The Banking Industry

Question 1

What is the difference between Banking and Banks?

Answer 1

Banking refers to the process and business of providing banking services

Bank is a company that specialises in the process and business of providing banking services

Question 2

Types of Financial Intermediaries

Answer 2

Banks

• Fee generating
• Take deposits; give loans

Investment institutions

• invest on behalf of investors e.g life assurance companies, pension funds
• invest in wide range of financial assets e.g debt securities, equity, foreign currency, real estate

Question 3

Banking Business

Answer 3

Basic Banking - take deposits, making loans, payment mechanisms
Corporate banking - Cash management, guarantees, overseas trade
Investment banking - financial advisory, syndicate lending, M&A advice, risk management

Universal banks
Commercial Banks
Investment Banks

Retail banking - individuals, small business, large number of transaction
Wholesale banking - small number of transaction, wealthy individuals M-Large businesses

Question 4

Taking Deposits

Answer 4

Main source of funds for banks
Deposits are financial liabilities for banks

SIGHT deposit

• Kept in current account
• depositor can withdraw at short notice, without penalty
• Low or zero interest

TIME deposit

• Savings account
• Penalty for early withdrawal
• Rarely have cheque facilitators
• carries high interest

Question 5

Lending

Answer 5

Lending to households

• consumer loans
• mortgages
• credit card

Lending to businesses 
Reasons why business prefer bank loans 
- Low admin and legal fees 
- fast 
- flexible 
- available to smaller companies 

Assets = total liabilities +capital

Question 6

Mismatched liquidity on a bank’s balance sheet

Answer 6

Bank Run

• Occurs when a large number of depositors withdraw simultaneously
• Can cause chain reaction around banking sector
• Makes the bank less liquid

Question 7

Liquidity management

Answer 7

Banks have liquidity risk - mismatch of liquidity (various terms to maturity)
How to address liquidity risk?
- unlikely that most depositors will withdraw at the same time
- required cash reserve (% of deposits)

Take new deposits
Raise new capital
Borrow from another bank or CB