Lecture 4- AIDs Flashcards
What is the net interest rate margin?
Difference between the average interest rate earned and the average interest rate paid by ADIs on their funds
What are the five types of AIDs in Australia
- Australian- owned banks
- Foreign subsidiary banks (retail and wholesale)
- Branches of foreign banks (wholesale- minimum deposit of $250k)
- Building societies (retail banking services, thrifts)
- Credit unions (Thrifts, provide retail banking services)
What are the main sources of funding for ADIs?
1) Retail deposits
2) Domestic financial markets:
- Money market: Negotiable certificate of deposit
- Bond market: unsecured bonds
3) International financial markets:
- Medium term bonds
- Long term bonds: covered bonds
4) Equity
5) Securitisation
How did the sources of funding from AIDs change as a result of the GFC?
Decrease in funding from financial markets and more domestic retail deposits
What are the benefits of retail deposits?
1) They are safe- deposits of up to $250k guaranteed by government
2) They are liquid
3) They pay interest
What are the three types of deposit accounts and what are their features?
1) “At call” account= used for day to day transactions, no/ limited interest rate, only small proportion of deposits held in these accounts
2) Savings account= They enable depositors to store funds and to earn interest. Will earn lower IR, but offer payment services through cards
3) Fixed- term accounts: Pay a fixed interest for a fixed term- however return will be forfeited if accounts are drawn
What is the main type of instrument offered by AIDs in the short term domestic wholesale market?
NCD: Negotiable Certificate of Deposit
What is an NCD
Negotiable certificate of deposit
- a wholesale deposit that has a fixed term and interest rate
- Cannot be drawn before maturity, but can be traded in market (liquidity provided)
How is the FV of an NCD calculated?
F= P(1+rate x time)
How do we calculate the value of a NCD when sold?
P= FV
(1+(rate x period))
where the period is the time remaining until maturity
What are the two types of overseas wholesale funds?
1) Unsecured medium term bonds and
2) Long term covered bonds- where collateralised by bank assets
What is a key feature of internationally wholesale funds?
They are denominated in their local currency- to reduce risk when converting amounts
What do ADIs mostly use funds for?
Providing loans and securities
How are interest rates determined for personal and business loans
Personal- variable rates
Business- prime rate + credit risk
What are the purposes of ADIs issuing securities
- Liquidity- to sell quickly for a fair price if money is needed to make loans or if there is a significant withdraw
- Secure low risk interest earning investments
- Trade in markets
What types of home loans are given to investors
Interest only loans
Are interest rates for houses standard?
Yes- they are standardised products- they have standard features and interest rates for ALL borrowers- (usually standard variable rate) point of difference is the amount that is being borrowed
What are the requirements for loans to ensure low loan losses
- Secured by a mortgage
- No more than 80% of value
- Made to borrowers with capacity to repay
- Documentary evidence to support claims
What is a mortgage?
The right for a lender to take position of and sell an asset if a borrower defaults on payments
- Helps lenders to avoid adverse selection and shifts risk from lender to borrower
- For borrowers- reduces the interest rate
What is the LVR?
Loan to valuation ratio- in Australia, for ever $1 of property, the maximum that will be lent is $0.8
What are the other types of loans to households?
1) Secured loans
- personal loans- for car loan, usually with fixed interest rate
- overdraft- overdrawn an account to a certain limit
- margin loans
2) Unsecured
- Credit card
- Some personal
What are the nature of loans made to businesses?
Small= Generally standardised and usually secured
Large business= determined case by case- including loan structure and security provisions
What is bill acceptance?
A promise by a bank to redeem a commercial bill if the borrower defaults on this payment
Why do people want bank accepted bills?
Acceptance improves the credit standard so it can be traded in the money market (as they are unsecured)
Borrowers pay an acceptance fee (which has fallen since the BFC)
What does ‘bps’ means?
Basis percentage point.
100 bps= 1%
What is a bill facility?
An agreement by the acceptor (bank) to rollover bills on their maturity date for an agreed period
What are the payments made during the term of the bill facility?
When rolling over: the difference between
The FV of the last facility and the PV of the new facility (which will always be lower as the bills are discounted)
What does the securitisation of housing loans involve?
Involves ADI assigning cash flows from illiquid assets (home loans) to securities (mortgage- backed securities) which are sold to investors
Who is the securitisation conduct by?
Special purpose vehicles- who issue mortgage backed securities- loans become that of the investors in the MBS, and they receive borrower repayments
What is mortgage originators?
Non- bank lenders who offer a range housing of loans with funds that are raised through the issue of mortgage- backed securities
What is the role of the originator?
To originate or commence the loan (find the person wanting to borrowing the funds)
Who issues MBS funds?
Invesmtnet bank and the borrower’s repayments less fees flow through to the investors in the MBSs
What is the difference between originators and securitisation?
Main difference is securitisation- loans already exist- originators- commencement of loans via the funds that have been raised
