement
i. MCR: 8% of RWAs
ii. Tier 1 Capital (at least 4% of RWAs):
Equity – Core Tier 1 (2% of RWAs) - Can absorb losses while bank is going concern
Non-cumulative perpetual prefs
iii. Tier 2 Capital (up to 4% of RWAs)
Cumulative prefs and debt
Basel III requirements
i. At least 8% RWAs
ii. Common Equity Tier 1 (CET1): At least 4,5% of RWAs (capital buffers)
iii. 1,5% Tier 1 capital (total of 6% Tier 1)
iv. 2% Tier 2 Capital
Capital buffers CCSLL
Capital conservation buffer
Countercyclical buffer
Systemic risk buffer
Leverage ratio
Liquidity coverage
Other risks (to understand) MSC PREM BCC
Margin risk
Systemic risk - hence systemic capital buffer)
Conduct risk
Pension risk
Reputational risk
Equity risk
Model risk
Business risk/Strategic
Cyber risk
Climate
Key components of climate change reporting MRSG
- Metrics and targets
- Risk management
- Strategy
- Governance
Guideline on how to account for emissions of a firm COO
- Counterparty emissions
- Own emissions
- Offsets
Climate risk definitions PIT
i. Physical risk – risk of physical impact of climate changes - Acute, Chronic risks
iii. Indirect impact of climate change on banks - Funded emissions, Exposure at risk
ii. Transitional risk – risk of transitioning to a lower emissions economy MTRP
Risks of transitioning to a lower emissions economy MTRP
Market risk
Reputational risk
Technology risk
Policy and legal risk
Physical risk modelling WELPI FAC
- Weather station or satellite data
- Exposure data – What could be lost due to climate change (crops, houses, infrastructure)
- Location
- Processing required
- Interpolation
- Consideration:
1. Frequency
2. Accuracy
3. Completeness
Transition risk modelling SESG
- Supply chain data
- Emissions data, tech development, policy changes
- Sector granularity: Which sectors will be more affected by transition
- Granularity: Supply chains, activities, sub-sector
