Lec 3 lending stuff Flashcards
What are the two types of loan?
fixed rate and variable rate
Describe a fixed rate loan
fixed rate - with the rate unaffected by subsequent changes in interest rates. Many loans in this category are referred to as structured loans because the repayments are set in advance in a clear structure of fixed payments covering interest and capital over a set number of regular instalments e.g. the same amount each month for 36 months.
What are structured loans also known as?
fixed rate loans
Describe a variable rate/floating rate loan
with the rate varying in line with a set standard. The reference rate may be the bank’s own base rate which will change at intervals in line with rates in general, usually with changes in multiples of half a percent or a quarter of a percent. Other common reference rates are money market rates e.g. 3 month LIBOR (London InterBank Offered Rate), which fluctuates more frequently than a bank base rate, and therefore reflects rises or falls in general interest rates more quickly than the base rate set by a bank.
What are the 4 things considered during lending?
The borrowing- Many customers expect banks to look at lending simply in terms of who is borrowing.
The use of the money-If a bank has fairly close control of how money is to be used this may be a determining factor in agreeing to lend. e.g bank might agree to lend money for the purchase of a house where it would not advance a similar sum for any other purpose
Security
Customers often expect banks to lend just because adequate security is being offered, and there are some special cases where this is more or less true. In practice few lenders consider security as the predominant issue when lending because getting money back by selling security is uncertain, complicated and time-consuming.
The situation
How do banks reduce risk
insurance staff training Setting lending limits monitoring lending Spreading risk
Sources of Information
Internal sources Audited accounts - balance sheet income statement notes to the accounts audit report (qualified vs unqualified) statement of sources and application of funds commentary directors/chairman's report
Approaches to Credit Risk
Profitability - Risk and Return
Risk Management
What is credit risk?
possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations.
Methods which banks use to reduce risk include?
Insurance Staff Training Setting lending limits Monitoring Lending Spreading Risk
