chapter 3 banking

Question 1

what are retail banks?

Answer 1

banks that specialise in taking deposits and providing loans to individuals

Question 2

what are corporate banks?

Answer 2

banks that specialise in taking deposits and providing loans to businesses, also known as commercial banks

Question 3

what are the three most common forms of borrowing provided by banks to retail customers?

Answer 3

• loans
• mortgages
• overdrafts

Question 4

what are the standard features of a loan?

Answer 4

a loan is usually:
- for a set period that is generally less than five years
- at a set rate of interest
- with a defined repayment schedule

Question 5

what is an unsecured loan?

Answer 5

when the bank does not require any security to be handed over to it while the loan is outstanding

Question 6

what are the standard features of a mortgage?

Answer 6

mortgages are typically:
- for a set period, longer than other forms of loan
- at a variable rate of interest (the bank’s ‘standard variable rate’)
- with a defined repayment schedule
- secured on the property the loan is used to buy

Question 7

what are the standard features of overdrafts?

Answer 7

bank overdrafts are generally:
- flexible, able to be drawn, repaid, drawn again up to the overdraft limit
- at a variable rate of interest, an arrangement fee may also be payable
- unsecured and repayable on demand

Question 8

what is secured borrowing?

Answer 8

where the lender has the right to take something that belongs to the borrower if the borrower fails to meet the terms of the loan

Question 9

what is the most obvious example of secured borrowing?

Answer 9

mortgages

Question 10

which are generally more expensive, secured or unsecured loans, and why?

Answer 10

unsecured loans, because the risk to the lender is greater

Question 11

what are investment banks?

Answer 11

a business that specialises in raising debt and equity for companies

Question 12

what are the three main functions of central banks?

Answer 12

• banker to the banks
• banker for the government
• regulatory role

Question 13

what does the central bank’s regulatory role entail?

Answer 13

• it is the central bank that licenses banks to operate and subsequently overseas their activities
• often has the responsibility of setting the appropriate interest rate in order to control inflation