Chapter 2 Intermediary Function Of Banks Flashcards

1
Q

What is the intermediary function of banks

A

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

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2
Q

Intermediary function: Insurance

A

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

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3
Q

Intermediary function: Stock Market Flotation

A

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

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4
Q

What is a share

A

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

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5
Q

What is a bond

A

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

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6
Q

What are securities

A

Collective term for shares and bonds

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7
Q

Intermediary function: Stock exchange

A

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

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8
Q

Intermediary function: Issue

A

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

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9
Q

Stock Market Flotation

A
  • 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
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10
Q

Trading in securities

A
  • 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
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11
Q

Selling securities

A
  • 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
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12
Q

Safe custody of securities

A
  • 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
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13
Q

Investment advice

A

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

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14
Q

Investment advice: Execution Only

A

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

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15
Q

Investment Advice

A

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

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16
Q

Asset Management

A

Consumer asks the bank to manage assets based on an agreement

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