Chapter 2 Intermediary Function Of Banks

Question 1

What is the intermediary function of banks

Answer 1

Bank brings borrowers and lenders together as a mediator
Brings market expertise, network and services to customers for a fee
Examples:
* handling stock market
* trading securities
* providing insurance
* Investment advice

Question 2

Intermediary function: Insurance

Answer 2

Bank acts as an intermediary for insurance policies
Example: policies for a private home + finance to buy a home

FIs are not allowed to act as a bank and insurance company simultaneously
Banking can have risks on ability to pay out insurance claims = vice versa

Question 3

Intermediary function: Stock Market Flotation

Answer 3

Large corporations use CM
* Issue bonds, shares, sell to an investor

Question 4

What is a share

Answer 4

A certificate of ownership
Shareholder is a co-owner of a company

Question 5

What is a bond

Answer 5

certificate of debt
Bond holder lends money to the company
Gives right of payment + interest

Question 6

What are securities

Answer 6

Collective term for shares and bonds

Question 7

Intermediary function: Stock exchange

Answer 7

Trading securities on the stock exchange
Examples:
NY stock exchange
NL = Euronext in Amsterdam, only open to members (most NL banks are members)

Question 8

Intermediary function: Issue

Answer 8

When new securities are put on sale
* ** New Issue Market **or Primary Capital Market: Trade in new securities for first time
* Need a bank to issue for them bc not a member of e.g. Euronext

Question 9

Stock Market Flotation

Answer 9

• First Issue
• When a company appears for the first time
• requires prep e.g. prospectus w/ details of the company
• Bank provides support for e.g. the initial flotation

Question 10

Trading in securities

Answer 10

• Secondary Capital Market: consumers sell securities to another party
• Company who issues securities not involved in secondary market, only gets money from initial issue
• Value changes to securities only affects the buyers/sellers

Question 11

Selling securities

Answer 11

• Banks can help buying/selling securities
• Customer can trade on their own account, bank does not account for losses
• Bank charges a comission fee % of the buy/sell transaction

Question 12

Safe custody of securities

Answer 12

• Custody Fee: Bank safe keeps purchased securities for customer for a fee
• ** Closed custody**: bank keeps paper document in a safe/admin records for book entry
• ** Open custody**: bank also takes on admin management for share dividend payments and redemption of bonds*
• Securities are not on the bank’s balance sheet
• Savings are included on the balance sheet (liabilities) since the customer can claim these against the bank

Question 13

Investment advice

Answer 13

Bank offers:
* Execution only
* Investment advice
* Asset management

Question 14

Investment advice: Execution Only

Answer 14

The bank only handles execution
Example: carries out investment transaction of a share purchase w/o advice

Bank is only liable for the proper execution

Question 15

Investment Advice

Answer 15

Investment advisor creates a profile with
* Investment objective
* Risk appetite
* Investment horizon (investment period)

Advice will depend on customer’s financial position and knowledge/experience

Custom advice is usually only for weathy clients, usual is to use models created by investment analysts
* Defensive model: risk avoidant
* Offensive model: risk seekers

Question 16

Asset Management

Answer 16

Consumer asks the bank to manage assets based on an agreement

Bank is given certain authorities such as carrying out buy/sell of securities