Chapter 3 - Banks and Financial Institutions Flashcards
Financial Action Task Force (FATF)
sets guidelines for KYC
makes recommendations on customer due diligence and each country determines how those obligations will be imposed
FIs are prohibited from holding anonymous accounts and are required to conduct due diligence on customers when opening accounts
FATF recommendations for due diligence
1) Identify a customer’s identity, using independent source documents, data or information for verification
2) Identify the beneficial account owner and understand the ownership and control structure of the customer for legal persons and arrangements
3) Understand and obtain information on the purpose and nature of the intended business relationship
4) conduct ongoing due diligence on the business relationship and transactions undertaken
Legal Lending Limit
the legal amount one FI is allowed to lend to one single customer (usually a percentage of their capital) 25% globally 15% US
Demand Deposit Accounts (DDAs) or Current Accounts
“Checking Accounts”
Provide a store of value and a vehicle to facilitate inter company funds transfers or payments made to vendors
interest bearing in many countries
Time Deposit Accounts (TDAs) or Noncurrent Accounts
Deposits maintained for a specified period of time, early withdrawal is allowed only with prior approval. e.g. CD, savings account, money market deposit accounts
Money Market Deposit Accounts (MMDA)
allow firms to earn competitive market rate of interest on cash balances
liquid but limited to 6 withdrawals a month
Bank Identification Code (BIC)
a unique identifier that specifies the FIs involved, most commonly used one is a SWIFT code
Society for Worldwide Inter bank Financial Telecommunications (SWIFT) - SWIFT Code
8 or 11 characters
1-4: bank code (alpha)
5-6: ISO 3166-1 alpha-2 country code (alpha)
7-8: Location code (alpha num)
9-11: branch code (optional)
International Bank Account Number (IBAN)
a way to identify bank accounts across national borders
adopted as an international standard by International Organization for Standardization (ISO)
34 alpha num characters
International Organization for Standardization (ISO)
adopted the IBAN numbers
Term Loan or Term Note
Type of short term business loan
a business borrows a specific amount to be repaid by a specific date
Revolving Line of Credit
type of short term business loan
a business can borrow up to a specified amount, repay all or part of the outstanding balance and borrow again in the future
Commercial Paper (CP)
a way for FIs to facilitate the acquisition of credit for corporate customers
consist of unsecured, discounted, short-term promissory notes issued by companies of the commercial bank holding companies
FIs typically act as the agents to place CP with investors
Trade Services Provided by FIs
Commercial Letter of Credit
Standby Letter of Credit
Documentary Collection
Banker’s Acceptance
Commercial Letter of Credit
Issued by Bank
Guarantees payment of a customer’s draft
specifies amount, period, and conditions to be met
bank substitutes its credit on behalf of customer
Standby Letter of Credit
Performance contract issued by bank
Ensures that certain terms and conditions will be met by bank’s customer
used when there is no tangible collateral to seize for nonpayment or non performance
Banker’s Acceptance
Used primarily to finance international trade
Related to a letter of credit or documentary collection
Created when bank “accepts” payment responsibility for draft
negotiable instrument
Fiduciary Services Provided to Corporate Customers include
- Establishing and managing employee pension plans or benefit plans
- acting as a corporate trustee for corporate bond or preferred stock issues
- monitoring compliance with bond indenture agreements
- acting as transfer agent by keeping records of each purchase and sale of stock
- acting as a registrar by compiling and maintaining lists of current stock and bond holders
- acting as paying agent
- custody services
Credit union
member owned, not for profit financial cooperative providing financial services
National Credit Union Administration (NCUA)
charters and supervises federal credit unions
Components of stock and bond issuance
Origination
Underwriting
Distribution
Stock/Bond Issuance - Origination
I bank advises the issuer when to actually issue
Stock/Bond Issuance - Underwriting
the act of purchasing all or part of a block of securities issued by a company
the I Bank is basically the intermediary between the issuer and the investing public
two types of underwriting:
Full Underwriting - bank owns the entire issue. issuer receives funds and the bank assumes the price and marketability risk associated with the issue
Best effort underwriting - bank assists issuer without taking the price and marketing risks. bank doesn’t issue it only helps with placement of the securities
Stock/Bond Issuance - Price Risk
means it might not be possible to sell the entire security issue at the anticipated price
Stock/Bond Issuance - Marketing Risk
the probability that not all shares will be sold
Stock/Bond Issuance - Distribution
the actual sale of securities
Sell Side
underwriting and distribution functions of an I Bank
Buy Side
Investment advisory and management function of an I Bank
Industrial Bank
sell certificates called investment shares and can also accept consumer deposits. they then lend the deposits out via installment loans to customers
no checking accounts
Captive Bank
a type of industrial bank that is a subsidiary of a large industrial corporation and that finances purchases solely of that corporation’s products
many auto companies have these because they can extend credit to customers without putting themselves at risk
Factors
non bank financial intermediary
provide short-term financing to companies by purchasing accounts receivable at a discount
Asset Backed Lenders/Loans (ABL)
loans secured by collateral. amount of credit is based on quality of the collateral (usually inventory or AR)
Documentary Collection
Processes the collection of draft and shipping documents through correspondent banks
collection letter accompanies documentation
Exporter is responsible for specific instructions in collection letter
