Role of Banks Flashcards
Role of Banks (5 points)
- Acts as financial intermediary between savers and borrowers, which results in efficient use of pooled resources.
- Facilitates the creation of money by expanding the supply of money through deposit and loan transactions
- Creates financial products and services that benefits is customers
- develops mechanisms for transferring money and making payments
- Contributes to the development of the economy
Financial Intermediation
the process of pooling funds from savers and using these to provide loans to borrowers. The bank acts as a go between, or intermediary for those who have extra money and those who want to borrow,
Bank’s creditors/bank’s debtors
1.customers who deposit money are the bank’s creditors because the bank effectively borrowing their 2.money customer to whom the bank lends money are the bank’s debtors, because these customers owe the bank the money they have borrowed.
Commercial Banking - typical structure of
- Retail Banking
- Business Banking
- Wholesale Banking
- Retail banking - taking deposits from and lend to individuals through a range of delivery channels, typically branch
- Business banking - involves similar activities where customers are small-medium sized business enterprise
- borrowing from and lend to large corp clients, other financial institutions, public and governments.
Investment Banks
need to establish barriers known as ‘Chinese walls’ or information barriers, within the organisations to prevent exchanges or communication that could lead to conflicts of interest.
what is a syndicate ?
when a lead bank works with a group of investment banks, to underwrite an issue so that the risk is spread among them
Equity capital Markets -
where a company needs more money to grow and decides to raise the funds by undertaking IPO whereby it sells its shares to the public and wider pool of investors for the first time.
What are private placements?
where customers place an offering of bonds with an institutional investor such as insurance company or retirement fund.
what is underwriting spread in investment bank
Investment bank would buy the securities at one price and then add on a mark-up in the sale price and thereby generate a profit that compensates for the risk they take on.
whole sale debt market
is where institutional investors such as banks, financial institutions, mutual funds corps and foreign portfolio investors all participates in the trading of government securities and bonds.
bills of exchange and promissory notes
Bills of exchange and promissory notes are specialised instruments, being an unconditional order in writing between parties, where the bank purchases the bill amount from the borrower, deducting charges. On maturity the bills is presented to the borrower and full amount is collected.
Equipment leasing and hire purchase
Equipment leasing and hire purchase are common forms of borrowing for the financing of plant, machinery, and vehicles by individuals and businesses.. Taxation benefits are often linked to these forms of debt, making them popular funding options.
Trade finance
Trade Finance assists in facilitating import and export transactions including lending, letters of credit, accounts receivable financing, export credit and insurance,
what is transfer of risk ?
A risk management technique whereby risk of loss is transferred to another party through a contract or professional risk bearer
Annuity
a secure investment that pays an income throughout the determined period.
Investment growth bond
provides a tax effective income stream
what is the difference of lending money at rates higher than they pay for deposits.
the difference is the spread, or the net interest income.
when the net interest income is divided by the banks earning assets, is the net interest margin.
for households credit cards represents
the largest component of fee income, followed by housing loan fees and deposits
for business, loans represents
the largest component of fee income, followed by fees for merchant services
what is maturity transformation
is in practice by financial institutions of borrowing money on shorter timeframes than they lend out.
liquidity is determined by
a banks ability to meet all its anticipated expenses, such as funding loans or making payments on debt using only liquid assets.
Liquidity arise when a bank does not hold sufficient cash on their balance sheet to repay depositors and other creditors.
solvency is the ability
of a bank to meet its long term financial obligations. solvency is essential to staying in business as it indicates a company’s ability to continue operations into the foreseeable future.
Profitability is the ability
to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time, profitability ratios such as profit margin, return on assets (ROA) and return on equity (ROE) are popular metric used in financial analysis
APRA
the Australian prudential regulatory Authority makes and enforces the rules which govern the capital adequacy of Australian banks to ensure they meet their financial promises to depositors, policy holders and fund members within a stable efficient and competitive financial system.
LCR - Liquidity coverage ratio
requires ADI to hold sufficient liquid assets to meet 30 day net cash outflows projected under APRA - prescribed stress scenario.
