class 6 after midterm Flashcards
what are the 2 sides on a banks balance sheet?
assets
liabilities and equities
what are assets on a balance sheet?
the use of the banks fund to create profit
what are liabilities on a balance sheet?
how the organization is funding their assets to create their profit
what are the 5 liabilities and equities on a bank balance sheet?
demand deposits
fixed deposits
borrowings
advances from BoC
bank capital
what are demand deposits?
the deposits that are in the chequing accounts their their clients create
what are fixed term deposits?
deposits that the bank will have for a predetermined amount of time
what are some examples of fixed term deposits?
GIC
fixed term savings accounts
what is bank capital?
money given to the bank from the shareholders/ owners
what are the 4 assets on a banks balance sheet?
reserves
securities
loans
other assets
what are reserves?
the cash that a bank keeps on hand
what are the 2 kind of loans a bank give out?
mortgages
non-mortgage loans
what are other assets?
buildings that banks own
how do banks make profit?
they my money on the spread between the interest that they owe on their liabilities and the interest that they earn on their assets
what is an example of how banks make money in the spread of interest?
if the interest on their liabilities are 4% and the interest of their assets are 8%, then they are making 4%
do owners want low capital requirements?
yes
why do owners want low capital requirements?
because they don’t need to risk much of their own money, and because the opportunity cost is high because they could use their funds in a better way
what is the benefit of a bank having a higher bank capital ratio?
if the economy falls, and your assets lose value you will still be able to pay your liabilities, you rely less on the profit of assets and decreases the chance of default
if a bank add 100 million of demand deposits on their liabilities side, how will that impact their assets?
their reserves will also increase by 100 million
what are the 4 primary concerns for a bank manager?
liquidity management
asset management
liability management
capital adequacy management
what is liquidity management?
making sure that the bank has enough cash ready to pay its depositors
what is asset management?
pursue an acceptability low level of risk by acquiring assets that have a low rate of defaulting and by diversifying asset holdings
what is liability management?
acquire funds at a low cost
what is capital adequacy
designing the amount of capital that the bank sound maintain and acquire the needed capital
what are the 2 kinds of risks bank have to manage?
credit risk
interest rate risk
what is credit risk?
the risk arising because borrowers may default
what must banks overcome that make loan defaults likely?
adverse selection
moral hazard problems
how do banks over come the adverse selection and moral hazard problems that make loan defaults more likely?
screening and monitoring
establish long-term customer relationships
collateral and compensating balance requirements
credit rationing
what are 2 companies that provide credit rating services?
equifax
trans credit union
what is interest rate risk?
the riskiness of earnings (bank income) and returns that is associated with changes in interest rates
how do banks deal with interest rate risk?
adjust the duration of the banks assets and/or liabilities
use financial derivatives
what is an example of banks adjusting the duration of earnings and returns that are associated with changes in interest rates?
if you firmly believe that interest rates will increase in the future, you should shorten the duration of the banks assets
what is the traditional banking business?
attract deposits (short-term funding) and issue loans (long-term funding)
what has caused the growth of the “shadow banking system”?
changes in economic environment stimulate innovation and the growth of the shadow banking system
what will a change in economic environment will stimulate financial institutions to do?
they will search for innovations that are likely to be profitable
what are 3 examples of banks innovating to become more profitable?
introducing adjustable rate mortgages
adding credit cards, debit cards, ATM, online banking
innovating to avoid government regulations
what is the shadow banking system?
a diverse set of institutions and markets that collectively carry out traditional banking functions but include securitization vehicles that do not show up on balance sheets
what is the difference between traditional banking and shadow banking?
in shadow banking certain transactions do not shown up on the banks balance sheet
what is securitization?
the transformation of traditionally not liquid assets like mortgages into marketable capital market securities
what us the fundamental building block of the shadow baking system?
securitization
what are mortgage backed securities?
a financial instrument (similar to a bond) where the value of it and the payments of security is base don the ability of the borrowers to make their mortgage payments
what is the problem with the securitization model “originate-to-distribute”?
if multiple people default on their mortgage then the security loses its value
what are the 4 steps in the securitization process?
loan origin
servicing
bundling
distribution
what is the originate-to-distribute model?
when the original lender does not keep the loan and instead sells the loan
how do the fees work in the originate-to-distribute?
all entities involved earn a fee, then original lenders collect the payments from the borrowers, then they take a fee and pass on the rest of that money to the final owners of the security
what is the 4 pillar approach?
there is regulation to each institution according to their core financial service
what are the 4 pillars?
banking
brokerage
trusts
insurance
what were the 3 revisions to the bank act?
can make residential loans (1967)
own securities firm (1980)
cross-ownership via subsidiaries between financial institutions (1990)`
what is a result of the revisions to the bank act?
canada traditional four pillars have now converged into a single financial services marketplace
what are the 2 advantages of the 4 pillars converging in to a single financial service marketplace?
take advantage of economies of scope
increased side of financial institutions, but also increased combination of product and services that provide
what is the glass-steagall act?
prohibited commercial banks form participating in the investment baking business, created by the federal deposit insurance corporation in 1933
what is the Gramm-leach-bliley act?
repealed part of the glass-steal act, commercial banks, investment banks, securities firms and insurance companies were allowed to consolidate
what are the 2 differences between between banking in Germany, the Netherlands and Switzerland versus in canada?
no separation between banking and securities industry
full range of services within a single legal entity
can banks in canada own significant shares in a company that they lend to?
no
who do trust and loan companies operate under?
under a charter issued by either the federal government or one of the provinces
who are trust and loan companies supervised by?
OSFI and register in all provinces they operate and conform to their regulations
what are the 2 companies that provide deposit insurance?
CDIC
QDIB
what are the 6 characteristics of credit unions and caisses populaires?
established under provincial legislation
accept deposits and make loans to members
members have voting right and elect board of directors who determine lending and investment policies
main source of funds is deposits
asset portfolio made up of largely mortgages
provincial governments provide deposit garuntees
what is an example of a government savings institution?
alberta tresaury branches (ATB) financial
when were government saving institutions established?
1938
how many branches of government saving institutions are there?
170 across 240 communities in Alberta
what are the 3 target markets of government savings institutions?
individual financial services
agricultural operations
independent businesses
have financial markets throughout the world become more integrated?
yes
what are 3 examples of Canadian banks in other countries?
in US: BMO, TD canada trust
in South America: scotiabank
in Europe and Asia: RBC, BMO
when were foreign banks allowed to operate in canada?
1981 after the revision of the bank act
what is an example of a foreign bank in canada?
HSBC bank canada
what schedule do these foreign banks enter the Canadian financial services industry?
they would enter as a schedule II or schedule III
what are the top 10 largest banks in the world?
1) industrial & commercial banks of china, china
2) china construction bank corporation, china
3) agricultural bank of china, china
4) bank of china, china
5) JPMorgan, US
6) Bank of America, US
7) Mitsubishi UFJ financial group, Japan
8) HSBC holdings
9) BNP paribas, france
10) credit agricole, France
