Chapter 1: Transformation Function of Banks

Question 1

What is the transformation function of banks

Answer 1

• In Financial Markets: Lenders trade with borrowers
• Two sides don’t always match: Banks take cash from businesses/individuals and transform into credit for those who need cash
• Occurs via Capital Markets
• Must rake into account risk, size and term

Question 2

Transformation Function: Size

Answer 2

• Individual savings = small
• Housing/Business = larger
• Bank provides appropriate credit facilities

Question 3

Transformation Function: Term

Answer 3

• Payment accounts are accessible on demand (withdrawl)
• Deposit accounts are a type of savings, can take months
• Credit facilities are long term (e.g. mortgage)

Question 4

Transformation Function: Risk

Answer 4

• Vendor and borrower have risks, bank takes on these risks
• Bank ensures loans are paid & lenders get money back