Financial Institutions Flashcards

1
Q

What are financial institutions?

A

They provide financial services.

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2
Q

What are depository institutions?

A

Can accept deposits from general public (legally allowed).

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3
Q

What are non-depository institutions?

A
Cannot accept deposits from general public. 
BUT
Can take other forms of money.
- Insurance providers
- Investment funds
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4
Q

What are the different licenses are given by the central banks?
(Depository Institutions)

(5)

A

1) Commercial Banks
a) Local Banks
b) Qualifying Full Banks
c) Wholesale Banks
d) Offshore banks

2) Savings Banks
3) Finance Companies
4) Savings & Loan associations
5) Credit Unions

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5
Q

What are the different licenses are given by the central banks?
(Non-depository Institutions)

(8)

A

1) Insurance Companies
2) Pension Funds
3) Investment/Merchant banks
4) Mutual Funds
5) Unit Trust
6) Private Equity Funds
7) Hedge Funds
8) Sovereign Wealth Funds (SWF)

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6
Q

What are the aims of Commerical Banks (Depository Institutions)?

A

Generate Profits

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7
Q

How many Local banks (Depository Institutions) are there in singapore?

(4)

A

1) DBS
2) OCBC
3) UOB
4) Bank of Singapore (Private arm of OCBC)

*In the past, UOB has Far Eastern Bank, and DBS had the Islamic Bank of Asia (Where DBS + Investors had stakes in the Middle East), now converted into an investment bank under DBS.

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8
Q

How do the commercial banks (Depository Institutions) earn profits?

A

1) Depositer deposits money
2) Bank would pay them interest.
3) Bank takes the deposited money to lend to busineses
4) Bank charge a higher interest rate

  • Difference between the interest rate is the profit that banks made
  • In order to give out more loans, banks need to attract people to deposit their money through the interest rates
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9
Q

How many Qualifying Full Banks (Depository Institutions) are there in singapore?

A

1) Bank of China
2) BNP Paribas
3) China Construction Bank
4) Citibank (Singapore)
5) HSBC (Singapore)
6) ICICI Bank
7) Industrial and Commercial Bank of China
8) MayBank (Singapore)
9) Standard Chartered Bank (Singapore)
10) State Bank of India

Ans: 10.

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10
Q

How do these Qualifying Full Banks (Depository Institutions) work?

A
  • Can open 25 places of business (10 branches)
  • Share ATMs among themselves
  • Tap ATMs of local banks
  • They have more functions & ability than non-qualifying full banks
  • This license allow foreign banks to open shop in SG
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11
Q

Which of the 10 Qualifying Full banks (Depository Institutions) has been incorporated locally so far?

(4)

A

Incorporated retail arm: They have taken in a lot of deposits & dealt with many common people businesses.

  • Therefore, MAS told them to be locally incorporated.
  • MAS can then implement more strict regulations
  • Lower the risk
  • Need to protect the people’s $$$

1) Citibank (Singapore) Limited
2) HSBC (Singapore) Limited
3) Maybank (Singapore) Limited
4) Standard Chartered Bank (Singapore) Limited

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12
Q

How many Full Banks (Depository Institutions) are there in Singapore?

A

21 branches of foreign-incorporated banks.

Ans: 21.

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13
Q

How many Wholesale banks (Depository Institutions) are there in Singapore?

A

98

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14
Q

How do Wholesale banks (Depository Institutions) operate in Singapore?

A
  • Formerly known as restricted banks (The kind of businesses they do are restricted)
  • No retail saving deposit
  • No fixed deposit of less than $250,000
  • They cannot have transactions with common people
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15
Q

How many Offshore banks (Depository Institutions) are there in Singapore?

A

Ans: 0.

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16
Q

How does Offshore banks (Depository Institutions) work?

A
  • No business done in the country –> More restrictive than wholesale banks
  • Transactions done in foreign currency units, not in SGD business units
  • Most transaction in ACU, very limited DBU business
  • Less regulation & transparency
  • Greater privacy
  • Often used to hide undeclared income
  • Little/no tax (Tax Haven)
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17
Q

Why did Singapore collapse Offshore banks (Depository Institutions) into the wholesale category?

A

ACU: Asian Currency Units
DBU: Domestic Banking Units
*Taxed differently, risks are different

Since DBU had very limited businesses, MAS done away with the distinction between DBU and ACU.

