Banking Systems

Question 0

Depository institutions
-responsible for the gathering of savings of small savers

1) commercial banks
2) savings and loan banks
3) postal savings banks
4) credit unions

Answer 0

1) commercial banks
- accept deposits from individuals and firms
- allow transfer funds by check from account-to-account
- lend money to individuals and businesses
- dominant form of corporation finance for small/middle size companies in industrialized countries
- stability!!! Heavily regulated to avoid failure
- government guards against runs on banks, (deposits insured by government)

2) savings and loan banks
- finance home construction and ownership
- accept interest paying deposits from savers and lend money to home buyers as mortgages
- can lead to mismatch in the term structure of assets and liabilities
- interest rates on mortgages (long term)= liquid assets
- deposits (liability)= liquid
- “savings and loan” crisis in U.S.

3) postal savings banks
- used in Japan
- provide highly liquid form of savings
- pays low interest
- don’t make loans
- accumulated and pooled savings passed up to the government

4) credit unions
- problem assessing risk to assign
- lend only to people with similar characteristics
- occupation or employer
- growing alternative for savings and lending in the U.S.

Question 1

The central bank

• It’s job is to…?
• does this by…?

Answer 1

• Job is to preserve the value of the currency
• does this by taking restrictive and conservative line on credit creation

Debate!!!!!
Political control OR no political control (market economy)

Question 2

Nondepository financial institutions

• underwriting= guarantee a price to the issuer and try to profit by selling stock higher than sell price
• spread= difference between guaranteed and sell price

1) investment banks
2) mutual funds
3) insurance companies
4) venture capital funds

Answer 2

1) investment banks
- help large businesses get new capital
- issue and underwrite new stock or bond issue into the primary financial markets
- offer help/advice in reconstructing firms
- engage in merchant banking, lend their capital to firms during reorganization
- increase efficiency of financial system by reducing information costs

2) mutual funds
- financial intermediaries, allow investors to take advantage of returns and security offered
- invest in diversified portfolios of stocks, bonds… As short term corporate debt
- small savers use it to gain access of diversification

3) insurance companies
- protect individuals/companies from risk
- accretion of premiums paid by policy holders put a lot of capital in insurance companies
- makes them important in financial markets

4) venture capital funds
- raise risk capital from private sources & grant it to start-up firms for a portion of the share in capital
- prove more flexible and innovative than commercial or investment banks
- great expansion in U.S. 1990’s
- Shark tank!

Question 3

Investment banks

• help large businesses get new..?
• issue and underwrite new stock or bond issue into the…?
• offer help/advice in reconstructing..?
• engage in merchant banking, lend their capital to firms during..?
• increase efficiency of financial system by reducing…?

Answer 3

• help large businesses get new capital
• issue and underwrite new stock or bond issue into the primary financial markets
• offer help/advice in reconstructing firms
• engage in merchant banking, lend their capital to firms during reorganization
• increase efficiency of financial system by reducing information costs

Question 4

Mutual funds

• financial intermediaries, allow investors to take advantage of…?
• invest in diversified portfolios of stocks, bonds… As short term..?
• ….. …… use it to gain access of diversification

Answer 4

• financial intermediaries, allow investors to take advantage of returns and security offered
• invest in diversified portfolios of stocks, bonds… As short term corporate debt
• small savers use it to gain access of diversification

Question 5

Insurance companies

Answer 5

• protect individuals/companies from risk
• accretion of premiums paid by policy holders put a lot of capital in insurance companies
• makes them important in financial markets

Question 6

Venture capital funds

• raise risk capital from private sources & grant it to start-up firms for…?
• prove more flexible and innovative than…?
• great expansion in U.S. 1990’s
• Shark tank!

Answer 6

• raise risk capital from private sources & grant it to start-up firms for a portion of the share in capital
• prove more flexible and innovative than commercial or investment banks
• great expansion in U.S. 1990’s
• Shark tank!

Question 7

Commercial banks

• accept deposits from…?
• allow transfer funds by ….. from account-to-account
• lend money to…?
• dominant form of corporation finance for …..??? size companies in industrialized countries
• stability!!! Heavily regulated to..?
• government guards against runs on banks, (deposits insured by government)

Answer 7

• accept deposits from individuals and firms
• allow transfer funds by check from account-to-account
• lend money to individuals and businesses
• dominant form of corporation finance for small/middle size companies in industrialized countries
• stability!!! Heavily regulated to avoid failure
• government guards against runs on banks, (deposits insured by government)

Question 8

Savings and loan banks

• finance…?
• accept interest paying …….. from savers and lend money to …. buyers as ………
• can lead to mismatch in the term structure of assets and liabilities

Answer 8

• finance home construction and ownership
• accept interest paying deposits from savers and lend money to home buyers as mortgages
• can lead to mismatch in the term structure of assets and liabilities
• interest rates on mortgages (long term)= liquid assets
• deposits (liability)= liquid
• “savings and loan” crisis in U.S.

Question 9

Postal savings banks

• used in Japan
• provide highly liquid form of..?
• pays low..?
• don’t make…?
• accumulated and pooled savings passed up to the…?

Answer 9

• used in Japan
• provide highly liquid form of savings
• pays low interest
• don’t make loans
• accumulated and pooled savings passed up to the government

Question 10

credit unions

• problem assessing …. to assign
• lend only to people with..?
• growing alternative for savings and lending in the U.S.

Answer 10

• problem assessing risk to assign
• lend only to people with similar characteristics
• occupation or employer
• growing alternative for savings and lending in the U.S.