Banking Overview Flashcards
(24 cards)
Discuss the roles of banks
Banking institutions play the role of financial intermediaries. In other words, they bring together providers and users of capital.
Banks also play a vital role in providing liquidity to the financial system.
The global nature of banking also makes possible the distribution of valuable economic and business information among customers and capital markets of all countries.
Banking also serves as a worldwide barometer of economic health and business trends.
Discuss the types of banks
- Traditional deposit-taking banks: Commercial banks provide services such as accepting deposits, providing loans, mortgage lending, and basic investment products like savings accounts. Commercial banks are usually public companies that are regulated, listed on major stock exchanges, and owned by their shareholders.
- Development banks: These institutions fill a critical role in providing credit through higher risk loans to both public and private sector initiatives. They are usually supported by the government of a country.
- Reserve (or central) banks: The role of the reserve or central bank, which is the government bank of the country, is to achieve and maintain price stability in the interest of balanced and sustainable economic growth.
- Investment banks: Investment banking is the term used to refer to financial market activities such as debt raising and equity financing for corporate or governments. This includes originating securities, underwriting them, and then placing them with investors.
- Community banks: The broad definition of community banks encompasses membership-based, decentralised, and self-help financial institutions. Under this definition fall several variants, credit associations such as a “stockvel”, more formalised village banks spread throughout the country, and very formalised institutions registered under the Mutual Banks Act.
Trading book
A trading book is a portfolio of financial instruments held by a bank, which are actively traded and which are to facilitate trading for the customers, to profit from trading spreads between the bid and ask prices, or to hedge against various types of risk.
Banking book
The banking book consists of everything not included in the trading book.
Corporate banks
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.
Retail banks
Offer deposit, investment and loan products to customers.
These can be long-term or short-term savings and secured or unsecured loans.
Types of banks
CRICT RD
* Corporate banks
* Retail banks
* Investment banks
* Community banks
* Trading deposit taking banks
* Reserve (or central) banks
* Development banks
Investment banks
Refer to financial market activities such as:
* debt raising
* equity financing for corporations and governments.
This includes originating securities, underwriting them, and then placing them with investors.
Reserve (or central) banks
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
Development banks
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
Traditional deposit taking banks
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.
How are loans priced?
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.
List 3 things that will influence the lending rate
- Credit quality of the customer
- Whether there is any security involved
- The tenor of the loan
Tenor - The length of time until the loan is due.
What will determine the deposit rates offered by the banks?
The bank’s own credit quality
How do banks make a profit?
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.
Provisioning
Banks create provisions (reserves) for loan losses. Periodically, the reserve is increased or decreased, and in some circumstances an “overlay” reserve may be created if there is an anticipation of worse than expected performance of the loan book.
Describe 2 banking trends
- Increasing regulatory requirements for risk management, risk measurement and capital holdings. Recent updates to the Basel accords represent the finalisation of the third revision of the accords since its inception.
- Fintech brings together financial services and technology to modernise banking. These include a greater digital and mobile banking experience, improved use of data, and Artificial Intelligence (AI)
List 7 typical retail banking products
- Transactional accounts
- Savings accounts
- Credit cards
- Overdrafts
- Mortgage loans
- Vehicle finance loans
- Unsecured personal loans: revolving and term.
List 9 typical business products offered by banks
- Transactional accounts
- Overdrafts
- Asset based finance
- Unsecured loans
- Merchant services
- Foreign exchange and trade solution services
- Cash solutions
- Savings and investment products
- Portfolio management
Main sources of revenue for a typical bank
- Net interest income: Banks which accept deposits and other funding and lend them out to other parties attempt to make a profit on this activity. Banks attempt to fund themselves at low rates and lend the money out at high rates. This enables them to make a positive net interest income.
- Non-interest revenue: Non-interest revenue is the income earned from the fees charged from banking book operations. These fees can include account fees, commitment fees, transaction fees, asset management fees, and insurance fees.
- Trading income from the trading book: This is the income related to all the contracts that the bank enters into as part of its trading operations. These contracts are marked-to-market on a daily basis.
Main costs for a typical bank
- Operational expenses: The largest operating expense for a bank is generally staff costs. Other expenses incurred by banks include: marketing and sales, IT systems and equipment, and running a branch network.
- Cost of credit: If payments due from the borrower are more than 90 days past due, the loan is then usually classified as non-performing. The bank then does not accrue interest on the non-performing loan when it calculates its profit.
Different types of loans in the loan book
- Retail secured
- Retail unsecured
- Corporate
- Commercial
List the key risks faced by banks
- Credit risk
- Market risk
- Operational risk
- Liquidity risk
List the 6 different types of market risk
- Volatility risk
- Currency risk
- Basis risk
- Interest rate risk
- Liquidity risk
- Commodity price risk
