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