chapter 5- what's a bank?

Question 1

what is a bank?

Answer 1

an organisation that has a banking license

Question 2

what do commercial banks do?

Answer 2

take deposits and make loans

Question 3

what do investment banks do?

Answer 3

underwrite the issue of securities (primary market activity) and then trade those securities and make markets in them (secondary market activity)

Question 4

what are global/ universal banks?

Answer 4

those that combine commercial and investment banking

they also do asset management

Question 5

what did the legislation of Glass-Steagall do?

Answer 5

separated commercial and investment banking after the 1929 crash but was later repealed (US)

Question 6

what origin are investment banks?

Answer 6

US

Question 7

how did many investment banks begin?

Answer 7

many developed through underwriting, distribution and trading expertise from acting as brokers

Question 8

what was the UK equivalent of the US investment bank?

Answer 8

merchant bank
these were started by rich merchants who provided finance to others and they helped merchants export overseas by providing them with trade finance

Question 9

why did the US investment banks take over merchant banks?

Answer 9

as they had more capital with which to underwrite flotations and bond issues
they also had additional expertise in the distribution and trading of securities

Question 10

what legislation was enacted to prevent issues such as runs to the bank with the Wall Street crash?

Answer 10

Glass-Steagall

meant that banks no longer could be both commercial or investment, they had to be either or

Question 11

how was the glass-steagall division between banking activities policed?

Answer 11

policed by the US securities and exchange commission (SEC)

the SEC never said yes, but instead responded with no action letters which were public and had presidential value

Question 12

when was glass-steagall repealed?

Answer 12

1999- both sides complained
investment banks- needed access to more capital
commercial banks- more of what they did touched the securities market

Question 13

what created the 2008 banking crisis?

Answer 13

the securitisation of home loans which collapsed in value and defaulted

Question 14

what is the moral hazard?

Answer 14

encouraging reckless behaviour by providing safeguards against the risks

Question 15

what instruments help avoid tax payer bail-outs?

Answer 15

co-co bonds

Question 16

what did the Volcker rule do in the US?

Answer 16

it was designed to stop investment banks behaving like ‘casino banks’

Question 17

what was Libor?

Answer 17

the London inter- bank offered rate- the rate of interest at which banks in London market would lend to each other

Question 18

when gold prices were fixed, how often would it be fixed everyday?

Answer 18

twice, once at 11 and then at 3

Question 19

what types fo finance do commercial banks deal with?

Answer 19

acquisition finance- loans to help companies take over one another
trade finance- helping companies finance exports
syndicated loans- loans to companies and governments that are too big for one bank to make
asset finance- finance of leasing big ticket items such as planes and ships
project finance- limited or non-recourse financing of infrastructure projects in emerging markets

Question 20

what types of finance do investment banks deal with?

Answer 20

corporate finance- advising companies on IPO’s and M&A’s
propriety finance- where thew investment bank uses its own capital to take stakes in businesses, merge them and sell them
derivatives- buying, selling and creation of instruments like swaps, options and forward contracts- banks sell these to corporate customers to use to mitigate risk
prime brokerage- is a set of services that investment banks sell to institutional investors