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FINA 481 > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

What are the 3 functions of a depositary institution and describe each of the 3

A

1) Accepting deposits: Offer a safe place to safeguard money for customers with accounts such as savings, checking and time deposits.
2) Providing loans: Use the pool deposits to lend money to indv. to support the economic activities (businesses, purchases, etc)
3) Facilitating payments and transfers: services that allow customers to transfer money and make payments efficiently to enable financial management.

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2
Q

How can banks use their business in terms of economies of scale and economies of scope?

A

Economies of scale: How many people they can go after. Once they target more people, they are dividing the cost of their expenses over more and more customers, driving down the price of each customer.
Economies of scope: Once you have access to those people, how can you reach them with multiple products (credit cards, insurances, bank accounts, loans, etc)

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3
Q

Depositary FI’s manage both the … side and the … side

A

Asset and liability

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4
Q

From a balance sheet how can you tell the difference between a financial institution and a regular business

A

On a financial institute balance sheet you with see lots of assets (loans) whereas any other typical company you would see a lot of PPE, supplies, and other good related to the business.

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5
Q

Name the 3 concepts that best describe banking in Canada

A

1) Concentrated and regulated: dominated by the big 5
2) Universal banking model: wide range of services under one roof
3) Resilient in crisis: no bank failures during financial downturns

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6
Q

Name the 3 concepts that best describe banking in USA

A

1) Diverse and competitive: thousands of banks from large to small
2) Complex regulatory environment: governed by federal and state agencies
3) Technology and innovation leaders: early adopters of fintech and digital banking, driving advancements in financial services

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7
Q

Why was there a large shrinkage in terms of US banks overtime

A

Because the USA realized their system wasn’t as good as elsewhere

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8
Q

Why was there structural changes across types of depositary institutions?

A

Generally as a result from changes in regulatory policy

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9
Q

What are the 4 impacts of universal banking model and briefly describe each

A

1) Enhanced financial stability: different revenue streams = mitigated risk
2) Increased competition: competition is good as long as risk management is appropriately applied
3) Improved customer convenience: “one stop shop” as well as lowering cost
4) Regulatory Challenges

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10
Q

Give examples of what could be an asset on the balance sheet of a FI

A

-loan
-investment securities
-credit card payments
-etc

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11
Q

Give 2 examples of liabilities on a balance sheet

A

-transaction accounts
-deposits

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12
Q

What happens to earnings as the canadian $ drops for companies that do business in the USA but report their earnings in CAD

A

They’re earnings in CAD go up

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13
Q

Describe what an off-balance sheet activity is and give and example

A

-They are pre approvals of money that have not yet been realized (money not yet borrowed). This pre approval is in the notes section of the banks financial reports and is called a off balance sheet activity. Only once some or all that pre approved amount is taken will it be part on the balance sheet.
-Ex: Line of credit

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14
Q

Are off balance sheet activities for FI’s and why?

A

Yes they are

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15
Q

What is revolving credit and give an example

A

Revolving credit is where a credit can go from any amount between 0 up until the limit approved where there exist flexibility in terms of how that money is repaid

-Ex: Line of credit. Can pay off as much as you want at a time

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16
Q

What is a letter of credit? Give an example?

A

It is an off balance sheet liability where the bank facilitates a transaction between a seller and buyer and acts as the middle man making sure the seller gets paid and the buyer pays. The bank verifies that the buyer has the money in their account to pay for the goods or services wanted. From there the bank will remove the sum of money from the buyers account and install them into a “suspense” account and give the buyer a special paper. From there the buyer will give the paper to the seller once he buys the goods and then the seller will call the bank and the bank will transfer over the money

-Ex: I want to buy $20 million of cheese from a store. The store may request for me to get a letter of credit from the bank. I will then go to my bank and request for a letter of credit where the bank will check if I have the $20 million in my account to pay for the cheese. If I have the money, the bank will take it out of my account and put it into a “suspense account” where it is taken out of my account and into a ghost account for the moment. The bank will then give me this piece of paper and I will hand it to the seller upon getting my cheese. Once the seller gets my paper he will contact my bank and the bank will remove the $20 million from that suspense account and hand it over to him.

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17
Q

When do most sellers get letter of credits involved

A

When you are dealing with international buying and selling or if it is your first time selling to a certain person

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18
Q

Give an example of a an off balance sheet equities

A

Options for the CEO’s that allow them to buy shares at a lower price but can only be exercised in 3 years

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19
Q

Name 4 derivatives transactions that are off balance sheet

A

1) futures
2) forwards
3) options
4) swaps

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20
Q

Why are derivative transactions off the balance sheet

A

Since they are usually without recourse (can’t go back after the person for not paying)

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21
Q

What are toxic assets for a FI

A

They are default loans where the person is not paying back the bank. This hurts the bank in terms of increased risk

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22
Q

What is a drawdown

A

During economic downturns we look at how much people are borrowing and how well/fast these loans are being paid back from the pre-approved line of credit

23
Q

What is an unsecured line of credit

A

It is a line of credit with no collateral backing it up which is one of the riskiest loans for a bank

