Week 3 Flashcards
How can banks be differentiated from other financial intermediaries?
If most of the liabilities on the SoFP are deposits, it’s a bank
Why are banks called ‘monetary financial institutions’?
Because deposits are effectively money
What transformations do banks perform?
- Size transformation
- Maturity transformation
- Risk transformation
How is the credit multiplier obtained?
1 / required reserve ratio, e.g. RRR = 10% -> credit multiplier = 1/0.1 = 10
How is the credit multiplier used?
original deposit x credit multiplier = new money supply
True or false: banks have high leverage, low capital
True
What are banks’ main profits?
Net interest income i.e. difference between lending & deposit interest
Why do banks hold capital?
To absorb losses & protect depositors
What are examples of modern/universal banking activities?
- Insurance
- Pensions
- Securities / investment banking
- Other financial & non-financial services
Why did banks branch out into universal banking?
- Low interest rates
- Tech = cheaper delivery
- Increased globalisation/competition
What are features of universal banking?
- Demand-led
- Focused on creating shareholder value
What are the advantages of universal banking?
- Economies of scale & scope
- Diverse revenue sources = more resilient to shocks
When was ring-fencing regulation introduced in the UK?
After the 2008 financial crisis
What does ring-fencing regulation require?
Keep loans & deposits isolated from other activities
What is the advantage of ring-fencing?
Protects repayment of deposits – other activities can fail without threatening core banking services
What is the disadvantage of ring-fencing?
Can make banks less competitive internationally
What is an example of ring-fencing?
Barclays UK (retail) vs Barclays Corporate & International (corporate & investment banking)
What are the core banking services protected by ringfencing?
- Making deposits
- Withdrawing deposits
- Overdraft services
What is ‘resilience’ in the context of ringfencing?
Protecting retail banking from unrelated risks
What is ‘resolution’ in the context of ringfencing?
Allowing banks to fail in an orderly manner
