CP1-A1 Banking Overview

Question 1

Name two roles of banks. [1]

Answer 1

Provide liquidity to the financial system and act as financial intermediaries.

Question 2

Why does South Africa have a well developed banking system? [1]

Answer 2

Banks are well-managed and have sophisticated risk management systems.

Question 3

How do banks provide liquidity to the financial system? [1/2]

Answer 3

By deposit-taking activities allowing lending.

Question 4

Discuss the role of financial intermediaries. [1.5]

Answer 4

They bring together providers and users of capital.
They develop facilities and financial instruments that make lending and borrowing possible.
Provide means to transfer funds from depositor to borrower.

Question 5

The global nature of banking allows… [1]

Answer 5

The distribution of economic and business information among customers and capital markets of all countries.

Question 6

Banking acts as the worldwide barometer of … [1]

Answer 6

… economic health and business trends.

Question 6

Name the types of banks. [2.5]

Answer 6

1. Traditional deposit-taking banks
2. Development Banks or Development Financial Institutions (DFIs)
3. Reserve (Central) Bank
4. Investment Banks
5. Community banks

Question 6

Discuss the characteristics of a traditional deposit-taking bank.

Answer 6

Commercial or retail banks.
Accept deposits, provide loans, mortgage lending, basic investment products.
Usually public companies that are regulated and listed on major stock exchanges.
Owned by shareholders.

Question 6

Discuss the characteristics of a Development Bank.

Answer 6

Are alternative financial institutions.
Include microfinance, community development institutions.
Provide credit through higher risk loans to public or private sector institutions.
Usually supported by government.

Question 6

Discuss the Development Bank of South Africa (DBSA).

Answer 6

Owned wholly by government.
Funding may also come from large private firms.
Manage large infrastructure projects in the public and private sectors.
Can fund private projects if motives align with criteria.
Usually cheaper finance than commercial bank.

Question 6

Who owns the reserve bank. [0.5]

Answer 6

Government.

Question 7

What is the role of the reserve bank? [1]

Answer 7

To achieve and maintain price stability in the interests of balanced and sustainable economic growth.

Question 8

List the roles of the South African Reserve Bank. [2.5]

Answer 8

1. Issues banknotes and coinage.
2. Assists in supervising the domestic banking system.
3. Ensures effective functioning of the national payments system.
4. Issues exchange controls.
5. Acts as a lender of last resort in exceptional circumstances.

Question 9

Who, together with the SARB, is responsible for the regulation and supervision of banks in SA? [0.5]

Answer 9

Prudential Authority (PA)

Question 10

List the activities of an Investment Bank in the financial markets. [2]

Answer 10

1. Debt raising.
2. Equity financing for corporations or governments.
3. Originating and underwriting securities and placing them with investors.

Question 11

List the key characteristics of community banks. [1.5]

Answer 11

1. Membership-based
2. Decentralized
3. Self-help

Question 12

Name an example of a community bank.

Answer 12

stokvels

Question 13

Under what are very formalized community banks registered?

Answer 13

Mutuals Banks Act

Question 14

What is the role of the economic department in a commercial bank? [1]

Answer 14

To consider economic trends and actions likely to be taken by the central bank.

Question 15

What is a trading book and how can banks profit from it? [2]

Answer 15

A portfolio of financial instruments held by the bank that are actively traded.
It facilitates trading for investors.
The bank profits from the trading spreads between the bid and ask prices.
Used to hedge against various types of risks.

Question 16

What is a banking book? [0.5]

Answer 16

Everything not in the trading book.

Question 17

The main products of banks are…

Answer 17

loans linked to benchmark rates.

Question 18

Benchmark rate in SA.

Answer 18

Prime lending rate.

Question 19

Why do banks add a premium to the benchmark rate when issuing loans? [1]

Answer 19

For credit risk. To cover expected losses while allowing bank to profit.

Question 20

What factors determine the lending rate? [1.5]

Answer 20

1. Credit quality
2. Loan Security
3. Tenor of loan

Question 21

Briefly explain how banks profit from interest rates. [1.5]

Answer 21

Banks offer deposit rates based on their own credit rating. They profit from positive spreads between the interest earned on loans and interest paid to depositors.

Question 22

Name the factors that affect the fee or commission of a banking product in theory. Name an example of a high fee product.

Answer 22

The amount of value added and specialization needed to provide the product and the product cost. For example interest-rate hedging products have high fees due to high provision costs.

Question 23

What is an overlay reserve? [1]

Answer 23

Reserve created if there is an anticipation of worse than expected performance of the loan book.

Question 24

How do you calculate the provision of a performing loan? How do you calculate the provision amount if there is a significant increase in the the credit risk of the loan?

Answer 24

It is the present value of credit losses from default events projected over the next 12 months.

Provision measured as the PV of all credit losses projected for the instrument over full lifetime.

Question 25

Name 2 banking trends.

Answer 25

1. Increasing regulatory requirements for risk management and measurement and capital holdings - Basel 3.
2. Fintech joins financial services and technology to modernize banking allowing greater digital/ mobile banking experiences and improved use of data, AI.

Question 26

What is factoring?

Answer 26

Selling of debts for cash.

Question 27

What are the 4 types of banking products?

Answer 27

1. Transactional
2. Investment
3. Loan
4. Insurance
   note: product type depends on customer type and customer needs

Question 28

What are the two sources of revenue for banks?

Answer 28

1. Interest
2. Fees charged to customers.