Chapter 2 Intermediary Function Of Banks Flashcards
What is the intermediary function of banks
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
Intermediary function: Insurance
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
Intermediary function: Stock Market Flotation
Large corporations use CM
* Issue bonds, shares, sell to an investor
What is a share
A certificate of ownership
Shareholder is a co-owner of a company
What is a bond
certificate of debt
Bond holder lends money to the company
Gives right of payment + interest
What are securities
Collective term for shares and bonds
Intermediary function: Stock exchange
Trading securities on the stock exchange
Examples:
NY stock exchange
NL = Euronext in Amsterdam, only open to members (most NL banks are members)
Intermediary function: Issue
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
Stock Market Flotation
- 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
Trading in securities
- 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
Selling securities
- 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
Safe custody of securities
- 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
Investment advice
Bank offers:
* Execution only
* Investment advice
* Asset management
Investment advice: Execution Only
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
Investment Advice
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