Commercial Banks Flashcards
_________ are the largest group of financial institutions in terms of total assets
Commercial banks
Major liabilities are federally insured deposits—thus, they are considered ______________
depository institutions
Commercial banks perform what services essential to U.S. financial markets?
- Play a key role in the transmission of monetary policy
- Provide payment services
- Provide maturity intermediation
Banks are ________ to protect against disruptions to the services they perform
regulated
_____ generate the most revenue for banks
Loans
Commercial and industrial loans are declining because of nonbank substitutes such as _____________
commercial paper
Mortgages are __________ in importance
increasing
____________ generate revenue and provide banks with liquidity
Investment securities
_________ are held to meet reserve requirements and to provide liquidity
Cash assets
Commercial banks face what unique risks because of their asset structure?
Credit, liquidity, and interest rate risk
___________ is the risk that loans are not repaid
Credit (default) risk
__________ is the risk that depositors will demand more cash than banks can immediately provide
Liquidity risk
___________ is the risk that interest rate changes erode net worth
Interest rate risk
Credit, liquidity, and interest rate risk all contribute to a commercial bank’s level of ____________
insolvency risk
The four main categories of assets are ___________
Cash, Investments, Loans & Other Assets
Total loans ____ as a result of the financial crisis
fell
Safe investments and cash ____ as a result of the financial crisis
rose
Real Estate loans are about ___ of loans
58%
___________ are the sum of noninterest-bearing demand deposits and interest-bearing checking accounts
Transaction accounts
_______________ are called negotiable order of withdrawal (NOW) accounts
Interest-bearing deposit accounts
___________________ have been declining in recent years because of MMMFs
Household (retail) savings and time deposits
______________ are fixed-maturity interest-bearing deposits with face values of $100,000 or more that can be resold in the secondary market
Negotiable CDs
Three examples of non-deposit liabilities:
Fed funds purchased, repos, and notes and bonds
Minimum levels of ___________ are required by regulators to act as a buffer against losses
equity capital
_________ are the main source of funds
Deposits
Equity has increased since the financial crisis and is now over ___ of assets
11%
_______________ engage in many fee-related activities that are conducted off the balance sheet
Commercial banks
When an event occurs, this item moves onto the asset side of the balance sheet or income is realized on the income statement
Off-balance-sheet assets
When an event occurs, this item moves onto the liability side of the balance sheet or an expense is realized on the income statement
Off-balance-sheet liabilities
The ________________ allowed nationwide branch networks to evolve
Reigle-Neal Act of 1994
The _______________ gave commercial banks the full authority to enter the investment banking and insurance business
Financial Services Modernization Act of 1999
______________ are considered “non-bank” banks
Industrial loan corporations (ILCs)
A ___________ is a merger of commercial banks with assets of $1 billion or more
megamerger
____________ refer to the degree to which a firm’s average unit costs of producing financial services fall as its output of services increase
Economies of scale
_______________ occur when the costs of joint production of FI services are higher than they would be if they were produced independently
Diseconomies of scale
________________ refer to the degree to which a firm can generate cost synergies by producing multiple financial service products
Economies of scope
_____________ refer to cost savings due to greater managerial efficiency
X-efficiencies
Retail banking is
consumer-oriented
Residential and consumer loans are funded by accepting
small deposits
______________ specialize in retail banking
Community banks
Wholesale banking is ________________
business-oriented
Commercial and industrial loans are often funded with _____________
purchased funds
_______________ engage in a complete array of wholesale banking activities
Regional or superregional banks
Examples of retail banking services are
- Automated teller machines (ATMs)
- Point-of-sale (POS) debit cards
- Preauthorized debits and credits
- Paying bills via telephone
- Online banking
- Smart cards (stored-value) cards
- Internet banking
Examples of wholesale banking services are
- Controlled disbursement accounts
- Account reconciliation
- Lockbox services
- Electronic lockbox
- Funds concentration
- Electronic funds transfer
- Check deposit services
- Electronic initiation of letters of credit
- Treasury management software
- Electronic data interchange
- Facilitating business-to-business e-commerce
- Electronic billing
- Verifying identities
- Assisting small business entries in e-commerce
Because larger banks generally lend to larger corporations, with more funding options larger banks often are required to have ________________________ than those of smaller banks
lower interest rate spreads and net interest margins
Large banks tend to pay ___________ than small banks
higher salaries and invest more in buildings and premises
Large banks tend to _______ their operations more and generate more noninterest income than small banks
diversify
__________ is the difference between lending and deposit rates
Interest rate spread
___________ is interest income minus interest expense divided by earning assets
Net interest margin
____________ is non-interest income minus non-interest expense divided by earning assets
Net non-interest margin
____________ is percent of loans written-off as uncollectable
Net Charge-Offs
___________ is net income divided by assets
Return on assets
___________ is net income divided equity
Return on equity
Commercial banks performance measures
- Interest rate spread
- Net interest margin
- Net non-interest margin
- Net Charge-Offs
- Return on assets
- Return on equity
The___________ insures the deposits of commercial banks
Federal Deposit Insurance Corporation (FDIC)
The U.S. has a ___________—banks can be either nationally or state-chartered
dual banking system
The ______________ charters and regulates national banks
Office of the Comptroller of the Currency (OCC)
The ____________ has regulatory power over nationally chartered banks and their holding companies and state banks that opt in to the Federal Reserve System
Federal Reserve System (FRS)
A _____________ is a parent company that owns a controlling interest in a subsidiary bank or other financial institution
holding company
Advantages of international expansion:
- Risk diversification
- Economies of scale
- Distribute new product innovations internationally
- Opportunity to find the cheapest and most available sources of funds
- Service the needs of domestic multinational corporations
- Regulatory avoidance
Disadvantages of international expansion:
- Information and monitoring costs are generally higher in foreign markets
- Foreign assets may be subject to nationalization or expropriation by host country governments
- The fixed costs of establishing foreign organizations may be extremely high
