Unit 1: The Role of Banks

Question 1

What 5 facets of financial intermediation are banks involved in?

Answer 1

• Business banking
• Trading in financial markets
• Stockbroking
• Insurance
• Funds management

Question 2

What are 5 `key roles of banks in society and the economy?

Answer 2

1. Financial intermediary
2. Financial products/services
3. Transfers and payments
4. Help economy
5. Expand money supply through deposit and loan transactions.

Question 3

Who are the 5 chief parties making up the financial system in Australia?

Answer 3

1. ADIs (banks, credit unions, building societies).
2. Insurance companies (life and general)
3. Financial markets (debt, equity, and derivative markets)
4. Superannuation funds
5. Payment systems (cash, cheques, EFTPOS, RTGS, and others.

Question 4

Why do we want a financial intermediary between savers and borrowers?

Answer 4

Efficient use of pooled resources

Question 5

What are 3 examples of ADIs?

Answer 5

1. Banks
2. Credit unions
3. Building Societies

Question 6

What is financial intermediation?

Answer 6

The process of pooling funds from savers and using these to provide loans to borrowers.

Question 7

Banks are intermediaries between people with extra money (savers) and people who want to borrow money (borrowers). Who could savers and borrowers be?

Answer 7

Savers and borrowers may be people or companies.

Question 8

Are savers considered as the bank’s creditors or debtors?

Answer 8

Savers are creditors - they provide money to the bank in the form of savings.

Question 9

Are creditors considered as the bank’s savers or borrowers?

Answer 9

Creditors are savers - they provide money to the bank in the form of savings

Question 10

Are borrowers considered as the bank’s creditors or debtors?

Answer 10

Borrowers are debtors - the bank will collect debts from borrowers.

Question 11

From the bank’s perspective, who are creditors and who are debtors?

Answer 11

Savers = creditors (provide credit)
Borrowers = debtors (owe debts)

Question 12

How do savers (bank’s creditors) make money?

Answer 12

They earn interest on the money they deposit.

Question 13

How do banks charge borrowers (bank’s debtors)?

Answer 13

Borrowers pay interest on money borrowed.

Question 14

How do banks make money between savers and borrowers?

Answer 14

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%).

Question 15

Give 4 examples of different banking activities:

Answer 15

1. Commercial and retail banking
2. Investment banking
3. Insurance
4. Funds management

Question 16

What are the 3 core functions of banks?

Answer 16

1. Accepting deposits
2. Granting loans
3. Acting as an agent for payments

Question 17

What are the 3 aspects of commercial banking?

Answer 17

1. Retail
2. Business
3. Wholesale

Question 18

What is retail banking?

Answer 18

Taking deposits from and lending to individuals

Question 19

What is business banking?

Answer 19

Taking deposits from and lending to small or medium sized businesses

Question 20

What is wholesale banking

Answer 20

Borrowing from and lending to large corporate clients, other financial institutions, public agencies, and governments.

Question 21

What are the 5 main functions of investment banking?

Answer 21

1. Debt capital markets
2. Equity capital markets
3. Underwriting deals
4. Private placements
5. Mergers and acquisitions

Question 22

What is an investment bank’s role in debt capital markets?

Answer 22

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.

Question 23

What is an investment bank’s role in underwriting details

Answer 23

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.

Question 24

What is an investment bank’s role in equity capital markets?

Answer 24

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.

Question 25

What are private placements?

Answer 25

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).

Question 26

What is an investment bank’s role in mergers and acquisitions?

Answer 26

 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.

Question 27

In underwriting deals, why might a lead bank work with a group of investment banks?

Answer 27

So that the risk is spread among them

Question 28

In underwriting deals, what is the underwriting spread?

Answer 28

The difference between the price of securities that an investment banks purchases from issuers compared to the price that they sell them to buyers.

Question 29

Why are conflicts of interest a key risk for investment banking?

Answer 29

Investment bankers can pass confidential information to their firm’s traders.

Question 30

How do investment banks address the risk of conflicts of itnerest?

Answer 30

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.