Commercial and Investment Banks Flashcards
What is a commerical bank?
a bank that accepts deposits and lends money to the general public for personal or business use
What is the key function of an investment bank?
help companies raise finance by assiting with issue of new capital, also governments
- engage in buying and selling financial assets in money and FE markets
What are the three main functions of commercial banks?
- accepting deposits
- lending to economic agents
- providing an efficient means of payment
WHat are the three objectives of commercial banks?
- liquidity
- profitability
- security
How do commercial banks make their profits?
taking small, short term, liquid deposits from retail savers and turning them into larger,longer maturity loans
What is an investment bank?
help companies and financial institutions to raise finance by selling bonds or shares
What do investment banks generally do?
- advise private companies on how to become public companies
- advice on MandA
- research and private equity investments
What are private banks?
provide wealth management services to high net worth individuals
What are building societies?
owned by members, not shareholders, offer braod range of retail banking products
What are credit unions?
small and local non-profit lending institutions
What are challenger banks?
a number of new banks attempting to establish themselves in UK financial system and challenge leading banks
Explain objective of profitability?
- banks have requirement to ensure investors recieve a return on their investment.
-banks with weak profitability will see low share prices and struggle to find investment
Explain objective of security>
- banks face risks and uncertainties, must maintain safety in their assets
Explain objective of liquidity?
must ensure have enough liquidity to meet demands of customers
What are the two trade offs between objectives?
- liquidity and profitability
- profitability and security
Explain trade off between liquidity and profitability ?
- must maintain enough liquid assets so customers are confident - do not generate good profit
- if focus on profitability, low liquidity and in possibility of bank run, bank cant survive
Explain trade off between profitability and security?
- rate of interest bank charged is a reflection of risk. most profitable loans have highest interest rate, but riskier
What is the main form of money?
bank deposits
What happens when a bank makes a loan?
creates credit
Explain how banks create credit?
- deposit made into bank
- bank only keeps 10% available in bank and lends out 90%
- deposits money in bank, only 10% kept, 90% given out
How is the total deposit calculated?
credit multiplier x initial investment
How do you work out credit multiplier?
1/ reserve ratio
What are the three limits to credit creation?
- types of assets held by bank ( wont lend all money out to balance objectives)
- demand for credit (not all money will be wanted)
- central bank policy (change capital ratios)
Give examples of assets ?
- cash
- balances at BofE
- money at short and call notice
- commercial bills and treasury bills
- investments
- advances
Give exaples of liabilities?
- share capital
- retained profits
- long term borrowing
- consumer deposits
Explain liquidity risk?
- banks tend to attract short term deposits
- lend for longer
- commerical banks may not be able to repay all those deposits if savers decide to withdraw funds
Explain credit risk?
- risk to commercial bank of lending to borrowers who then cant repay their loans
- can be controlled by proper research + regulation
