Chapter 11 Test 2 Flashcards
what is a commercial bank
They are the largest group of depository institutions in terms of the value of assets
whats a commercial banks main asset and liabillity
Main asset: loans they give to businesses and individuals
Main liability: deposits from customers
What are investment securities
they help banks earn interest and keep cash available when needed
What are working capital loans used for?
To support ongoing business operations
Working capital loans provide the necessary funds to cover day-to-day expenses.
What is the purpose of term loans?
To finance the purchase of fixed assets
Term loans are typically used for acquiring long-term assets like machinery or real estate.
What is a direct lease loan?
A loan where the bank purchases assets and leases them to the firm
This arrangement allows businesses to utilize assets without upfront purchase costs.
What does an informal line of credit allow a business to do?
Borrow up to a specified amount
This type of credit provides flexibility for short-term financing needs.
What is a revolving credit loan?
Obligates the bank to offer up specified funds
Businesses can withdraw, repay, and borrow again within the credit limit.
What is loan participation?
A loan from a group of banks to a large corporation
This method spreads the risk among multiple lenders.
What are loans supporting leveraged buyouts used for?
Loans to businesses attempting LBO
Leveraged buyouts involve acquiring a company using borrowed funds, usually secured by the assets of the company being acquired.
What are the risks of a commercial bank
- credit; promised cash flows from loans and securities may not be paid in full
- liquidity risk; a sudden increase in deposit withdrawls requrie banks to liquidate assets in a short period of time
- interest rate risk; interest rates rise and bank assets drop in value or interest rates dall and the cash flow from new loans decline
Off-Balance-Sheet (OBS) Activities
-Banks earn fees from activities that don’t initially appear on their balance sheet.
- These can become assets, liabilities, income, or expenses when triggered.
Standby Letters of Credit
A bank guarantees payments (e.g., for municipal bonds) if the borrower defaults.
Future Lending Commitments
bank promises to provide funds in the future (e.g., buying commercial paper if no one else does).
OBS Assets
Move onto the asset side of the balance sheet or become income when triggered.
OBS Liabilities
Move onto the liability side of the balance sheet or become expenses when triggered.
Trust services/department
Offered by only the largest banks
- manage assets for individuals and corporations
individual trusts are largest group of trust managed by banks
-pension funds are sencond largest group managed by trust departments
Correspondent banking
the provision of banking services to other banks.
Has the number of commercial banks in U.S declined and inclined
Declined
- 2021; 4321 banks
-1984; 14483 banks
what year did banks possess powers to perform investment banking
1987
U.S banks may be subject to the supervision and regulations of as many as..
Four seperate regulators
FDIC,OCC,FRS, State bank regulators
Federal Deposit Insurance Corporation (FDIC)
Insures deposits of commercial banks
-acts as receiver and liquidator when insured bank is closed
-manages the depositors insurance fund
Office of the comptroller of the currency (OCC)
provides charters to national banks
Federal reserve system (FRS)
serves as the countrys central bank, has regulatory power over national banks and state chartered banks that opt into Fed system