NSFR Net stable funding ratio
required ADI to fund their assets with sufficient stable income to reduce funding risk over a one year horizon as prescribed by APRA
Primary Market
where new issues of shares or other forms of security are offered to the market for the first time
secondary market
where these securities are traded after their IPO
Interest rate or debt
trading includes short/long term securities such as government and corp bonds
Foreign exchange market
exchanging one currency for another, trades 24/7
commodities market
trading raw or primary products such as wheat, grain, cattle
Derivatives market
a contract whose value is derived from one or more underlying assets or instruments, eg. forward rate agreements on underlying exchange rate,
non-bank financial institutions (NBFI)
banks, NBFI and brokers normally act as intermediaries - price taker where else corps, government and individuals are price takers.
Financial Technology(FinTech)
is a broad term that describes new digital tech and other innovative developments
Bitcoin is
a decentralised digital currency that enables instant payments to anyone, anywhere in the world, using peer to peer technology to operate with no central authority,
Microeconomics
is the study of decisions that people and business make regarding the allocation of resources, prices of goods and services. Taking into account of supply/demand and other forces that may impact the price level in the economy. eg, regulations and taxes.
Macroeconomics
focuses on the issues that affect the economy as a whole and the interaction between economic growth in output and national income, employment and general level of prices. key indicators are
- unemployment rates
- GDP Gross domestic product
- inflation
- exports/imports
fiscal policy
is the Government spending and taxation that influences the economy. the annual budget outlines government revenue and spending activities
The reserve bank is responsible
for Australia’s Monetary policy which aims to maintain price stability, full employment and economic prosperity of the Australian people by managing inflation,
RBA target inflation rate at
2-3%
Moral Absolutism
people who think that there are universal rules that apply to everyone
Moral relativists
- different cultures or different periods in history had different moral views
- what is good depends on what a particular group of people approve of
- relativism considers the diversity of human societies and responds to different circumstances surrounding human acts
Metacognition
‘thinking about thinking’. It helps us to plan, assess and improve our thinking
Unwritten ethics
can be problematic especially when they are misunderstood
written ethics
guidelines can be problematic, especially when they are too broad or generalised in an attempt to cover too wide of a range situation
contracts of difference
an arrangement made in financial derivatives trading where differences in the settlement between the open and closing trade prices are cash settled
intuition
we think that we are rational people who work towards decisions using facts and detached reasons.
fast thinking
helps us to do tasks that seem automatic
slow thinking
is more deliberate and requires more effort
common tendency is to substitute fast thinking when we should be using slow thinking
we try to shortcut thinking and have trouble recognising new patterns or significant of information
expediency
unless we are aware of it, we can often make the easy decision rather than the best possible decision
framing
key element to good decision making is being able to correctly frame the problem we are solving. framing helps us remove the noise from an issue to allow us to see the problem as it is.
group conformity
human will do things to simply fit in with the group
not thinking
one of the biggest influences on how we make decisions is the temptation to simply do what has been done before and not question ‘this is what we normally do’ are the best courses of action.
fresh eyes
it’s useful to get fresh or different perspective on issues
encourage challenge
encourage and reward people for challenging the way things are currently done, promote constructive challenge
consequences
there must be tangible consequences for ethical failure, and people must know the consequences are material and not idle threats.
moral agent
being, who has the ability to discern right from wrong. a moral agent can make a considered judgement based on professional experience, thus reasonable for individual or group to be held accountable.
- we are causally responsible for the effects/lack of effects of our actions/inaction
- we intentionally brought about the effects or could be foreseen them
- the effects are morally important
ethical egoism
an action is morally right if the consequences of these actions are more favourable than unfavourable. what decision would be best for me ?
ethical altruism
an action is morally right if the consequences of that action are more favourable than unfavourable to everyone except the person doing the action. what decision would be best for everyone.
utilitarianism
is about maximising human well being. what decision would result in the greatest good for the maximum number of people.
five step process for ethical dilemmas
- recognise - recognise the ethical dilemma
- facts- look at the facts on the situation including what are the available options
- discuss - talk about your action
- implement your chosen action
- review - review the outcome
