Element 3-Banking Flashcards
What is the difference between retail and commercial banking? What types of customers-individuals/corporates
Retail banks that specialise in taking deposits and providing loans to individuals.
Corporate banks that specialise in taking deposits and providing loans to businesses. In parts of the world outside the US, these are often referred to as commercial banks.
Retail banks provide services to individuals.
Commercial banks provide services to businesses.
Types of borrowing available to retail customers?
From banks- loans, mortgage loans, overdrafts.
From banks and credit card companies-credit cards.
From other sources-pawnbrokers, payday loans.
Bank Loans are unsecured loan because the bank does not hold any security.
Mortgage loan is secured loan as the bank holds a security such as property.
Overdraft facility is flexible but tend to be very expensive and also unsecured.
Credit Cards- unsecured.
Pawnbrokers- requires valuables to be left as security.
Payday Loans- repayable on next payday.
What interest limit has been imposed for U.K. lenders in 2015?
Since January 2015 the U.K. based payday lenders can now charge no more than 0.8% per day.
What is the Difference between the quotes interest rate on borrowing and the effective annual rate of borrowing?
If the frequency of charging interest is annually, the quoted rate and the effective annual rate are the same.
When interest is charged more frequently than annually - quarterly, or monthly the effective annual rate will be greater than quoted rate.
Calculate the Effective Annual Rate.
formula: (1+(nominal interest rate/number of compounding periods))^(number of compounding periods)-1
Amount x100 to get a %
What is the difference between secured and unsecured borrowing?
Secured borrowing is where the lender has the right to take something that belongs to the borrower if the borrower fails to meet the terms of the loan.
Unsecured loans are more expensive than secured loans because the risk to the lender is grater.
What types of borrowing are likely to be relatively expensive?
Pawnbrokers/payday loans, credit cards, overdrafts, unsecured loans; and cheaper-secured loans, eg, mortgages
What is the role of an Investment Bank?
Investment banks help companies to raise money and advise them on strategy, eg Mergers and Acquisitions
What is the role of Central Bank?
There are 3 main activities of Central Banks
1. Banker to the the Banks
Banks holds accounts with the central bank.
- Banker for the Government
The Government gathers all the tax receipts, spends on defence and welfare. Also some governments holds money in different forex reserves. - Regulatory Role
Many central banks regulate other banks
Set interest rates in accordance with government policy
