Chapter 12 Review Flashcards
What Services to Banks provide?
- Preserve Wealth
- Provide Services, and protection
- Bill-pay
Banks are related to what?
The heart; they pump money through the financial system.
Banks Loans and Deposits
- Loans - Assets
- Deposits are the Liabilities
Business model of a bank:
- They borrow at a lower rate than they receive.
- Increase interest spread and leverage like crazy.
Bank Risks:
- Liquidity Risk: Depositors demand their money.
- Credit Risk: The risk of default.
- Interest rate risk: The market interest rate may rise or fall.
CONTINUE WITH CH. 12 Book notes!
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3 Cash Items
- Reserves: Regulations require it.
- Cash items in process of collection: Uncollected fund from checks.
- Balances of accounts at other banks.
Securities:
*second largest asset.
Loans are the primary asset of modern banks:
Business loans
Real estate loans
-Consumer loans, etc
Liablities of banks
These of the source of the funds loaned out.
- Transaction accounts: short term, checking accounts,
- Non-transaction accounts: Savings and CD’s.
ROA
NI/Total assets
Net interest margin of a bank is very similar to
THe ROA
Size of bank’s assets:
15.5 trillion
Size of Bank Liabilities
13 trillion
Size of bank loans:
8.5 trillion
How to Solve Liquidity risk
(ADJUST ASSETS AND LIABILITIES)
-Hold Reserves
- Diversification: buy securities, t-bills, treasuries.
- Liabilities: Time Deposits
How to solve Credit Risk
- Credit Risk analysis: Analyze customer histories.
- Diversification: Diversify types of loans and different demographic of customers.
How to solve Interest Rate risk:
- Derivatives(trade risk) —Liabliities
- Use time deposits to make liabilities longer term and match maturity dates.
- Turn loans into floating rate loans.
Bank’s off-balance-sheet activities
- Loan Commitments: Lines of credit that firms can use whenever.
- Letters of Credit: Guarantees that a customer will make a promised payment.
