Essay Revision Q2 Flashcards
What is CAR?
Capital asset requirements.
Capital serves as a form of protection for depositors and contributes to financial stability.
It refers to the banks capacity to absorb losses ( can’t write these from liabilities because they still have to be paid).
Name some interest rate management systems?
These can be Internal or external.
What is internal risk management?
Involve changes to the balance sheet and cash flow structures of the organisation.
The higher the debt of a bank the higher the interest payment and exposure to IR risk.
They can sell off assets to pay off debt, forecast IR. Changes and price loans accordingly.
Change the timing of cash flows,
Put clauses into loans that prohibit them being paid or redeemed early.
What is external risk management?
These involves off balance sheet strategies like futures, forwards, options and swaps.
Explain liquidity management for a financial intermediary?
Financial intermediaries, like banks, are required to hold a certain amount of liquid assets and have a liquidity management strategy. As per Basel III and APRA.
Liquidity management ensures the institution is able to meet its operational liquidity demands.
First, they must hold high quality liquid assets that can sustain them for a month during acute stress.
Second, they must fund their activities with stable sources of funding.
The first issue relates to the matching principle ( that short term assets should be matched with short term liabilities and long term assets with long term liabilities).
