Week 1 Flashcards
What is the objective of a bank manager in relation to risk?
To maximise shareholders’ profits while controlling risk and preventing the institution from becoming vulnerable or defaulting
What are some of the main risks faced by banks?
Interest rate risk, market risk, credit risk, and liquidity risk
What are the three dimensions of mismatching between assets and liabilities that create bank risk?
Maturity, liquidity and credit risk
What is interest rate risk?
Risk resulting from mismatching in asset & liability maturities
What is refinancing risk?
The risk that the cost of rolling over or re-borrowing will rise above the returns on asset investments. It occurs when the maturity of assets is greater than liabilities and interest rates increase
What is reinvestment risk?
The risk the returns on assets to be reinvested will fall below the costs of borrowed funds. It occurs when the maturity of liabilities is greater than assets and interest rates go down
What creates liquidity risk?
The mismatching of duration between assets and liabilities
What is credit risk?
Risk that promised cash flows on financial claims held by FIs are not paid in full or only partially
What is sovereign risk?
Risk that repayments from foreign borrowers may be interrupted because of interference from a foreign government
What is market risk?
Risk incurred in the trading of assets and liabilities due to changes in interest rate, exchange rate, and other asset prices
What is foreign exchange risk?
Risk that exchange rate changes can adversely affect the value of an FI’s assets and liabilities denominated in a foreign currency
What is off-balance-sheet (OBS) risk?
Risk incurred by a FI due to activities related to contingent assets and liabilities
What is insolvency risk?
Risk of insufficient capital to offset a sudden decline in the value of assets relative to liabilities
What should risk management achieve?
Creating shareholder value
What is international banking?
It refers to the system of financial services and activities that involve cross-border transactions and banking operations conducted by banks for individuals, businesses, and governments in different countries. It comprises cross-border business in any currency and local business in foreign currencies.
What are the three market segments of international banking?
- Denominated in a currency that is foreign to the borrower
- Denominated in a currency that is foreign to the lender
- Denominated in a currency that is foreign to both the borrower and the lender; this is the offshore market.
What is multinational banking?
When a bank in country A lends to a borrower in country B via a local bank affiliate (a branch or a subsidiary) in country B.
What is cross-border banking?
When a bank in country A lends directly to a borrower in country B.
Name the key players in international banking.
Commercial banks, investment banks, universal banks, central banks, multilateral development banks (MDBs), and multilateral organisations.
What role do commercial banks play in international banking?
Facilitate cross-border transactions, support multinational corporations, provide trade finance and foreign exchange services, provide cross-border lending, and offer wealth management for global clients.
What is the role of investment banks in international banking?
Capital raising through international equity and debt markets, cross-border advisory (global market entry, investment opportunities), cross-border Mergers and Acquisitions (M&A) advisory, underwriting services for international clients, facilitating FDis, and providing global research insights.
What is the role of universal banks in international banking?
Provide a broad spectrum of financial services, combining commercial and investment banking under one roof. They facilitate large scale international transactions, including interbank lending, syndicated loans and trade financing.
What are the key functions of central banks in international banking?
Maintain monetary and financial stability, manage foreign exchange reserves, facilitate cross-border payments and settlement, promote currency stability, promote international cooperation, and support global liquidity.
What is the role of Multilateral Development Banks (MDBs)?
MDBs foster economic and social progress, including by supporting international trade. They provide guarantees to mitigate the risks of conducting trade operations in particular countries, particularly in relation to SMEs.
What is the role of Multilateral organisations?
They work to stabilise global financial systems by monitoring risks and implementing policies to prevent crises. They support countries in managing exchange rates, monetary policy, and balance-of-payments challenges.