Previously (as at 2017) there were 58 wholesale banks and 36 offshore banks.
Now: No more offshore banking licence.

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18
Q

How do Savings Banks (POSB) operate?

Depository Institutions

A
  • They could give a lot of mortgage loans (housing etc.)
  • Encourage savings from consumers
  • No Forex Activity
  • No deposits from corporate
  • No financing of foreign trade
  • Restricted lending activities: Credit POSB

*All these help to manage risks for the common people

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19
Q

How many savings bank does singapore have?

Depository Institutions

A
  • Bought over by DBS on Nov 1998

Ans: 0.

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20
Q

How do Finance Companies in Singapore operate?

(Depository Institutions)

(4)

A
  • No checking account
  • Mostly fixed deposits
  • Similar to banks: They can take in deposits and give out loans
  • Different from banks: Cannot take same kind of deposits
  • They are not as capitalised as the 4 locally corporated banks
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21
Q

What are the 2 finance companies in Singapore?

A

1) Hong Leong Finance (HLF)

2) Singapura Finance (SIF)

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22
Q

What are the changes made to the loaning policies of the finance companies?

A

Previously:

1) No unsecured personal loan > S$5,000
2) Total unsecured loans must be < 10% of capital funds
* SMEs are unable to get much financing help

Currently:

1) Loan has increased to 0.5% of capital funds per borrower
2) Total unsecured loans < 25% of capital funds (1/4 of the businesses)
* Help the 200,000 SMEs in Singapore

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23
Q

What are secured loans?

A
  • Has collaterals
  • Approved for a specific purchase
    Examples:
    1) Mortgages
    a) Car
    b) House
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24
Q

What are unsecured loans?

A
  • Flexible
  • Loan to purchase anything
    Example:
    1) Credit card debt
  • They are riskier.
  • Thus, higher i/r + smaller loans
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25
Q

How do Savings and loan associations operate?

Depository Institutions

A
  • Mortgage lenders
  • They specialise in giving out mortgage loans
  • Bank-like entity
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26
Q

How many Savings and loan associations are there in Singapore?
(Depository Institutions)

A

Ans: 0.

Mainly US.

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27
Q

What happened during the S&L crisis in the 1980s?

(Depository Institutions)

(7)

A
  • Short-term deposits (time to maturity = 0, can withdraw anytime)
  • Long-term fixed mortgage loans
  • Fluctuation of interest rates
  • Lifting of deposit rate ceiling (Regulation Q): Interest rates increase, banks can now freely compete to become more attractive to depositers.
  • Interest rate of new loans increased due to inflation BUT then, it caused negative net interest income.
  • Thus, had to increase risk of loan portfolio and lend out to more riskier profiles for higher income flow.
  • Decrease in real estate prices leading to defaults (Bubble burst)
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28
Q

Why did interest rates increase for deposits in the S&L crisis in the US in the 1980s?

A
  • Curb inflation
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29
Q

How many credit unions are there in Singapore?

Depository Institutions

A

Ans: 0.

US have credit unions.

30
Q

How do credit unions operate?

(Depository Institutions)

(4)

A

1) No corporate stock ownership (no selling of shares to shareholders)
2) Owner by members: Mutuals (Organisation set up by members, for members, owned by members)
e. g. NTUC started like this
3) Deposits = shares (ownership is based on deposits, become a member by depositing)
4) Membership limited to groups having a common bond of occupation or association (e.g. school or job type)

31
Q

How are Credit Unions different from Commercial Banks?

(Depository Institutions)

(3 differences)

A

1) Members pool their money (technically buying shares in the cooperative)
2) This pool of money is used to provide loans; demand deposit accounts and other financial services.
3) Any income generated is to fund projects and services that will benefit the community and the interests of its members.

32
Q

After the 08/09 crisis, why are credit unions preferred?

(Depository Institutions)

(2)

A

1) Maximise the well-being of members (Suppress loan rates, increase deposit rates)
2) Lower risk

33
Q

After the 08/09 crisis, why are commercial banks not preferred?

(Depository Institutions)

A

1) They maximise shareholders’ wealth (Suppress deposit rates and increase loan rates)
2) Engage in higher risk to increase the return for the company.

34
Q

How do insurance companies operate?

(Non-Depository Institutions)

What are the 4 types of insurance they give?

A

They give out different kinds of insurance:

1) Human
2) Properties
3) Liabilities
4) Exotic

35
Q

What kinds of human insurance are there?

