Lecture1

Question 1

What is the role of the financial system?

Answer 1

• facilitate financial transactions through the creation, sale and transfer of financial assets

Question 2

List the 3 components of the financial system

Answer 2

• financial institutions
• financial markets
• financial instruments

Question 3

List different institutions in the financial system

Answer 3

• Reserve bank of australia (RBA)
• Authorised deposit-taking institutions (ADI)
  e. g. banks, building societies & credit cooperatives
• Financial corporations Act Institutions
  e. g. money market corporations, finance companies, general financiers, pastoral finance companies
• Life offices and superannuation companies

Question 4

How is a bank defined?

Answer 4

Banking Act 1959

Question 5

Who approves a firm if they used the word bank, banker or banking?

Answer 5

Australian Prudential Regulations Authority (APRA) must authorise these banks to be advertised

Question 6

Operational focus of the big four banks

Answer 6

• national focus

- offer complete corporate and retail banking services

Question 7

operational focus of smaller (regional) banks

Answer 7

• regional, mainly retails focus with operations across state borders
• large proportion of assets invested in residential housing loans

Question 8

Enhanced margins lead to

Answer 8

• higher performance, as reflected in their return on shareholders’ funds
• greater cost efficiences

Question 9

Without financial institutions what could happen?

Answer 9

• excess savings could only be held as cash, physical assets or invested in corporate securities
• the flow of funds is likely to be low
• little or no monitoring would occur
• risk of investments would increase

Question 10

why might households defer from direct investments in corporate securities?

Answer 10

• monitoring costs
• liquidity costs
• price risk

Question 11

who provides services for households to invest in the corporate sector?

Answer 11

financial institutions

Question 12

what are the two major functions of financial institutions

Answer 12

• brokerage function - economies of scale
• intermediation (asset-transformation) function:
• primary & secondary securities

Question 13

types of asset accounts in a bank balance sheet

Answer 13

liquid assets
loans
other assets

Question 14

types of liability accounts in a bank balance sheet

Answer 14

deposits
other liabilities
equity

Question 15

explain agency costs

Answer 15

costs relating to the risk that firm owners and managers use savers’ funds in a way that is not in the best interest of the savers

Question 16

what does agglomeration of funds resolve?

Answer 16

• greater incentive for information collection and monitoring activities (free-rider problem and delegated monitor)
• development of new secondary securities to more effectively monitor

Question 17

what do FI’s provide to household savers that is highly liquid?

Answer 17

secondary claims

Question 18

why must banks hold a variety of liquid products?

Answer 18

to diversify portfolio risk

e.g. bank can offer highly liquid demand deposits while investing in risky illiquid loans

Question 19

what is maturity intermediation?

Answer 19

• funding long term borrowings with short term funds

- this causes a mismatch in assets and liabilities

Question 20

how can you measure shareholders wealth in monetary value

Answer 20

• share prices

- market capitalisation - number of shares issued x the share price

Question 21

how can you measure shareholders wealth in non-monetary value?

Answer 21

• mathematical model

- present value of expected future CFs discounted at investors’ required rate of return

Question 22

what can influence shareholder value?

Answer 22

• current and expected future profit levels
• timing of the profits
• risk and risk appetite of investors (this affects investors’ required rate of return)