Monetary Financial Institutions

Question 1

What are monetary financial institutions?

Answer 1

They are central banks, credit institutions and money market funds.

Question 2

What is MFI’s purpose?

Answer 2

• to receive deposits
• to grant credits
• to make investments in securities

Question 3

What are credit institutions?

Answer 3

They are an enterprise who receives deposits and grants credits.

They are: banks, saving banks for housing, mortgage loan banks, credit unions

Question 4

What is the banking system?

Answer 4

It is the totality of the institutions authorized by law to perform banking operations.

It has 2 levels: the central bank and the commercial banks

Question 5

What are a bank’s functions?

Answer 5

• to act as payment agents by conducting checking making payments
• to borrow money by accepting funds deposited on current account and by issuing debt securities
• to lend money
• banks provide almost all payment services within the economy

Question 6

What is a commercial bank?

Answer 6

It performs all the operations allowed by the banking law.
It raises funds by collecting deposits
It makes loans to businesses and customers
It buys corporate bonds and government bonds

Question 7

What services does a commercial bank provide?

Answer 7

Deposits=liabilities
Loans=assets

• funds transfers
• portfolio management
• safekeeping of securities
• intermediation of interbank market
• guarantees and commitments
• investment advice
• financial planning

Question 8

What are the specialized credit institutions?

Answer 8

• saving banks
• investment banks: specialized in large financial operations
• foreign banks
• international banks
• banks for agriculture
• banks for foreign trade

Question 9

What are mortgage loan banks?

Answer 9

Specialized credit institutions who grant mortgage loans and issue mortgage bonds.

Except for deposit collection, mortgage banks can carry on some other activities provided it is for the granting of mortgage loans or issuing of mortgage bonds.

Question 10

What is a mortgage loan?

Answer 10

It is a loan granted for real estate investment.

Question 11

What are the saving banks for housing?

Answer 11

They are credit institutions specialised in long term financing for housing.

Question 12

What activities do saving banks for housing perform?

Answer 12

Collective saving and lending for housing
Anticipated financing for saving-lending contracts
Intermediary financing for s-l contracts
Granting of credits for housing
Management of 3rd parties’ risk portfolios for the purpose of house financing
Low risk investments
Funds transfers
Financial and banking consulting

Question 13

What is a credit union?

Answer 13

It is a member-owned financial cooperative, in which individuals pool their money to provide loans and services to other members.
They offer members more affordable rates than commercial banks, or higher return on savings.

Question 14

What are cooperative banks?

Answer 14

They are larger credit unions. They provide savings and loans to non-members as well as members. Unlike credit unions, they are regulated under banking legislation.

Question 15

What are the Romanian credit institutions?

Answer 15

• banks
• credit cooperative organizations
• saving banks for housing
• mortgage loan banks

Question 16

What are money market funds?

Answer 16

They are a type of mutual funds thay invest in low-risk securities such as government deposits, certificates of deposit and commercisl paper of companies. They have lower risk compared to mutual funds and provide a similar yield.

Question 17

What is a mutual fund?

Answer 17

It is a company that pools money from investors and it invests it in stocks, bonds and short term money market instruments.

Question 18

What are non-bank financial institutions?

Answer 18

They are financial institutions that provide banking products without meeting the legal definition of a bank.

They cannot take deposits from the public.

They finance themselves by taking loans from other financial institutions.

Question 19

What types of services do non-banking financial institutions perform?

Answer 19

• granting of loans
• financial leasing
• issuing of guarantees
• granting of loans in exchange for goods (pawnshops)
• issuing and managing credit cards

Question 20

What is bank liquidity?

Answer 20

It is the ability to meet its financial short term obligations.

Question 21

What is asset management banking?

Answer 21

It is a characteristic of small banks.
They receive funds from customet deposits
Their assets are mostly loans to small firms and households
Usually they have more deposits than loans
Excess funds are invested in liquid assets.
The holding of assets than can be turned easily into cash at need.

Question 22

What is liability management banking?

Answer 22

It is a characteristic of a large bank.

• insufficient deposits for self-funding
• deals with large companies, governments etc
• borrows funds from other major lenders in the form of short term liabilities
• riskier than asset management

Key to liability management: always being able to borrow.

Question 23

How to reduce liquidity risk?

Answer 23

• holding liquid assets
• dispersing withdrawal risk by diversification of funding sources
• analyze liquidity ratio
• holding minimum required reserves

Question 24

What is a bank run?

Answer 24

It is a great demand for cash by a bank’s depositors.

Deposit insurance is used to protect against a bank run.

Question 25

What are the bank risks?

Answer 25

Credit risk=the risk of loss because counterparties may be unwilling or unable to fulfill their contractual obligations

Market risk=risk of loss due to movements in the financial markets

Operational risk=risk of loss resulting from inadequate internal processes

Liquidity risk=risk of being unable to meet its financial obligation

Question 26

What is the efficient market hypothesis?

Answer 26

It argues that relevant information about the financial market is available to all borrowers and lenders at insignificant cost.

Question 27

What is the asymmetric information concept?

Answer 27

It argues that the financial market may be inefficient regarding the information available to customers.

Question 28

What is adverse selection?

Answer 28

It means that due to asymmetric information, the bank can choose to work with the wrong clients.

Question 29

What is the moral hazard?

Answer 29

It implies that one party to a contract may change its behavior after the contract is concluded in the detriment of the other parties.