A

1) Life Insurance
a) Term Life
b) Whole Life
c) Endowment

2) Others
a) Health
b) Hospital (H & S - stay at least 1 night + have surgery)
c) Dental
d) Accident (Surgery & inpatient)

36
Q

What is a Term Life insurance?

A
  • No payment unless death within policy period
  • With a regularterm life insurancepolicy, ifyouare still living when the policy expires,you getnothingback.
  • If youdie the dayafter your policyexpires,yourfamily won’t be eligible for a death benefit of any size
37
Q

What is a Whole Life insurance?

A
  • Lifelong coverage and provide extra support during retirement
    E.g. Get some money after 30 yrs of paying premiums
38
Q

What is endowment?

A
  • Preparing a pool of funds for a certain use in the future (Education, housing, retirement)
  • Similar to a savings plan
39
Q

What kinds of Properties insurance are there?

3

A

1) Houses (Covers the structure, not the content)
- Have to be taken up when you do mortgage loan
- Allows the bank interest to be protected
- Acts as a insurance for the banks’ collateral

2) Cars
- Covers the victim
- Such as third party motor car insurance

3) Boats

40
Q

What kind of Liabilities insurance are there?

2

A

1) Product
- Have to use the product in a reasonable way that a person will use it
- Example: products’ own defects causes injury

2) Professional (e.g. Doctors, lawyers, accountants)
- The risk that someone could get sued for causing damages to another person as a result of their work.
- Professional liability only includes damages that occur as a result of a person’s work.
- If a person causes damages to another person outside of work, that is a personal liability.

41
Q

What exotic insurance are there?

A

1) Dancer’s legs
2) Pianist fingers

*Only can be insured if you are like world class

42
Q

Who comes up with pension funds?

3 groups of people

A
  • By government
  • By employers
  • By unions
43
Q

What kinds of pension funds are there?

2 types

A

1) Defined Contribution (DC) plans

2) Defined Benefit (DB) plans

44
Q

How do DC plans work?

A
  • Specify the amount (or percentage) contributed by employer and employees
  • Amount payable at retirement is not guaranteed but depends on the results of the investments
  • Contribution is certain

Example: CPF
- Portable
Contribution amt per period (month) is pre-determined (fixed)
- Cap at $6,000 of ordinary wages (from Jan 1, 2016) [ORDINARY WAGE CEILING]
– The first $6,000 ofyour monthly salary is subject to CPF contributions. Any amount above that won’t have a portion deducted for CPF.
– It also means your employer doesn’t need to contribute to your CPF account for amounts above $6,000.
– As you age, the employer contribution decreases: Encourages employers to employ older workers.

*Read up on CPF from lecture slides

45
Q

How do DB plans work?

A
  • The amount payable is guaranteed.
  • Insured vs non-insured: Insured by insurance company or not
  • Portable vs non-portable: Whether the company will lose the benefits if he/she leave the company
  • Put in money for many months for the people who are retired
  • Hopefully when retire can draw some money
  • Social securities systems are bankrupt or severely underfunded

Why?

  • Ageing population
  • More people drawing out money, less people to put in money –> Big strain on the funds (lesser contributors, more beneficiaries)
  • Rising medical costs
  • Rising public debt, government has been borrowing to spend instead of beefing up the pension
  • Rising life expectancy (obligations are multiplied)
46
Q

How do Investment banks or Merchant banks operate?

A
  • UNDERWRITING
  • Help corporations raise funds
  • They undertake the risks associated with a venture or investment or loan
  • In return, they get a premium
47
Q

What kind of financial assets do investment banks/merchant banks help to underwrite?

Part 1

(3)

A

1) IPOs
- Difficult to issue IPO independently
- They help companies to issue equity shares to the general public for the first time
- Investment banks first buy/underwrite the securities of the issuing entity and then sell them in the market
- So basically when a fresh new company goes ipo, they receive the money that they are trying to raise right away from bank investor also call (underwriters).
- Then the underwriters are taking those shares they just bought from that company to try to make their own profit, by selling them to the ipo public.

2) Private Placement
- Sell (or place) securities to selected investors (Those high net worth individuals)

3) Mergers and Acquisitions
- Help sellers to find buyers and vice versa
- Help to valuate the company
- Advice clients on method of payment: cash, shares or both.
E.g. Cross-border M&A: Involve many big parties, need to do a good job in valuing the company

48
Q

What kind of financial assets do investment banks/merchant banks help to underwrite?

