Module Fundamentals

Question 1

What are the Core Functions of a Bank? (DFM)

Answer 1

• Deposit-Taking.
• Full Intermediation.
• Maturity Transformation.

Maturity transformation can otherwise be understood as the transferring of funds, “from agents in surplus demanding short-term deposits to agents in deficit with long-term financing needs.”

IMF Working Paper, Banks’ Maturity Transformation: Risk, Reward, and Policy [5].

Question 2

What is Full Intermediation?

Answer 2

The practice of matching Lenders with surpluses to Borrowers with deficits.

Question 3

What is Maturity Transformation?

Answer 3

The practice of borrowing for shorter timeframes than one lends, i.e. borrowing short and lending long.

Resultant to this practice is the creation of a ‘maturity mismatch’, which is arguably the essential source of banks’ fragility under the Fractional Reserve Model

Question 4

What practice is yielded from combining Full Intermediation and Maturity Transformation?

Answer 4

The practice of transferring funds, “from agents in surplus demanding short-term deposits to agents in deficit with long-term financing needs.”

IMF Working Paper, Banks’ Maturity Transformation: Risk, Reward, and Policy [5].

Question 5

What are the Seven Types of Bank? (CCIRCUS)

Answer 5

• Clearing Bank.
• Commercial Bank.
• Investment Bank.
• Retail Bank.
• Challenger Bank.
• Universal Bank.
• Shadow Bank.

Question 6

What is a Retail Bank?

Answer 6

A bank that provides financial services to individual consumers rather than businesses.

Question 7

What is a Clearing Bank?

Answer 7

A bank that is member to its Central Bank’s payment clearning system and can thus effect payments between individuals or businesses.

Question 8

What is a Commercial Bank?

Answer 8

A bank that provides general financial services to both individuals and companies, broadly focusing on issues of naitonal and global commerce.

Question 9

What is an Investment Bank?

Answer 9

A bank that specializes in capital creation for large entites and proprietary trading.

Question 10

What is a Universal Bank?

Answer 10

A bank which provides the whole range of financial services to all types of customer.

Question 11

What is a Shadow Bank?

Answer 11

A non-bank entity which function like a bank, but is not regulated as such.

Question 12

What is a Challenger Bank?

Answer 12

A bank that has entered the market after the GFC.

Question 13

What is a Building Society?

Answer 13

A mutually-owned financial organization that focuses on deposit-taking and mortgage lending to individuals and households.

Question 14

What is a Credit Union?

Answer 14

A mutually-owned financial organization that focuses on providing savings and loans to the individuals and households.

Question 15

What are the Core Objectives of Banking Law and Regulation? (FMBC)

Answer 15

• Financial Crime Prevention.
• Market Conduct Regulation.
• Maintenance of Bank Stability.
• Consumer Protection.

Question 16

Who are the Regulatory Authorities in Banking?

Answer 16

• The Financial Conduct Authority.
• The Prudential Regulation Authority.

Question 17

Considering the implications of Full Intermediation and Maturity Transformation, what are the Preeminent Dangers faced by banks?

Answer 17

1. Liquidity risk, i.e. having to repay liabilities before assets have had sufficient time to mature.
2. Solvency risk, i.e. having borrowers default on their debt.

Question 18

What are the Private Sources of Law in Banking Regulation? (VIC)

Answer 18

1. Voluntary Codes.
2. Industry Customs.
3. Common Law.

Question 19

What are the Pubilc Law Sources of Banking Regulation? (PIES)

Answer 19

1. Primary Law.
2. International Standards of Practice.
3. EU Law.
4. Secondary Law.