Chapter 5 - Banks (1/3) Flashcards
What are diff types of banks
- Central Banks
-Commercial Banks (retail, wholesale, investment)
What is a central bank
It is responsible for the monetary policy of a country (ies)
What is a central banks MAIN objective
To maintain stability of the national currency and money supply
What are other objectives of a central bank
1) Managing foreign currency reserves
2) Acting as a “bailout lender during financial crisis
3) Controlling subsidised interest rates
4) Supervisory powers - prevent fraud and recklessness
Foreign, bailout, interest, supervisor
Who owns central banks
Typical = state owned, minimally autonomous, gov intervention
Independent central bank: policies to prevent political interferance
What is a commercial bank
any bank that is involved in making commercial transactions with customers
What is a Retail bank?
banking services to individuals and small businesses
What is a wholesale bank
banking services to larger businesses
What is an investment bank?
an intermediary in complex corporate transations
What is a clearing bank?
Clears checks and finalises financial decisions
What services do commercial banks provide?
-Safe place to store wealth
-Act as a financial intermediary
-Lending via overdrafts and loans
-FX dealings
What is credit creation?
Banks do not have to keep cash reserves that match the value of all customer deposits
What is a cash/reserve ratio?
If you give 100 to a bank and it gives out 75% to others
you have a 25% cash or reserve ratio
How do you calculate increase in deposits?
Initial deposit/cash ratio
i/e 100/0.25
1/CR = credit multiplier
What are the functions of money
Store of value
Unit of account
Medium of exchange
Standard of deferred payment
SUMS
What is the capital adequacy ratio
Minimum amount of capital held to cover risks
Set by the BIS: Bank of international settlements
What is the Capital adequacy ratio set at ?
trad was 2% but lots of worthless assets which led to toxic debt
now 7% of risk bearing assests that are top qual
