Week 8 - Topic 7 - Financial institutions Flashcards
What are the 2 main types of banks in Australia?
- Commercial banks
- Investment banks
What do commercial banks mainly do?
accept deposits from savers who store their money in the bank, making it a liability for the bank. This capital is then lent out by the bank to borrowers at a higher rate of return.
What do Investment banks mainly do?
take on higher-risk activities, providing capital raising and risk management services and instruments for large businesses, public corporations, and financial institutions.
What are banks’ 2 liabilities, and how can they be differentiated?
- Retail assets → home loans, personal loans, car loans, credit cards, insurance.
- Wholesale assets → overdrafts, leases, trade finance, term loans.
Define the term ‘Bank Risk’?
uncertainty arising from cash flows of the bank’s assets and liabilities. This includes
What are the 3 aspects included in bank risk?
- Interest rate risk
- Liquidity risk
- Credit risk
What is ‘Interest rate risk’?
Arises from unforeseen changes in the interest rate margin due to volatility in asset earnings and cost of funds.
What is ‘Liquidity risk’?
Banks typically borrow a significant part of their funding from depositors for short terms while lending that money to customers for much longer terms. (Smaller banks have a minimum liquidity requirement of 9% of total liabilities as liquid assets.)
What is ‘Credit risk’?
The possibility of default in the bank loan book.
What is ‘asset management’ in terms of financial institutions?
maintaining sufficient cash and non-cash assets that can be quickly converted to cash.
What is ‘liability management’ in terms of financial institutions?
Acquiring liquidity quickly and easily through debt while ensuring diversification in creditor obligations.
What is ‘Capital Adequacy Ratio (CAR)’?
The ratio of equity capital to risk-adjusted assets must be at least 8%
What is the equation for the ‘Capital Adequacy Ratio (CAR)’?
CAR = Equity Capital / Risk-weighted Assets
What is the impact of the tightening of regulations on financial institutions?
Banks have to hold more liquid assets and increase the equity capital proportion to strengthen liquidity and capital adequacy.
What is the impact of the relaxation of regulations on financial institutions?
banks need fewer liquid assets and reduce equity capital proportion, which weakens their liquidity and capital adequacy.
