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.
