Chapter 2

Question 1

What are the 3 functions of a depository institution

Answer 1

1) Accepting deposits
2) Providing loans
3) Carry out payments/transfers

Question 2

What is economies of scale

Answer 2

% of people you can go after

Question 3

what is economies of scope

Answer 3

how you can reach them to offer other products, once you have their credit rating

Question 4

what are is the major asset, liability and equity for a bank

Answer 4

asset: loans
liability: deposits
equity: retained earnings

Question 5

what are the 4 impacts of universal banking

Answer 5

1) enhanced financial stability (diversification)
2) increased competition (can decrease interest rates)
3) improved customer convenience
4) regulatory challenges

Question 6

What is the difference between a transaction account and certificates of deposit

Answer 6

transaction account: chequing account, non interest bearing
certificate of deposit: fixed maturity interest

Question 7

what is off balance sheet activites

Answer 7

activities that happen but dont show on financial statement, there is notes explaining the situation

Question 8

Is a pre approved line of credit an asset for the bank

Answer 8

it is not an asset until the borrower uses some of the credit

Question 9

what is a letter of credit

Answer 9

bank takes out money of buyers account, puts it on hold. Its a guarantee that seller will get his money

Question 10

Is a letter of credit an off balance sheet or on balance sheet activity.

Answer 10

It is a off balance liability, until the money is deposited into sellers account, then turns to on balance

Question 11

what is contingency

Answer 11

something has to happen to off balance sheet for it to become on balance sheet

Question 12

what is an unsecured line of credit

Answer 12

no collateral backing up line of credit, its pre approved based on income

Question 13

what is disintermediation

Answer 13

skipping the middle man like the bank, going straight to the market (private investors/private debt)

Question 14

what are credit unions

Answer 14

-non public institutions
-members own the bank
-difficult to access equity quickly
-reports to provincial gvmt

Question 15

what is the difference between bank loan portfolios

Answer 15

small banks cater to mortgages (real estate)
large bank cater to commercial loans (have less risk, more diversified)

Question 16

explain what a:
-community bank
-regional bank
-super regional bank
-national bank

Answer 16

-community bank: small, local focus
-regional bank: specific regions
-super regional bank: multiple regions
-national bank: largest, nationwide

Question 17

what is the purpose of the FDIC (federal deposit insurance corp)

Answer 17

insurance for deposits if bank goes bankrupt

Question 18

Differentiate between all 3 schedule banks

Answer 18

Schedule 1 banks: domestic, operate in canada, no one can hold more than 20% voting shares
Schedule 2 banks: Foreign entities (HSBC)
Schedule 3 banks: limited operations, target a very specific clientele, only accepts deposits over 150k

Question 19

What is OSFI (office of the superintendent of financial institutions)

Answer 19

main financial regulator , responsible for overseeing

Question 20

What is a demand deposit

Answer 20

chequing account, money can be withdrawn without notice

Question 21

What is a notice deposit

Answer 21

savings account, money can be refused, must give notice to withdraw

Question 22

What is a fixed term deposit

Answer 22

investment that is locked in for a specific amount of time

Question 23

How does notice and demand deposit effect the bank.

Answer 23

Demand deposits: forces the bank to keep cash on hand for withdrawls
Notice deposits: gives the bank more flexibility to use money for long term investments (in case of crisis)