Phillip's section Flashcards
Why are politicians so keen to nationalise banking?
1) Banks play incredibly important function in economy
– payments and allocation of new money.
2) The stability of the system isalso paramount for continued lending
3) The banking industry is rife with conflicts
of interest
What is money?
Anything widely accepted as payment, particularly by the government as payment of
tax, is, to all intents and purpose, money
What does money comprise of?
1) Banknotes and coin
2) Central bank Reserves
3) Commercial bank money/deposits
What does central bank money comprise of?
1) Banknotes and coin
2) Central bank Reserves
Which money is actually circulating the economy?
Banknotes and coin
What is a legal tender?
Legal tender is anything recognized by law as a means to settle a public or private debt or
meet a financial obligation, including tax payments, contracts, and legal fines or damages
What is the the primary determinant of how much commercial banks lend?
the primary determinant of how much they lend is the confidence that the loan will be repaid and confidence in the liquidity and solvency of other banks and the system as a whole.
What is the name of the stone money used in the Yap Island group?
Rai stones
What is the name of the benchmark interest rate set by the SARB?
Repo rate
Is the repo rate an interest rate paid on deposits at the SARB or an interest rate paid on loans from the SARB or both?
It is both
Explain what the SARB sees as a well-functioning monetary policy transmission mechanism?
The SARB wants their repo interest rate to be the benchmark interest rate in the money market, i.e.
when they adjust the repo rate they want all other interest rates to adjust in lock step.
What are the disadvantages of CBDC (i..e central bank digital currency)
-perhaps more costly than physical cash
- Privacy problems
- Under complete control of the central bank
What do depositors want from banks?
They want to know that:
1) The bank has got enough cash to pay them back their
deposit when they want it back.
2) The bank is only giving loans to people that will pay back.
3) If an unforeseen event hits the bank, then the bank will
not fail
What agency problem may exist in banking?
the agency problem is between the bank and the depositors
Why is there an agency problem between the bank and the depositors?
Managers know more about bank and might have
wrong incentives due to performance contracts, resulting in them not acting in the best interest of the bank and depositors
What is the formula for ROE in Phillip’s section?
ROE = leverage x profitability
= assets/equity x net profit/assets
thus = leverage x ROA
What is the Conflict over ROE for bank managers and depossitors?
The conflict of interest between managers and depositors is that managers may have performance contracts. Therefore, to ensure they get bonuses, they may want the banks performance to look good. Therefore, they would like > leverage to make the ROE higher. whereas depositors would like lower leverage even if it meant a lower ROE
Do S.A banks charge a fixed rate or do they charge a variable rate? and what is that rate called?
SA banks charge a variable rate called the prime interest rate. The prime rate is 3.5% higher than repo
What is the difference between Basel I capital coverage calculation and the Basel II and Basell III calculation?
Basel 1 only took into
account whether capital (Tier 1 and Tier 2) could cover CR AND MR by >
8%
However, Basel II took into account whether
capital could cover improved
CR, MR AND OR by > 8%
Basell 3 introduced new K to the calculation i.e CET1 AND it introduced that the total capital should cover the risks by > 8% AND surcharges
Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:
The central bank’s benchmark interest rate is increased?
It would increase because all banks in the system will increase their loan rates
Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:
Loan transaction volumes at Bank X decrease significantly?
It would increase because Cost per loan will increase and thus a higher return per loan is required
Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:
The income tax rate in the country that Bank X operates in decreases.
It would decrease because Less tax is to be paid, thus, less expenses, thus, less return is needed
Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:
The regulator determines that Bank X should keep more cash on hand.
It would increase because Cash earns no return and other assets need to return more as a result
Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:
Operational costs at Bank X gets slightly out of control and increases beyond the increase
justified by transaction volumes
It would increase because Return needs to be higher to pay the higher costs
Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:
Bank X improves its risk monitoring systems as a result the amount of risk-weighted assets
(RWAs) decreases.
It would decrease because Less capital is required, thus leverage increase, thus lower interest rate is needed
Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:
The country that Bank X operates in improves its property ownership records at the deeds
office and title becomes surer
It would decrease because Credit risk decreases as property rights would now be more secure
Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:
The regulator prohibits Bank X from paying a dividend for a few years.
It would increase because Capital accumulates, leverage decreases and higher return is needed to maintain ROE.
How will decreasing interest rates on loans lead to an increase in the supply of houses?
Decreased interest rates mean that more people can afford to pay back a loan, all else equal, and
thus with more loans more houses can be built
Please explain why regulators put so much emphasis on the minimum capital that a bank should
hold?
Insolvency is the ultimate form of bank failure and capital puts a buffer between the bank and
insolvency. Regulators do not want banks to fail due to the extreme public cost involved. More
capital means a larger buffer and less chance of insolvency. Capital is there to protect a bank
against unforeseen events
How should a bank protect itself against known risks?
By charging for it.
What is the cash reserve ratio?
It is cash resources (i.e cash assets e.g C&C equiv.s & mandatory deposits in central bank) / Total liabilities
What is CET1 in Philip’s section?
Includes Share capital, surpluses, retained
earnings including most reserves such as OCI.
Excludes Pref. shares. Deductions like DT adjustments, intangible assets and investment in other banks.
What are duties of a bank regulator?
- Appointment of executive directors are signed
off on by regulator. - Regulator can restrict payment of dividends.
- Regulators put constraints on capital structure.
- Regulator oversees credit quality of loans.
- Regulator requires daily/monthly reports.
- Shareholders in any case own shares, not
companies.
What is the main method of bank regulation?
Ensuring adequate capital is main method of regulation.
Basel 3 now also brought in minimum liquidity
requirements and leverage ratio
What is the repo rate?
It is the is SARB’s “policy instrument and It is the lowest short term risk-free interest rate in the economy.
Why does the SARB want the repo rate to be the benchmark interest rate in the economy?
So that when it changes then all other rates should also change
What adjustment must the SARB do to the repo rate when inflation is too low?
if inflation is too low, then reduce repo rate, all other rates drop, including lending rates, and more money is spent, increasing demand, increasing inflation
What adjustment must the SARB do to the repo rate when inflation is too high?
if inflation is too high, then increase repo rate, all other rates increase, including lending rates, and less money is spent, decreasing demand, decreasing inflation.
List the 4 interest rates in the economy and list them in their order
1) Repo rate
2) Interbank rate
3) Bond rates
4) Loan rates
What is a repurchase agreement?
It is a form of short-term
borrowing for banks, secured by government securities.
The banks “sell” the securities to the SARB in
exchange for Reserves and agree to “buy” the
securities back at a slightly higher price in a few days
time. The SARB’s “profit” on the transaction is the repo
interest rate
What is the repurchase agreement called For the party selling the security and agreeing to repurchase it in the future?
it is a repo;
What is the repurchase agreement called For the party on the other end of the transaction (SARB), buying the security and agreeing to sell in the future?
It is a reverse repo
How is the SARB protected against credit and market risks in a repurchase agreement?
“In order to protect the SARB against credit and market
risks, commercial banks have to provide the SARB with Securities with an adjusted market value (“haircut valuation”).
