App: Banking

Question 1

Banking book

Answer 1

Consists of everything not in the trading book

Question 2

Trading book

Answer 2

A portfolio of financial instruments held by a bank, which are actively traded and which are to facilitate trading for the customers

Question 3

Corporate banks

Answer 3

Traditional banking activities such as:

• taking deposits
• making loans
• clearing cheques

They also offer merchant services and payroll services to businesses.

Most have a banking book and a trading book.

Question 4

Retail banks

Answer 4

Offer deposit, investment and loan products to customers.

These can be long-term or short-term savings and secured or unsecured loans.

Question 5

Types of banks

Answer 5

CRICT RD

Corporate banks
Retail banks
Investment banks
Community banks
Traditional deposit taking banks

Reserve (or central) banks
Development banks

Question 6

What is the role of banks?

Answer 6

Banks play a vital role in providing liquidity to the financial system.

Banks also play the role of financial intermediaries.

Banks make possible the distribution of valuable economic and business information among customers and capital markets of all countries.

Question 7

What is a financial intermediary?

Answer 7

Business entity that brings together providers and users of capital.

They develop the facilities and financial instruments which make lending and borrowing possible.

Question 8

Investment banks

Answer 8

Refer to financial market activities such as:
- debt raising
- equity financing
for corporations or governments.

This includes originating securities, underwriting them, and then placing them with investors.

Question 9

Reserve (or central) banks

Answer 9

The role of the reserve or central bank is to maintain price stability in the interests of balanced and sustainable economic growth.

Carries out these missions through:
- formulation and implementation of inflation targeting and monetary policy

Question 10

Development banks

Answer 10

Also known as Development Financial Institutions.

• They provide credit through higher risk loans
• Usually supported by the government of a country
• Usually focuses on large infrastructure projects within the public and private sector

Question 11

Traditional deposit taking banks

Answer 11

Known as commercial or retail banks.

Provide services such as:

• accepting deposits
• providing loans
• mortgage lending
• other basic investment products

They are usually public companies that are regulated, listed on an exchange and owned by their shareholders.

Question 12

How are loans priced?

Answer 12

Lending is typically priced relative to a benchmark rate (prime).

To account for credit risk, banks add a premium to the benchmark rate, to determine the lending rate.

The premium is intended to cover expected loan losses, while allowing the bank to make a profit.

Question 13

List 3 things that will influence the lending rate

Answer 13

1. Credit quality of the customer
2. Whether there is any security involved
3. The tenor of the loan

Tenor - The length of time until the loan is due

Question 14

What will determine the deposit rates offered by banks?

Answer 14

The bank’s own credit quality.

Question 15

How do banks make a profit?

Answer 15

Banks make a profit on the positive spread between what is earned on their loans and what is paid on their deposits and other funding.

Question 16

Provisioning

Answer 16

Banks create provisions for loan losses.

• Represents a charge against the income statement
• An ‘overlay’ reserve may be created if there is an anticipation of worse than expected performance of the loan book.

Question 17

Describe two banking trends

Answer 17

1. Increasing regulatory requirements for risk management, risk measurement and capital holdings
2. Fintech brings together financial services and technology to modernize banking:
   - Include greater digital and mobile banking
   - Improved use of data
   - Artificial intelligence (AI)

Question 18

List 7 typical retail banking products

Answer 18

1. Transactional accounts
2. Savings accounts
3. Credit cards
4. Overdrafts
5. Mortgage loans
6. Vehicle finance loans
7. Unsecured personal loans: revolving and term

Question 19

List 9 typical business products offered by banks

Answer 19

1. Transactional accounts
2. Overdrafts
3. Asset based finance
4. Unsecured loans
5. Merchant services
6. Foreign exchange and trade solution services
7. Cash solutions
8. Savings and investment products
9. Portfolio management

Question 20

Main sources of revenue for a typical bank

Answer 20

1. Net interest income
2. Non-interest income:
   - Fees charged for banking book operations
   - Account fees
   - Commitment fees
   - Transaction fees
   - Asset management fees
   - Insurance fees
3. Trading income from trading book:
   - Income related to all the contracts that the bank enters into as part of its trading operations.
   - Contracts are marked-to-market daily

Question 21

Main costs for a typical bank

Answer 21

1. Operational expenses:
   - staff costs
   - marketing and sales
   - IT systems and equipment
2. Cost of credit:
   - bad debts

Question 22

Different types of loans in the loan book

Answer 22

1. Retail secured
2. Retail unsecured
3. Corporate
4. Commerical

Question 23

List the key risks faced by banks

Answer 23

1. Credit risk
2. Market risk
3. Operational risk
4. Liquidity risk

Other risks faced include:

• Business strategic risk
• Currency risk
• Pre-payment risk
• Model risk

Question 24

List the 6 different types of market risk

Answer 24

1. Volatility risk
2. Currency risk
3. Basis risk
4. Interest rate risk
5. Liquidity risk
6. Commodity price risk

Question 25

What is the difference between a commercial bank and a mutual bank?

Answer 25

The biggest difference is that depositors who save their funds in the mutual bank become the shareholders of the bank.