24
Q

What are some differences between a credit union and cause populaire

A

A credit union is not public, the account holders are the owners whereas a caisse populaire is governed by the province

25
Q

What is a co-op

A

It is a FI where people who bank there own it

26
Q

What is the difference in terms of bonds and stocks between a credit union and public institution

A

Since banks are public institutions and credit unions are not, credit unions are more restricted in terms of of raising equity. Banks can issue bonds and stock whereas credit unions can only issue bonds

27
Q

Name some similarities between a credit union and caisse populaire

A

-Specialize in smaller consumer loans
-expansion of services offered in order to compete with FI
-owned and operated for their members (depositors)
-both governed by provincial authorities

28
Q

In the USA you can find very … FI’s and very … FI’s

A

Very large and very small FI’s. These FI’s differ in terms of composition of assets and liab, as well as regulatory oversight

29
Q

Name the 4 sectors of commercial banking in Americal

A

1) Community
2) Regional
3) Super Regional bank
4) National bank

30
Q

A community bank can have as little as how many banks? What are community banks?

A

Can have as little as 1 brand
They are small, local focus, personalized services

31
Q

What are regional banks?

A

Banks that operate in specific regions with wider range of service than community banks

32
Q

What are super regional banks

A

Multiple regions, broad service but regional focus

33
Q

What is a National Banks

A

Largest, nation wide operations full-service range

34
Q

What is FDIC in banking? What is the difference between USA banks and Canadian banks with regards to FDIC?

A

It is the Federal Deposit Insurance Corporation where banks pay a premium in case the bank goes out of business, the depositors will have access to their cash. In the USA, because banks go bankrupt all the time, FI’s must pay for these premiums however in Canada since banks don’t go bankrupt, there is no need to pay these premiums

35
Q

What is the role of FDIC

A

To prevent bank runs or panics which may take place if rumours come out about a FI potentially going bankrupt

36
Q

What is the function of the OCC?

A

To charter (and close) national banks

37
Q

What is chartering for a bank? How does it work?

A

Chartering is a legal document that tells the bank what they can and cannot do. They must apply for it rather than being given it

38
Q

What is the FRS

A

Monetary policy, a lender of last resort

39
Q

What is a dual banking system

A

Coexistence of national and state chartered banks

40
Q

Name the 5 banks in Canada

A

1) RBC
2) TD
3) BMO
4) National Bank
5) CIBC

41
Q

Why is there not any foreign banks in Canada?

A

Because the market is so concentrated, there is no room for new comers

42
Q

What are the 3 Canadian depositary institutions

A

1) schedule 1 banks
2) Schedule 2 banks
3) Schedule 3 banks

43
Q

What is a Schedule 1 banks

A

-“Home player” bank
-By the people for the people
-HAVE to be a domestic Canadian FI, widely help, chartered to conduct business under the Bank Act
-Can operate in any province, can lend money to each other and much more
-*where one person may not hold more than 20% of the voting shares
-RBC, National, CBIC, BMO and TD are schedule 1 banks

44
Q

Why can’t someone own more than 20% of a schedule 1 FI? What is the point of this rule?

A

Because although you are a minority shareholder, you are considered to be a significant minority shareholder which means once you hit the 20% threshold, you automatically get a seat on the board. The point of this rule is to remove any possible chance of conflict of interest where someone could be on the board and be borrowing money from that specific FI

45
Q

What is a Schedule 2 Bank

A

A subsidiary foreign bank that is allowed to conduct business in Canada
Ex: HSBC

46
Q

What is a schedule 3 banks

A

A foreign bank branch that is authorized under the Bank act to accept deposits in amounts over $150k. This type of schedule aims at the highly wealthy individuals
Ex: A Swiss bank comes to Canada and only accepts deposits of minimum $150k

47
Q

How are schedules given to banks?

A

Based on their business model

48
Q

What is the big difference between a schedule 1, a schedule 2 and a schedule 3 bank?

A

Schedule 1 (RBC) is domestic and schedule 2 is foreign (HSBC), whereas schedule 3 banks is special purpose, well defined, strategic missions where they come into Canada to bank for the high wealth individual (specific target)

49
Q

What is a demand deposit? When can you pull out your money?

A

It is a checking account where you can withdraw money without notice to the FI. The FI must honour the withdrawal

50
Q

What is a notice deposit? When can you pull out your money?

A

It is a savings account where the FI requires a notification before withdrawal. If this notification (ex: 5 days before withdrawal) is not met, then the FI can refuse the withdrawal and tell the customer to come back at a later date. It can take up to 30 days for the FI to transact the withdrawal from a notice account

51
Q

Why was the notice deposit created?

A

They wanted people (depositors) to save money but also it was a sense of stability and protection for these FI’s without it being an in and out type of account

52
Q

What is a fixed term deposit

A

Usually a short term asset which is NOT locked in and yields less return or interest because it is not locked in like a GIC for example. Again, there is a need for withdrawal notification of a certain period, if not the depositor could be refused access of their funds

53
Q

What is a loan company

A

They lend their own money and are not FI’s but charge high rates for this money

FINA 481 (15 decks)

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