Chapter 4 - Banks and Banking Flashcards
List 3 Supernational Banks
- IMF - International Monetary Fund
- World Bank
- European Bank for Reconstruction and Development
List the seven main functions of commercial banks.
- Accepting deposits from the public for reasons of security, savings and the convenience of payment. 2. Advancing loans to the public (both secured and unsecured). 3. Advancing loans in the form of overdrafts. 4. Discounting bills of exchange: a system used for advancing money to financial traders for short-term purposes. 5. Investment: a bank will invest its surplus funds in securities. 6. Act as an agency under instruction from its customers: such as collecting cheques, dividends, making payments, buying and selling securities and sending money from one place to another. 7. Other functions: safety deposits, providing references, buying and selling fx, providing financial advice, issuing letters of credit, and providing small loans for consumer durables.
The IMF’s fundamental mission is to ensure the stability of the international economic system.
List the 3 ways that it does this.
- keeping track the global economy and the economies of member countries
- lending to countries with balance of payments difficulties
- giving practical help to its member
Describe the World Bank’s role.
The world bank is a source of financial and technical assistance to developing countries around the world.
It helps government in poor countries reduce poverty by providing them with the money and technical expertise they need for a wide range of projects
- education
- health
- infrastructure
- communications
- government reforms
What is the role of the European Bank for Reconstruction and Development?
EBRD provides project financing for banks, industries and businesses in central Europe, the western Balkans and central Aisa.
What is the core role of the Central Banks?
- Monetary policy, which is largely directed at controlling inflation
- Custodian of foreign exchange and gold reserves
How is monetary policy controlled?
Through the setting of interest rates and managing the money supply.
What is the overnite rate?
The interest rate at which Central Banks lend to commercial banks.
True or False
Most commercial banks have accounts with their country’s Central Bank?
True
Most commercial banks have accounts with their country’s Central Bank?
What rates does the Overnight Rate influence?
- the interbank rate - the rate at which commercial banks lend to each other
- commercial loans
- homeowner mortgages
- credit cards
- etc
What might Central Banks do in severe economic hardships?
During severe economic hardships, Central Banks may implement Quantitative Easing.
What is Quantitative Easing?
Quantitative Easing is when Government buys up its own debt from the market.
To do this, Central Banks print money and inject it into the economy by buying government debt from financial institutions such as pension funds.
In theory, these institutions will use the money to buy riskier assets, which should boost price and encourage demand, and at the same time increase the money circulating in the financial system.
What are the negative effects of Quantitative Easing?
- Can put the bond markets out whack
- At some point, the Government will have to sell its debt which will tighten the money
What are the world’s leading central banks?
- US Federal Reserve (The Fed)
- European Central Bank (ECB)
- Bank of England (BoE)
- Bank of Japan (BoJ)
- Swiss National Bank (SNB)
- Bank of Canada (BoC)
- Reserve Bank of Australia (RBA)
- Reserve Bank of New Zealand (RBNZ)
What are ways that Central Banks try to prevent fraud when manufacturing bank notes (i.e. paper money)?
- serial number
- security thread
- watermarks
- variable colour ink
- holograms
- bar code
- and well kept secrets
