Chapter A1 - Banking Flashcards
List the different types of banks?
Traditional deposit-taking banks (retail / commercial banks)
Development banks
Reserve / Central banks (mandated by the government)
Investment banks
Community banks
What are the roles of (retail) banks?
Act as financial intermediaries
o Between savers (providers of capital) and borrowers (users of capital)
o Banks develop facilities/instruments/products to make lending, borrowing possible
o Direct impact on a country’s production, local and international trade, economic growth
and employment
Provide liquidity to the financial system
o Lending activities injects liquidity into the economy
o Fractional reserve banking allows banks to lend a high proportion of their deposits, which
ultimately leads to increase in money supply (m=1/R)
o Central bank may adjust “R” to increase/decrease money supply and liquidity.
Provider of information
o Economics research and trends
o House prices indices
o Trade/credit/industry statistics
Describe the activities and products of a retail/commercial bank.
o Accept deposits, provide loans
o Usually public companies and highly regulated
Describe the activities and products of a developmental bank.
o Specific developmental role o Could target small enterprises (microfinance) or large infrastructure projects o High risk (usually unsecured) loans o Can fund public or private projects o Usually government owned
Describe the activities and products of a central bank.
o Price stability (achieved through monetary policy) for economic growth
o Supervision of banking industry
o Ensure effective national payments system
o Lender of last resort
o Administer exchange controls
o Banker of the state
Describe the activities and products of an investment/corporate bank.
(Large question)
Facilitate long-term funding, which includes: o Structuring / originating securities o Pricing securities o Marketing and sale of securities o Underwriting of securities o Placement of securities
Other products and services include: o Fiduciary and trust services (estate planning, setting up trusts) o Stockbroking services o Portfolio management o Sale of insurance products o Provision of information
Trading Book activities:
o Trading for own account
o Meet the needs of its clients e.g. facilitates stockbroking trading by investors (eg purchase illiquid shares), or sell currency option to a corporate client to help it reduce its foreign exchange risk
o Hedging against some of a bank’s market risks (eg enter into swap to protect the bank from rising interest rates)
List the various items to consider when pricing interest-rate products at a bank.
- Benchmark rate (e.g. repo rate)
- Pricing for risks / expected losses and for profit:
- Credit quality/security
- Tenor
- Credit rating agencies
- Lending (loan) rates
- Borrowing (deposit) rates - (banks own credit quality)
- Fees and Commissions
List the 4 key risks for banks
Credit Risk
Market Risk
Operational Risk
Liquidity Risk
Briefly discuss Credit Risk
- Failure of a borrower to meet its loan obligations
- Specific form of counterparty risk
- Default by a borrower can be defined in many ways:
- Length of time past the due payment date
- Default on other obligations
- Breach of contractual conditions (e.g. covenants)
• Credit risk can be amplified by concentration risk
What are the different sources of Market Risk (also be able to briefly describe what these sources entail)?
Volatility Risk Currency Risk Basis Risk Interest-rate Risk Liquidity Risk Commodity Price Risk
What are the different sources of Operational Risk (be able to give examples)?
People
Internal Processes
Systems
External events
Briefly discuss Liquidity Risk.
Liquidity risks can relate to a firm, a market, or an asset.
In all three circumstances liquidity risk is the risk of not having access to cash when needed e.g.
• A firm not having ready access to cash
• Participants in a market not easily being able to convert positions into cash
• An asset not being easily sold and converted to cash
Direct consequences of liquidity risk could be:
• Insolvency risk
• Financial losses due to needing to borrow, or sell assets for less than what they are worth, or payment of penalties
