Retail Banking Flashcards
What is the difference between a retail bank and a wholesale bank?
- Retail banks operate large branch networks and are prepared to deal in small and large sums of money
- Wholesale banks usually do not operate branch networks and deal in large sums of money often raised in London’s money markets
What is the difference between a primary and a secondary bank?
- Primary banks operate the payments mechanism system within the country and offer a system for transferring money by means of current accounts (money transmission accounts)
- Secondary banks do not form part of the payments mechanism or take part in the clearing system
What is a clearing bank?
- Primary banks that operate the payments mechanism
- Vary in size but to some extent they all enjoy economies of scale
- The branch network, internet and contact centres make clearing banks accessible to a wide range of customers
- Able to offer a comprehensive direct banking service
- Risk is spread over a range of sectors of the economy and country
- Larger banks employ experts and have specialist departments and services and can afford to outsource some operations
- Larger banks require proportionally lower levels of liquid assets as risk of unexpected withdrawels is spread more widely
- Larger banks can make fullest use of technology
What was the Independent Commission on Banking (ICB)?
In June 2010, the Chancellor of the Exchequer announced the creation of the ICB, chaired by Sir John Vickers.
The ICB was to consider structural and non-structural reforms to the UK banking sector to promote banking stability and competition.
What did the the ICB suggest with regards to stability?
Making the bankning system safer requires:
- Making banks more able to absorb losses - get them to hold more capital
- Making it easier and less costly to sort out banks that get into trouble - split retail from wholesale and investment banking and thereby isolating the taxpayer from the risks of wholesale and investment banking.
- Curbing incentives for excessive risk taking
What did the the ICB suggest with regards to competition?
The ICB stated that UK retail banks need to be more competitive and that European Comissions’ branch sell off requirements of Lloyds and RBS were insufficient. The ICB stated that:
- The number of Lloyds branch sell-offs could be greater to create a more effective challenger to the incumbent banks
- The ability of customers to switch banks could be improved
What are the major functions of UK retail/clearing banks?
- Note issue
- Accept deposits
- Agents for payments
- Grant loans
- Investment management
- Insurance
- Income tax advice
- Trustee and executorships
- Keeping companies’ share registers
- Foreign business
What is the conflict between liquidity and profitability?
- Liquidity: holding enough cash on hand to meet the immediate demands of customers. Liquid assets typically offer a poor return
- Profitability: banks are companies operated for profit on behalf of the shareholders. The more the banks lend, the more interest and profits they stand to make
The asset structure of a bank is a compromise between the desire for profit and the need for liquidity and success depends on finding the right balance.
Give a brief history of the central bank in the UK.
In the UK, the central bank is the Bank of England:
-
Established by Royal Charter 1694 in return for loaning £ 1.2mil to the government at 8%, this allowed it to:
- Accept deposits & make loans
- Discount bills
- Issue notes
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The Bank Charter Act 1844
- Aimed to control the money supply by regulating note issue
- Acheived this by placing a limit on the BoEs ability to issue notes unbacked by gold and by phasing out private bank note issues in England and Wales
- During the 19th century the BoE took on the role lender of last resort
- In 1964 the BoE was nationalised
What is the purpose of the BoE?
BoE: “As the central bank to the UK, we are comitted to promoting the public good by maintaining a stable and efficient monetary framework as our contribution to a healthy economy”
This is realised by:
- Maintaining the integrity and value of the currency
- Maintaining the stability of the financial system, both domestic and international
- Seeking to ensure the effectiveness of the UK financial services
What are the jobs of the BoE?
- The government’s banker: the governments account with the BOE is called the exchequer account. The BOE can provide short term finance to the government by “ways and means”
- The banker’s bank: for clearing banks – allows them to settle payments between each other
- issuer of notes
- Lender of last resort
- International relations: cooperates with worlds’ principle central banks e.g US Federal reserve Board and the European Central Bank. Takes part in International Monetary Fund, Bank for International Settlements and the World Bank
- Manages the Exchange Equalisation Account (EEA): selling and buying other currency (dollars, euros and yen) to maintain the pound’s exchange rate
- Private banking
- Regulatory role
What were the main provision of the BoE Act 1998?
- The statutory monetary policy objectives of the bank are to maintain price stability and support the governments economic policy
- Established a Monetary Policy Committee which has responsibility for formulating monetary policy within the bank
- Put in place a new accountability framework for the bank based on its statutory duties. It also created the need for greater transparency in the bank’s operations
- Transfer of the bank’s supervision of UK banks to the FSA (now FCA).
Name other providers of financial services.
- Building Societies
- National Savings and Investments
- Credit Unions
- Merchant and Investment Banks
Why have the number of BSocs declined since the 20th Century?
- Closure of some small permanent BSocs
- The process of amalgamation by mergers
- The BSoc Act 1986 gave BSocs the right to convert from mutual to company status and reclassify itself as a bank/mortgage bank
How did the BSoc Acts 1986 & 1997 change the BSocs’ services?
Raising funds from personal savers to lend out for house purchase was no longer the sole purpose of a BSoc, but the principle purpose
They offered new services such as money transmission, house puchase services, non-mortgage lending etc.
