Lecture 3 Flashcards
What are the three types of Fi’s
- Authorised deposit taking instiitutions (ADI’s)
- Non ADI’s FI’s
- Insures and hedge fund manages
What are the four types of deposit taking institutions
Wholesale banking
Retail banking
Building Society
Mutual Society
Describe the functions and how a credit society operates
- It was traditionally set up where membership was based on a common bond between the members. E.G Teachers, uni credit,
Ethos of self help
Describe a building soceity
A corporation that is owned by its members, pays deposit on interests and help members buy their own home.
Set up for the benefit of its members
What four types of assets in the balance sheet of banks
1, Cash and liquid assets that are due from other financials institutions- Short term loans to other Banks
- Trading ad investment securities — Bonds
- Loans ,advances and other receivables
- Fixed assets and all types of assets — Branches, Atm
What are the five types of liabilities on the balance sheet of the banks
- Deposits and other borrowing from the banks perspective
On demand and short term deposits Money market borrowing current account savings account investment saving account term deposits certificate of deposits
- Debt issues — issue of bonds
- Bills payable
- Provision and their liabilities
- Loan capital
What is the equation for shareholder equities. Give 4 few examples
Assets - Liabilities = Shareholder Equities
Preference shares
Ordinary shares
Retained earnings
Reserves
What are the two broad categories that occur as a result of OFF Balance Sheet Activities
Give examples in the first category
- Potential liabilities or assets – Contingent assets or liabilities but not assets or liabilities currently
- market related transaction - interest rate swap, futures, options
- Direct credit swaps - Bank guarantees payment
- letters of credit - if consumer can not pay banks will pay
- Commitments - underwriting facilities
- OBS activites that create revenue or expenses but not shown as A&L in the balance sheet
- Explain ROA
- What is the standard equation for ROA
- What is the another equation for ROA show that they equal
How much profit you can generate from assets
ROA = Operating profit after tax / Total assets
ROA= Profit margin x Asset Utilization yield
Profit margin = Operating profit / Revenue
Asset Utilization yeild = Revenue / total assets
Explain ROE
What is the standard equation for ROE
What is the second equation for ROE, show that they equal
Return on equity profit that is generated on your equity
ROE = Operating profit after tax / Equity
ROE = ROA x Leverage multiplier
Leverage Multiplier = Total assets / Equity
Explain Liquidity Risk
What is the Liquidity ratios
FI’s can not fund Financial needs of its liability as they come due
Liquidity ratio = Short term security / Deposits
Explain Interest rate risks the ratio and how banks are affected
It is the impact of changes in interest rate on the borrowing and lending
A change in the interest can have either a positive or negative effect on the bank
Interest rate sensitivity ratios = interest sensitive assets / interest sensitive liabilities
If > 1 positive effect through an increase in interest rates and vice versa.
Explain credit risk and how banks try to mitigate these risks.
The risk that borrowers will default, the higher the credit risk of the borrower the higher the interest rate bank will charge. To minimize credit risks banks can also lend across a range of borrowers.
Explain capital risks and who are affected from this risk
The risk that the value of assets may decline.
Putting at risk payments to depositors. Indicate how much assets value decline before providers of capital are affected.