Part 2

(3)

A

4) Creation and trading of financial products
- Options
- Futures
- Swaps
> Lend out money
> When loan reaches maturity, reloan out the money

5) Asset Securitisation
- Issue securities backed by a pool of assets
- Everything can be securitised (mortgages; credit card debts; auto loans, etc.)

*Transform non-tradable assets into tradable securities (Use a $10m loan to convert into tradable securities to sell to investors)
> Recycle the assets/securities to continuously give out loans
Pros: Banks can raise more funds to do more business and encourage people to buy property
Cons: Speculation of housing prices promoting inflation

6) Securities Trading
- They make the market (provide continuous pricing for an asset listed in a market)
- Arbitrage: Riskless & Risky (Taking advantage of a price difference between two or more markets, profit from the market prices at which unit is traded)
- Speculation
- Provide research

49
Q

What happened to the investment banks during the 08/09 (sub-prime) crisis ?

A
  • The banks are suppose to monitor the mortgages.
  • But for asset securitisation, investor bear the risk and credit rating monitors the risk –> banks do not monitor and filter –> give loans to bad risk people
  • Sub-prime loan (okay to loan to them, legal to loan to them, they still have assets for collateral)
  • But this can become Ninja loan (no income, no job, no assets) –> customer cannot pay for mortgages –> illegal (LIARS LOAN) –> Bank does this cos they do not to bear the risk anymore (shirk responsibility), they do not check
  • More risks spread among more investors

> Bank suppose to do the filtering, filter the bad risk people (assessing bad risk).
Monitoring: Monitor the loans and the mortgagee (e.g. if you update your particulars, they reward you with movie tickets and voucher, why do they do this? So that they know your circumstances when you take up a loan, based on circumstances, risk will change.

  • Initially good thing about asset securitisation is that instead of the bank bearing a huge risks of loaning 10m, asset securitisation splits the loan into smaller denominations to different investors, smaller loans –> smaller risks BUT THAT DID NOT HAPPEN (see above)
  • Banks came up with CLOs, CBOs, and CDOs, toxic waste
  • They took these and went to create e CDO^2, CDO^3 etc and
    broke them into ratings to securitise them.
  • Process multiplied risk (risk increased): when one of the mortgages default, risk
    is multiplied
  • CDSs: bond issuance for toxic waste bond in case of risks
  • CDS market went up to US$60-80 trillion but with no regulators (nobody was looking) –> led to
    sub-prime crisis
50
Q

What are the 4 benefits of asset securitisation?

A

1) Increase velocity of money (efficient transfer of funds)
2) When default, investors bear the risk (bank outsource the risk to investors)
3) Allows bank to get revenue through transaction fees
4) Recycle capital, generate more funds for people to borrow money

51
Q

What are the 2 costs of asset securitisation?

A

1) May not have the incentive to do a good job in filtering (looking at the credit scoring of customers to see if they should get the loan + monitoring of loans - making sure customers are still credit worthy over time)
2) If customers are more risky, can increase interest or call back the loan

52
Q

What is the Glass Steagall Act?

A

1993: To curb conflict of interest (i.e. JP Morgan & Morgan Stanley)
- When commercial banks lend out a loan and find out the company is not doing
well, commercial bank pass the loan on to investment banking arm to do
something to the loan to lend out to investors
- When Great Depression happened, companies went bust and investors suffered
- Since then, Glass Steagall Act to split commercial and investment banks up

53
Q

What are open-ended Mutual Funds?

A

Buys and sells at NAV (Net Asset Value) an unlimited number of shares.
- New units are always created through depositing of basket of assets

54
Q

What are closed-ended Mutual Funds?

A

Sell a limited number of shares at once which can be traded on the exchange like stocks

  • Can be traded at premium/discount
  • Based on demand & supply; fund performance; market conditions
55
Q

What are mutual funds in general?

A

The biggest sector in the Finance Sector.

  • A collective investment that pulls together the money of a large number of investors to purchase a variety of securities (e.g. stocks, bonds, etc)
  • Single investment with a portfolio of stocks (diversification)
  • Similar to a basket of investments, but instead its a SINGLE
  • Need 20 to 30 securities to diversify most of the unsystematic risk away
56
Q

What are Unit Trusts?

