Unit 1: The Role of Banks Flashcards
In this unit we will look at the role of banks in the financial system, the development of banking and the different types of financial services organisations that operate in Australia.
What 5 facets of financial intermediation are banks involved in?
- Business banking
- Trading in financial markets
- Stockbroking
- Insurance
- Funds management
What are 5 `key roles of banks in society and the economy?
- Financial intermediary
- Financial products/services
- Transfers and payments
- Help economy
- Expand money supply through deposit and loan transactions.
Who are the 5 chief parties making up the financial system in Australia?
- ADIs (banks, credit unions, building societies).
- Insurance companies (life and general)
- Financial markets (debt, equity, and derivative markets)
- Superannuation funds
- Payment systems (cash, cheques, EFTPOS, RTGS, and others.
Why do we want a financial intermediary between savers and borrowers?
Efficient use of pooled resources
What are 3 examples of ADIs?
- Banks
- Credit unions
- Building Societies
What is financial intermediation?
The process of pooling funds from savers and using these to provide loans to borrowers.
Banks are intermediaries between people with extra money (savers) and people who want to borrow money (borrowers). Who could savers and borrowers be?
Savers and borrowers may be people or companies.
Are savers considered as the bank’s creditors or debtors?
Savers are creditors - they provide money to the bank in the form of savings.
Are creditors considered as the bank’s savers or borrowers?
Creditors are savers - they provide money to the bank in the form of savings
Are borrowers considered as the bank’s creditors or debtors?
Borrowers are debtors - the bank will collect debts from borrowers.
From the bank’s perspective, who are creditors and who are debtors?
Savers = creditors (provide credit)
Borrowers = debtors (owe debts)
How do savers (bank’s creditors) make money?
They earn interest on the money they deposit.
How do banks charge borrowers (bank’s debtors)?
Borrowers pay interest on money borrowed.
How do banks make money between savers and borrowers?
They charge more to borrowers (debtors) then they pay to savers (creditors).
Example: if the bank lends money at 5% and pays 3% interest on deposits, it earns 2%).
Give 4 examples of different banking activities:
- Commercial and retail banking
- Investment banking
- Insurance
- Funds management
What are the 3 core functions of banks?
- Accepting deposits
- Granting loans
- Acting as an agent for payments
What are the 3 aspects of commercial banking?
- Retail
- Business
- Wholesale
What is retail banking?
Taking deposits from and lending to individuals
What is business banking?
Taking deposits from and lending to small or medium sized businesses
What is wholesale banking
Borrowing from and lending to large corporate clients, other financial institutions, public agencies, and governments.
What are the 5 main functions of investment banking?
- Debt capital markets
- Equity capital markets
- Underwriting deals
- Private placements
- Mergers and acquisitions
What is an investment bank’s role in debt capital markets?
Large companies or governments may issue bonds to raise capitals for large projects (e.g., building a factory or airport)
An investment bank would be involved in planning the bond issuance, pricing the bond issuance, working with the issuer to manage documentation, and helping selling bonds.
What is an investment bank’s role in underwriting details
Buying securities from issuers and selling them to public or institutional buyers.
They will buy at one price and add a mark up to sale price to generate profit and compensate for the risk they take.
What is an investment bank’s role in equity capital markets?
When companies raise funds by offering an IPO, investment banks:
* Put together prospectus explaining the terms of the offering and the risk it carries.
* Manage the issuance process
* Help price the offering.
What are private placements?
Customers place an offering of bonds with an institutional investor such as an insurance company or a retirement fund (often this can be a fast-track option due to lower regulatory requirements).
What is an investment bank’s role in mergers and acquisitions?
Investment banks offer advice on how the company should proceed with the acquisition, including the pricing of the offer. This involves valuing the targeted company.
Companies putting themselves up for sale also need investment banks to evaluate the asking price and offers.
In underwriting deals, why might a lead bank work with a group of investment banks?
So that the risk is spread among them
In underwriting deals, what is the underwriting spread?
The difference between the price of securities that an investment banks purchases from issuers compared to the price that they sell them to buyers.
Why are conflicts of interest a key risk for investment banking?
Investment bankers can pass confidential information to their firm’s traders.
How do investment banks address the risk of conflicts of itnerest?
By establishing information barriers (known as ‘Chinese Walls’) to prevent communication that could lead to conflicts of interest. They often separate people or divisions that have confidential non-public information.
