Investment and commercial banks pt2

Question 1

Moral hazard

Answer 1

When an economic agent has an incentive to take more risks because they do not bear the full costs of the risk

Question 2

Systematic risk

Answer 2

The possibility that the failure of a large financial institutions could have a damaging effect on other financial institutions or the economy - the risk of the breakdown of the entire financial system. Knock on consequences cause significant damage to the economy.

Question 3

The balance sheet of a retail bank

Answer 3

A summary of its assets and liabilities.

Question 4

Balances at the bank of england

Answer 4

Money that banks have deposited with the BoE - a certain amount is required by law as a reserve

Question 5

Money at call

Answer 5

A type of short term, interest earning loan between banks that a borrower banks pays back immediately when the lender bank demands

Question 6

Money at short notice

Answer 6

Similar to money at call but with a 14 day period to pay it back rather than immediately

Question 7

Assets

Answer 7

-Cash
-Balances at the BoE
-Money at call and short notice
-Bills
-Investments

Question 8

Liabilities

Answer 8

-Share capital
-Reserves
-Long and short term borrowing
-Deposits from customers

Question 9

Made up money

Answer 9

Only 2.5% of M4 (money in circulation) is real cash money and the rest technically doesn’t exist

Question 10

Credit

Answer 10

Refers to an agreement where a borrower receives something of value with the promise to repay the lender at a later date, usually with interest. A banks ability to create credit is limited by its cash ratio, capital ratio and demand for credit.

Question 11

Loan

Answer 11

When a bank makes a loan it creates credit. It makes an advance, which is an asset, and a deposit, which is a liability. Credit isn’t a deposit but credit can lead to a deposit (and advance).

Question 12

Cash ratio

Answer 12

The proportion of a banks total deposits that are backed by cash.