Chapter 11 Flashcards
a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses.
- highly regulated
- By Assets, 2nd Largest of Financial Institutions.
- Maturity Intermediation
- Highly levered, Gigantic systemic risk
commercial bank
How is a Commercial Bank different from non-financial companies?
Balance Sheet is Different:
- Loans are listed as Assets
- Deposits are Liabilities
sources of equity (3)
- common/preferred stock
- additional paid-in capital
- retained earnings
- transaction deposits
- time deposits
- fed funds purchased (debt)
- repos
- notes and bonds
liabilities
transaction deposits (2)
- checking accounts
- money market accounts
time deposits (3)
- savings
- retail CDs
- Negotiable CDs
assets (5)
- business loans
- consumer loans
- mortgages
- securities
- cash
A bank in which another bank has an account (and vice versa) for the purpose of facilitating fund transfers.
- Authorized to conduct foreign bank’s transactions:
- currency exchange
- trade documentation
- money transfers.
correspondant bank
maturity intermediation
Making long-term loans on funds borrowed at short-term interest rates.
- financial institutions use those funds to make long-term loans and purchase long-term assets
- credit risk
- liquidity risk
- interest rate risk
- Counterparty risk
all add up to:
systemic risk
interest rate spread
the difference between lending and deposit rates
Banks process loans up front:
- Information collection
- Information processing
- Banks watch borrowers while loan outstanding
- Review financial statements
- Communicate between interest payments
- Have “skin in the game” (their equity is on the line)
- Single party better than dispersed share/bond holders
Banks as monitors
banks as lenders (2)
- retail banking (consumer-oriented)
- wholesale banking (commerce-oriented)
banks as facilitators
- processing transactions
- trust departments
- correspondent banking
- financial advising
- residential and consumer loans
- funded through consumer and small business deposits
- community banks
retail banking
- commercial and industrial loans
- requires large deposit base
- largest banks are “money center banks”
wholesale banking
The possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations.
Credit Risk
The risk that a bank will have insufficient funds to meet its financial commitments in a timely manner.
Liquidity Risk
The potential for investment losses that result from a change in interest rates. If interest rates rise, for instance, the value of a bond or other fixed-income investment will decline.
Interest rate risk
is the risk for holding a risky bond
Credit risk
is the risk that the counterparty will not be able to meet its contractual obligations if the credit event were to occur.
Counterparty risk
The risk of a cascading failure in the financial sector, caused by linkages within the financial system, resulting in a severe economic downturn.
Systemic Risk
Bank Balance Sheet Assets
Total investment: (2)
- U.S. government securites
- Federal funds and repurchase agreements
Bank Balance Sheet Assets
less: ___ for loan __
Less: __income
Less: Reserve for loan losses
Less: Unearned income
Bank Balance Sheet Assets
Investment securities (loans): (4)
- Commercial & Industrial
- Real Estate
- Individual
- Other
transaction deposits
A bank deposit that has immediate and full liquidity, with no delays or waiting periods.
transaction accounts are the sum of ____ and ___
noninterest-bearing demand deposits; interest-bearing checking accounts
NOW deposits (interest-bearing checking accounts)
- Checking accounts where you earn interest on the money you have deposited.
- Bank or credit union has the right to require at least seven days written notice of a withdrawal, though this is rarely done.
An interest-bearing bank account that has a date of maturity, such as a certificate of deposit (CD).
Timed Deposits
Fixed-maturity interest-bearing deposits with face values of $100,000 or more that can be resold in the secondary market.
negotiable certificates of deposit (CDs)
What are generally Bank’s largest Liabilities?
Non-transaction deposits
are typically those not owned by or are a direct obligation of the company.
- For example, when loans are securitized and sold off as investments, the secured debt is often kept off the bank’s books.
off-balance-sheet activities
- Although not recorded on the balance sheet, they are still assets and liabilities of the company.
off-balance-sheet activities (3)
- letters of credit
- guarantees
- derivatives transactions (futures, forwards, options & swaps)
IF the debtor fails to settle a debt, the bank will cover it.
- enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.
Bank Guarantee
An “intermediary” letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount.
Letter of credit
generally represent agreements between parties either to make or receive payments or to buy or sell an underlying asset on a certain date (or dates) in the future.
- corporations use these on loans to gain favorable interest rates
- common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and stocks
Bank Derivatives
Banking that provides financial services to consumers as individuals not businesses.
- a way for individual consumers to manage their money, have access to credit, and deposit their money in a secure manner.
retail banking
Commercial-oriented banking, such as providing commercial and industrial loans funded with purchased funds.
wholesale banking
- borrowing, and lending activities are with governments, large corporations, and regular banks.
- These types of financial institutions generally do not borrow from or lend to consumers.
money center banks
ROA and ROE on Different sized Banks:
Any Bank below $100 million has a ___ average ROE% than those above $100 million.
ROA is ___ ___with all $ ranges.
lower; relatively consistent
The coexistence of both nationally and state-chartered banks, as in the United States.
Banks are either Federal- or State-chartered
- Office of the Comptroller of the Currency (OCC)
- Each state has its own regulatory agency
- May/Have to join the Federal Reserve System
Federal Reserve Act in 1913
Dual banking system
A federal agency that oversees the execution of laws relating to national banks. Specifically, it charters, regulates, and supervises national banks and federal branches and agencies of foreign banks in the U.S.
Office of the Comptroller of the Currency (OCC)
Current Regulation of Savings Institutions
3 Main Regulators:
- Office of Comptroller (OCC)
- FDIC
- State Regulators (ex. Office of Banks and Real Estate)
A risk-based insurance premium (cents per $100 insured) that is conditional upon:
- CAMELS rating
- Capital Adequacy
- Loan mix & financial ratios
- DIF reserve ratio
Deposit Insurance (FDIC)
net interest margin
Interest income - interest expense / earning assets
interest earning accounts: ___ & ___
interest bearing accounts: __ & __
- securities & loans
- deposits & borrowings
