Chapter 3 - Banks and FInancial Institutions Flashcards
Four General Types of Banks
Commercial Banks
Investment Banks
Universal Banks
Central Banks
Dual Mandate for the US Federal Reserve
- Inflation (Pricing)
- Unemployment Rate (Employment)
US Banking Regulatory Authorities
OCC
Board of the Federal Reserve
FDIC
State Regulators
Basel III - Key Ratios
- Liquidity Coverage Ratio
- Net Stable Funding Ratio
Liquidity Coverage Ratio (30 Days Liquidity)
Short-term
Net Stable Funding Ratio (1 Year)
Medium / Long-Term
Third Party funds that will be available
Largest Shadow Banks
Pensions Funds
Insurance Companies
NBFI
Non-Bank Financial Institution
Primary Role of Financial Institutions in a Market
Intermediation of funds to allow for availability of capital
Depository Institutions Core Feature
Accepts deposits and provisions loans
Investment Bank Services
- Underwriting securities
- Providing custodial services
- Facilitating mergers, acquisitions, etc.
- Acting as a broker or financial advisor
Two Types of Short-Term Business Loans
- Term Loan / Term Note
- Revolving Line of Credit
What role will financial institutions take when it comes to commercial paper?
Typically act as agents to place commercial paper with investors
Industrial Banks
Limited scope of services
Locally chartered
Sell certificates called investment shares
Can accept deposits
Do not offer DDAs
Automobile manufacturers may use these
Three Ways of Managing Monetary Policy for US Federal Reserve
- Interest Rates
- Reserve Requirements
- Open market operations
Seigniorage
Income derived from providing currency to the FIs through the sale of government bonds
Difference between the value of the money and the cost to produce it
Fractional Reserve Banking
Process of recycling deposits through the reserve requirement
Export Credit Bank / Export Credit Agency
Helps facilitate exporting goods, especially to emerging markets
Two Stages in Bank Supervisory Regime
- Initial chartering
- Ongoing supervision and surveillance
Dual Banking System
Bank can be federally or state chartered
(US as an example)
Two Bank Monitoring Requirements
Capital and liquidity
Minimum asset quality
Impairment of Capital Rules
Regulators restrict the ability for financial institutions to loan out to certain sectors or companies
Three Pillars of Basel II
Minimum capital requirements
Supervisory review (dealing with and evaluating risk)
Market discipline (disclosure requirements for risk)
Basel III Two Reform Targets
Bank-level regulation
System-wide risks
Four Requirements from Basel III
Minimum capital levels
Leverage Ratio
Liquidity coverage ratio
Net Stable funding ratio
Regulation D
Reserve requirement provision of the Federal Reserve Act of 1913
Regulation Q
(List Acts that have impacted this Regulation)
Previously restricted interest amounts on certain accounts
Glass-Steagall Act of 1933 -> DIDMCA of 1980 -> Dodd-Frank of 2010
Current version implements the Basel III minimum capital requirements and capital adequacy standards
Regulation Y
Covers acquisition of banks and bank holding companies
Defines and regulates non-banking activities bank holding companies and foreign banking organizations can do
Regulation BB
Requires banks to meet the credit needs of the entire community where they do business
Regulation VV
Volcker rule
Regulation WW
Minimum liquidity requirement on large and internationally active banking organizations
Based on liquidity coverage ratio
Volcker Rule
Generally prohibits banking entities from engaging in proprietary trading
Prohibiting investing in or sponsoring hedge funds or private equity funds
Limit exposures to hedge funds and private equity funds
Recently amended in 2019/2020 to reduce restrictions on investments in venture capital funds
Two areas of concern learned from the 2007-09 financial crisis related to shadow banking
Role of asset managers and the risk of contagion in the event of a collapse of a fund
The growth in the use of all forms of financial derivatives beyond the oversight of central banks and other regulators
What does it mean when securities are held by broker-dealers in a “street name”?
held in the broker’s name on behalf of the broker’s customer
eliminates having to re-register securities
Two Types of Brokerage Firms
Discount – make trades at reduced prices, but little to no advice
Full Service – need to make sure group providing advice is independent
Prime Brokerage Services
Offer a range of asset management services
Captive Finance Companies
Subsidiary of a large industrial corporation that finances purchases solely on the corporation’s products
Auto manufacturers typically have one of these
Asset-Based Lenders
Loans are secured by collateral hat is pledged by the borrower
“Advance Rate” used by Asset-Based Lenders
percentage of eligible collateral to determine total amount that can be borrowed
Insurance companies can provide what types of services outside of typical insurance arrangements?
Mortgage funding
Leasing services
Guaranteed investment contracts
Insurance Company Summary
Risk Management Partner
Institutional Investors
Transfer Agent (Fiduciary)
Keeping records of each purchase and sale of stock and bonds
Registrar (Fiduciary)
Compiling and maintain lists of current stockholders and bondholders for dividend and interest payments
Issuing Agent
Distributing securities to investors on behalf of issuer
Issuing and Paying Agent
Combined issuing and paying agents
Corporate Trustee
Serves as intermediary between the issuer and the investors
Provides a variety of services related to these securities including
Monitoring compliance
Payment administration
Recordkeeping
