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Money and Banking > Week 3 > Flashcards

Week 3 Flashcards

1
Q

What are the main activities of banks

A
  • Borrowing money from customers
  • Lending money to customers
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2
Q

What is a bank’s balance sheet?

A

It is a statement of what an institution of company owns at a given time.

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3
Q

What is the golden rule of balance sheet?

A

Total assets = Total liabilities

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4
Q

How are bank’s assets divided?

A

Financial assets
- Reserves
- Cash items
- Deposits at other banks
- Securities

Customer assets
- Commercial and Industrial assets
- Mortgages

Physical assets
- Branches
- Buildings

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5
Q

How are bank’s liabilities divided?

A

Wholesale funding

Customer deposits
- commercial deposits
- retail deposits

Bank capital
- Assets - Liability
- Owed against shareholders
- Cushion against a drop in value of assets due to defaults which could force bank into insolvency.

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6
Q

What is used to calculate a bank to deposit ratio base (LDR)?

A

customer deposits

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7
Q

If LDR > 100%

A

Bank has loan book greater than deposit base

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8
Q

If LDR < 100%

A

Bank has loan book less than deposit base

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9
Q

What is the net interest margin?

A

Difference between interest rate a bank pays on its liabilities and interest rate it generates from its financial assets

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10
Q

What services do banks provide?

A
  • Foreign exchange
  • Payments
  • Insurance polices
  • Investment services
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11
Q

Using a T account show what happens if you open a current account with HSBC using Cash

A
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12
Q

Using a T account show what happens if you open a current account with HSBC using a cheque from Barclays.

A
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13
Q

Show using T account how a bank makes profit when HSBC receives 100 as checkable deposit. Bank has to maintain 10 reserves. What happens to the excess? What is that process called?

A
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14
Q

What concerns does a bank manger have?

A
  • Liquidity management
  • Asset management
  • Liability management
  • Capital adequacy management
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15
Q

Suppose a bank has required reserves of 10% and it suffers a deposit outflow of 10M what happens do the balance sheet?

A

If a bank has excess reserves, a deposit outflow does not necessitate changes in other parts of its balance sheet.

Higher the costs associated with deposit outflows, more excess reserves the bank will want to hold.

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16
Q

Suppose a bank has required reserves of 10% and it suffers a deposit outflow of 10M what happens do the balance sheet?

A

Since reserves are a legal requirement the shortfall must be eliminated Since excess reserves are insurance against costs associated with deposit outflows.

17
Q

What are the ways of eliminating shortfalls?

A
  • Borrowing
    cost incurred on the interest rate they have to pay on borrowed funds from the interbank market
  • Selling securities
    cost of selling securities is the brokerage and other transaction costs
  • Central bank
    Borrowing from the federal reserve is called the discount rate
  • Reduce loans
    most costly way of acquiring reserves and it will antagonize customers.
18
Q

What are the goals of asset managers?

A
  • Seek Highest possible returns on loans and securities
  • Reduce risk
  • Have enough liquidity
19
Q

What tools do asset managers use?

A
  • find borrowers who will pay high interest rates and low default risks
  • purchase securities with high returns and low risk
  • lower risk by diversifying
  • balance need for liquidity against increased returns from less liquid assets
20
Q

What is liability management?

A
  • Decisions made by banks in order to maintain liquid assets to meet bank’s obligations to depositors
  • Due to rise of money centre banks in 1960s
21
Q

What are the 3 reasons why banks hold capital?

A
  • Prevent bank failure
  • Amount of capital affects return for shareholders of a bank
  • Regulations
22
Q

How does a bank’s capital prevent from insolvency. Show using two banks T accounts below. Say 5M loans go bad so they are written off. How would they look after the write off?

A
23
Q

What is return on Assets?

A
24
Q

What is return on Equity?

A
25
Q

What is equity multiplier?

A
26
Q

How is ROE, ROA and EM related

A

ROE = ROA * EM

27
Q

What are the tradeoffs between safety and returns to equity holders

A
  • Benefits the owners of a bank by making their investments safe
  • Costly to owners of a bank because the higher bank capital, lower the return on equity.
28
Q

Why do banks hold capital?

A

due to regulatory requirements by authorities to protect depositors

29
Q

Why do banks prefer to hold less bank capital relative to assets that are required by authorities.

A

due to High costs of holding capital

Money and Banking (4 decks)

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