Depository institutions Flashcards
Why are banks important
Payments and settlements services.
• Key financial intermediaries (maturity, risk transformation
e.g. credit & liquidity transformation & denomination/size
intermediation = asset transformation & economies of
scale).
• Transmission of government monetary policy
What is a off balance sheet (OBS) agreement?
it is when banks enter into OBS
agreements that don’t appear on balance sheet until
transaction occurs- they are services that earn banks income
key features of current deposits
– Funds in cheque accounts
– Highly liquid funds
– May be interest or non-interest bearing (level of
interest rate compared to other types?)
key features of fixed term deposits
– Offer choice of terms of investment
– Loss of liquidity (fixed maturity) – break penalty
– Higher rates of return –more maturity risk
– Generally, a fixed interest rate.
key features of Negotiable Certificates of Deposit (CDs)
– S/T discount security issued by a bank in its own name directly into money market
– Repayment of face value of the CD at maturity by the
issuing bank
– Highly negotiable, wholesale security
– S/T (30 to 185 days)
– Useful as S/T funding as the yield adjusted quickly
key feature of non deposit source of funds
-Fees from bill acceptance e.g. company borrowing S/T funds via discount security
key features of debt liabilties source of funds1
From money markets-
- issue negotiable certificates of deposits (CDs)
From capital markets-
- issues of notes- generally unsecured,
- debentures (bonds with collateral backing)
- Transferable certificates of deposit (TCDs) 3 to 5 years
- Covered bonds
key features of Loan capital &
shareholders’ equity source of funds
banks have issued/sourced funds by:
- ordinary shares listed on exchange
- retained earnings from profits
- preference shares (equity) e.g. ASB Capital No. 2 –
features- perpetual, resettable interest rate
- bonds &
- subordinated notes (hybrid security) & debentures (debt)
key features of banks commercial lending
• Loans to business sector & other institutions
• Examples:
– Term loans – fixed or floating rates
– Overdraft facilities
– Commercial bills- bank bills held, rollover facilities
– Lease finance
the 3 uses of funds by banks
1) Notes, coins & balances held at central bank
2) Lending:
- to govt by buying govt securities
- to businesses- commercial loending
- to individuals - personal finance
3) Other bank assets e.g. property
Features of lending to Govt
• Buying (investing in) Treasury bills & Govt bonds
Note in NZ
• Number of reasons they hold govt. securities:
• They hold Govt securities for liquidity reasons
• As investment alternative
• Collateral as part of borrowing
• Income stream
• Manage interest rate risk
features of personal finance lending
Categorised into:
• Owner-occupied housing finance (Mortgages) with
fixed or floating interest rates & other housing finance
Fixed loans e.g.
• Overdrafts
• Credit cards
feature of other bank assets use of funds
• Foreign currency assets
What is securitisation?
it is when non-liquid assets are sold into special vehicles (trusts)
• Then trustees issues new collaterised securities
• Cash flows from original securities are used to repay the
new securities
in relation to a banks balance and this
C + S + L + MA = D + NDB + EC
what does C + S + L + MA stand for?
C = cash in vault & deposits held at other depository FIs S = Security holdings- backup source of liquidity (about 10%-20%) L = Loans made to supply income (about 60% of their assets) MA = miscellaneous assets (plant & equipment)
n relation to a banks balance and this
C + S + L + MA = D + NDB + EC
what does D + NDB + EC stand for?
D = deposits - main source of funding NDB = nondeposit borrowing EC = equity capital = long-term base of financial support
What are the 4 OBS transactions?
- Direct credit substitutes
- Trade & performance-related items
- Commitments
- Market-rate related transactions.
Features of direct credit substitutes
• The bank acts as guarantor on behalf of client for fee.
• Client has financial obligation to a third party.
• So bank ensures client gets funds, say directly from
markets.
• Bank is only required to make payment if the client
defaults on payment to third party.
Features of trade and performance related items
• Banks act as guarantor.
– Documentary letters of credit where exporter will
require importer to arrange with its bank to provide
documentary letter of credit for trade transactions
• Client has non-financial obligation (agreement) to a third
party, e.g. for goods & services
– Bank pays compensation if client fails to fulfil the
obligation
features of commitments
• Bank undertakes to advance funds, or make a purchase
of assets at some time in future.
• Examples include:
– forward purchases such as buying foreign currency
– Repurchase agreements –banks sells securities
temporarily
features of market related transactions
Examples include the derivatives: – Futures (usually on interest rates) & forwards – Options (usually on interest rates) – foreign exchange contracts – Swaps e.g. currency swaps – forward rate agreements (FRAs) • Used for hedging
sources of funds for depository institutions credit unions
- from public who sign up as members
- Low cost financial services as operate under special controls
Uses of funds for depository institutions credit unions
- Most loans - for relatively small sums & for
S/T although some of larger ones also lend on house
mortgage.
Sources of funds for Savings Institutions
ccept public savings in shares &
deposits (liabilities)
uses of funds for Savings Institutions
are used mainly for housing loans (assets).
Why is specialised regulation needed?
- Markets work efficiently & competitively
- Consumers are protected
- Adverse consequences of breaching financial promises
- Mechanisms exist for low-cost means to resolve disputes