A
  • Similar to closed-end funds in that the number of unit certificate is fixed
  • A passive investment strategy (Not managed actively, fund managers are not active)
  • Assets are placed with trustee
  • Fixed termination date
  • Specific collection of assets
57
Q

What assets are in a Unit Trusts?

The compilation of assets depend on _____?

A

Example of assets in Unit Trust:
Equities, bonds, listed property, cash

Fund’s risk profile and the mandate.

58
Q

What are the 6 differences between Unit Trusts and Mutual Funds?

A
  1. Unit Trust maintain a fixed portfolio
  2. Sponsors do not normally change once they select them
  3. Investors can usually buy or sell UITs on any business day at the current market price
  4. Fund manager selects. Buys and holds the securities until maturity
  5. Management fees of a UIT are lower
  6. Mutual funds actively trade the securities
59
Q

What are Private Equity Funds?

A
  • A private partnership

- Invest in companies that are not publicly listed

60
Q

Who is the General partner in a private equity fund?

A
  • A private equity firm holding the control power
61
Q

Who is the limited partner in a private equity fund?

A
  • Institutions or wealthy individuals (passive partners)
  • They cannot interfere is how the funds are runned
  • These individuals tend to have more knowledge in the finance industry,thus, they tend to take higher risks
62
Q

What are the 3 types of investments in a private equity fund?

A

Equity investments

1) Venture Capital: Major stake in less mature firm
2) Growth Capital: Minor stake in more major firm
3) Buy-outs (including LBOs): Buying a controlling equity stake - need a lot of money to buy it out to become private
- Happens when a company is not doing well (e.g. rough patch; keyman died; bad shape; stock prices declining), private equity firm may buy over to take over management and make the company more successful

63
Q

Examples of private equity firms?

A

1) Blackstone Group
- Now publicly listed on the NYSE on July 22, 2007
- Higher disclosure now
- Weird because PE firms thrive on secrecy

2) Carlyle Group
3) Goldman Sachs
4) TPG

  • Many more has gone public, leading to less secrecy
64
Q

What are hedge funds?

A
  • For high risk appetite investors
  • Since these investors are usually quite wealthy, they can invest freely in any company
  • Similar to PE company due to the private partnership
  • Located offshore for tax and regulatory purposes (more relaxed regulations)
  • Operate through private placement to rich individuals and institutions
  • Short overvalued (as a hedge for market going down) and long overvalued
  • Investment techniques, includes short position and leverage (a lot of derivatives trading)
  • Leverage to amplify returns
65
Q

What are the 4 differences between mutual funds and hedge funds?

A

1) Investors
Hedge Funds:
- Have to be an accredited (rich) investor
Mutual:
- No need to be an accredited (rich investor - anyone can invest

2)  Regulations
Hedge Funds: 
- Lax 
Mutual Funds: 
- Tough
- More regulated since it is pooling from common people's money
3) Redemption
Hedge Funds: 
- Have a lock-in period
- Cannot withdraw/deposit
Mutual Funds: 
- No lock-in period
- Can cash-in and cash-out anytime

4) Transparency
Hedge Funds:
- Low
- No rights to know what they do with your money
Mutual Funds;
- High
- Since, dealing with common people money

66
Q

What is a short position?

A

SHORT SELLING

  • A trading technique in which an investor sells a security with plans to buy it later.
  • When an investor anticipates the price of a security will fall in theshortterm.
67
Q

What is leveraged investing?

A
  • A technique that seeks higherinvestmentprofits by using borrowed money.
  • These profits come from the difference between theinvestmentreturns on the borrowed capital and the cost of the associated interest.
  • Exposes an investor to higher risk
68
Q

What are Sovereign Wealth Funds?

A
  • State-owned investment funds
  • Difficult to regulate
  • Invest in stocks, bonds, real estate, precious metals (Both real and financial assets), private equity funds, hedge funds (alternative investments)
69
Q

What are the recent concerns surrounding SWFs?

A
  • High profile purchases amid the credit crisis
  • When state-owned investment funds invest in other countries, citizens tend to get concerned.
  • Why is the government investing our resources in other countries?
  • Are they investing insensitively?
  • Lack of transparency

*Thus, there are various meetings between SWF and government officials to iron out the issues.

70
Q

What are some examples of SWFs?

A

1) Singapore (Temasek & GIC)
2) Middle East (Qatar, Dubai)
3) China

Investments:

1) CitiBank
2) UBS
3) Morgan Stanley