Week 1-4 Flashcards
-Institutions that match up savers and borrowers help ensure that economies function smoothly
-Are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money).
Bank
The amount banks pay for deposits and the income they receive on their loans
Interest
can be individuals and households, financial and non financial firms, or national and local governments.
Depositors and Borrowers
Who lend money to the bank
Depositors
(to whom the bank lends money).
Borrowers
converting short-term liabilities (deposits) to long-term assets (loans).
maturity transformation
Banks can also package the loans they have on their books into a security and sell this to the market to obtain funds they can
re lend
Liquidity transformation and
Securitization
- A bank’s most important role
matching up creditors and borrowers
They do this because they must hold on reserve, and not lend out, some portion of their deposits—either in cash or in securities that can be quickly converted to cash.
*Banks also create money
a government institution that is at the center of a country’s monetary and banking system. Banks keep those required reserves on deposit with central banks, such as the U.S. Federal Reserve, the Bank of Japan, and the European Central Bank.
central bank
also lend and recycle excess money within the financial system and create, distribute, and trade securities.
* Banks have several ways of making money besides pocketing the difference (or spread) between the interests-they pay on deposits and borrowed money and the interest they collect from borrowers or securities they hold.
They can earn money
From income from securities they trade; and fees for customer services, such as checking accounts, financial and investment banking, loan servicing, and the origination, distribution, and sale of other financial products, such as insurance and mutual funds
Banks earn on average between 1 and 2 percent of their assets (loans and securities
bank’s return on assets
also play a central role in the transmission of
monetary policy, one of the government’s most important tools for achieving economic growth without inflation.
Bank
A sharp increase in bank reserves or liquid assets for any reason can lead
- by reducing the amount of money banks have to lend, which can lead to higher borrowing costs as customers pay more for scarcer bank funds.
- can hurt economic growth.
credit crunch
- Banks’ vulnerabilities arise primarily from three sources:
-a high proportion of short-term funding
-Most deposits are used to finance longer-term loans, which are hard to convert into cash quickly;
-withdrawals, providing basic checking and saving accounts
gear their services toward corporate clients. They provide services such as merger and acquisition activity and underwriting among other investment services
Investment banks
are hindering their financial lives from enjoying services that lead to financial well- being. Many must resort to services outside the banking system to cash checks or borrow loans and incur higher transaction fees and interest unnecessarily.
Unbanked or underbanked
some of the reasons why banking tops the list of pillars required in financial literacy.
- Safeguard your cash
- Manage your finances – record keeping and budgeting
- Receive your paycheck quickly using direct deposit
- Facilitate financial transactions
- Insure your liquid assets
- Use debit and credit card services
- Earn interest
- Borrow loans
- is a specific bank account against which checks can be drawn by the account depositor
Checking account
used to pay bills, set up an automatic transfer, or use a debit card. Depending on each financial institution, checking accounts can provide features and restrictions.
Transactional account
is a basic type of bank account that allows you to deposit money, keep it safe, transfer money to checking account, and/or withdraw funds, all while earning interest.
A saving account
is a saving certificate with a fixed maturity date and specified fixed interest rate that can be issued in any denomination aside from minimum investment requirements
Certificate of Deposit
A CD restricts access to the funds until
the maturity date of the investment
account is an interest-bearing account, provides the account holder with limited check writing ability.
offering benefits of?
Money market
combined saving and checking account
is a method of banking in which transactions are conducted electronically using a device such as a computer or a cell phone.
Online banking
allows your employer to deposit your earnings electronically into your bank account which allows you to get to your money faster than having to deposit a paper check and wait for it to clear before you can access available funds
Payroll direct deposit
is used to determine where to route funds to or from for each financial institution.
Routing number
is the assigned number to each customer to indicate ownership.
Account number
takes money from your bank account (money that you have)
A debit card
is borrowed money charged to your account (money you must pay back plus applicable interest).
Credit Card
- The difference between a debit card and a credit card
from which source the cards pull the money.
– (debits) you give your permission to the company to take the payments from your bank account.
Automatic Bill Payment
(recurring) you give permission to your bank or credit union to send the payments to the company.
Bill-pay
Automated teller machine (ATM)
an electronic banking outlet that allows customers to complete basic transactions without the aid of a branch representative or teller
are financial institutions who offer financial services such as accepting deposits, lending money, offering debit and credit cards, certificates of deposit, and many other financial services.
Banks & Credit Unions
function to generate profits for their shareholders. The need to make profit results in higher fees, but lower returns to consumers.
Banks
operate as not-for-profit organizations designed to serve their members who are also de facto owners
Credit Unions
Characteristics
Banks
1.Can have multiple locations (national and international)
2. Eligibility to join has little restrictions to none
3. Convenience and numerous ATM machines
4. Sophisticated electronic banking technology
5. Wide range of choices in services and products
6. Profit-driven to satisfy shareholders
7. They serve customers
Characteristics
Credit Union
1.Have limited locations by region or state
2.Eligibility to join is restricted to individuals affiliated with certain groups
3.Limited ATM locations
4.Limited online banking services, depending on size
5.Limited range of choices in services and products, depending on size
6.not-for-profit driven to satisfy members/owners
7.They serve members/ de facto owners
is a practice used by financial institutions to mitigate financial risks resulting from a mismatch of assets and liabilities
Asset and liability management (ALM)
combination of risk management and financial planning
-ALM strategies
are often used by organizations to manage long-term risks that can arise due to changing circumstances.
financial planning
financial institutions can achieve greater efficiency and profitability
while also reducing risk.
By strategically matching of assets and liabilities,
financial institutions can achieve greater efficiency and profitability
while also reducing risk.
By strategically matching of assets and liabilities,
Most often, the mismatches are a result of changes to the
financial landscape, such as?
changing interest rates or liquidity
requirements.
is a coordinated process that uses frameworks to
oversee an organization’s entire balance sheet.
ALM (Asset Liabilities Management)
focus on asset management and risk mitigation on a macro level,
addressing areas such as market, liquidity , and credit risks.
ALM practices
is an ongoing process that continuously monitors risks to ensure that an organization is within its risk tolerance and adhering to regulatory
frameworks.
ALM
benefits of implementing ALM
-manage its liabilities strategically to better
-prepare itself for future uncertainties.
-allows an institution to recognize and quantify
the risks present on its balance sheet and reduce risks resulting from
a mismatch of assets and liabilities.
downsides of ALM
- implementing a proper framework.
no general framework
most common risks addressed by ALM
interest rate risk and
liquidity risk.
risk refers to risks associated with changes to interest
rates, and how changing interest rates affect future cash flows.
Financial institutions typically hold assets and liabilities that are
affected by changing interest rates.
Interest rate
most common examples are deposits (assets) and loans
(liabilities).
refers to risks associated with a financial institution’s
ability to facilitate it’s present and future cash-flow obligations, also
known as liquidity.
Liquidity Risk
which are risks
associated with changes to exchange rates. When assets and
liabilities are held in different currencies, a change in exchange rates
can result in a mismatch.
currency risk,
which are risks associated
with changing equity prices. Such risks are often mitigated
through futures , options, or derivatives.
capital market risk,
