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CQIB > Chapter 1 Business of banking > Flashcards

Chapter 1 Business of banking Flashcards

1
Q

role of banks x5

A
  1. acts as a financial intermediary = efficent use of pooled resources
  2. facilitates the creation of money by expanding the supply of money through deposit and loan transactions
  3. creates financial products and services that benefit its customers
    4.develops mechanisms for transferring money and making payments
  4. contributes to the development of the economy
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2
Q

customers who deposit money are the banks……… as they are effectively borrowing money their money

A

creditors

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3
Q

customers who the bank lends money to are the banks …….. cos these customers owe the bank the money they borrowed

A

debitors

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4
Q

how would an investment bank participate in the debt capital market

A

they would be involved in the planning of bond issuance, working with the issuer to manage to documentation required to issue bonds and help sell the bonds.

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5
Q

what is the underwriting spread

A

the difference between how much the investment bank bought the securities for and the price they are then sold on for.

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6
Q

what is the equity capital markey

A

where companies will sell shares to the public and wider pool of investors for the first time to raise capital

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7
Q

why would a chinese wall in an investment bank

A

to prevent exchanges or communication within the bank that could lead to a conflict of interest

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8
Q

what kind of deposits would the bank get from the wholesale debt market

A

government and corporate bonds

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9
Q

what are bills of exchnage and promissory notes

A

specialised instruments, being unconditional order in writing btween parties, wheere the bank purchases the bill amount from the borrower, deducting charges. on maturity the bill is presented to the borrower and the full amount is collected.

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10
Q

what is the transfer of risk

A

a risk management technique where risk of loss is transferred to another party through a contract (ie a hold harmless clause) or to a professional risk bearer (ie an insurance company)

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11
Q

what are the two ways the bank makes money

A
  1. lending money at higher rates than they pay for deposits - the difference = the spread
  2. charging fees for products and services
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12
Q

what is maturity transformation

A

when the bank offers short term liabilities (such as deposits) and transforms them into longer term assets (such as loans)

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13
Q

what is credit risk

A

the probability of loss due to a borrowers failure to make paymen of any debt

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14
Q

what is liquidity risk

A

the potenyial inability of a bank to meet its payment obligations in a timely and cost effectively manner

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15
Q

interest rate risk

A

the risk that movement in interes rates will have an adverse effect on the value of an investment

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16
Q

what is solvency

A

th ability of a bank to meet its long term financial obligations.

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17
Q

would a home loan be in the assets or liabilites section of the banks balance sheet

A

assets

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18
Q

would transaction deposits, retained earnings and share capital be on the assets or liabilities section of the banks balance sheet

A

liabilities

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19
Q

the banks capital adequacy requirements and framework are based on….

A

the basal comittee on banking supervison

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20
Q

what are the Basel lll standards in NZ

A

released in dec 2012 by the basal committee on banking supervision. they are new global regulatory standards for bank capital adequacy and liquidity.

21
Q

who is the Basal committee on banking supervision

A

an international group of banking supervisors that endevour to formulate broad supervisory standards and guidelines and recommend statements of best practsise

22
Q

what are the 4 types of financial markets

A
  1. primary market
    2.secondary market
  2. exchange traded markets
  3. over the counter markets
23
Q

what happens in the primary market

A

ne issues of shares or other forms of security are offered o the market for the first time (ie if the government is seeking to fund a project to build a road, it may choose to finance this by borrowing funds on the market and issuing government securities. )

24
Q

what is the secondary market

A

where securities are traded after their initial issue ie have already been issued through the primary market

25
Q

what are the two main exchange traded markets in NZ

A

equities (shares) and exchange traded derivatives (such as futures) on the NZX (nz stock exchnage)

26
Q

what are over the counter markets

A

non-standardised and negotiated between the parties involved in the transaction

27
Q

what is the derivatives markets

A

a contract whose value is derived from one or more underlying assets or instruments ie forward rate agreements on the underlying exchange rate

28
Q

example of what takes place in the equities market

A

trading shares in listed companies

29
Q

what are 2 examples of other financial providers (ie not banks) in NZ

A

building societies and credit unions

30
Q

what is a building society

A

a mutual institution, which means that most people who have a savings account or mortage with thwm are members. each building society has a board of directors who run the society and are responsible for setting its strategy. Each member has voting rights on how the organisation is run

31
Q

hat are credit unions

A

like building societies are mutually owned institutions, providing basic, low cost deposit accounts, personal/housing loans and payments to service members. Members finance their personal borrowing from their owned combined resources. often member share a common bond ie live in the same area or work in the same industry

32
Q

in terms of ownership structure whow do banks differ from building socities and credit uniosn

A

banks are companies that are usually listed on the stock market and owned by shareholder, whereas the other two are owned by and for the members

33
Q

how does they way banks and credit unions and building socities differ in the way they supplement domestic funding.

A

baks can access large and specialised markets, wheres the others are limited by the proportion of funds that they can raise from the wholesale market.

34
Q

what are crowdfunding providers

A

a service that acts as an intermediary between issuers (whicch are companies that use the service to raise capital by offering shares) and investors ( who use the service to select offers to invest in)

35
Q

the FMA (financial Markets authority) only liscence ……-based crowdfunding services. Where companies raise money by offering shares rather than offering rewards (goods or services)

A

equity - based

36
Q

what is bitcoin

A

a decentralised digital currency that enables instant payments to anyone, anywhere in the world using peer to peer technology to operate with no central authority

37
Q

what is blockchain

A

a distrubuted ledger using peer to peer technology, providing real-time records that are replicated among participants

38
Q

what are six trends in the nz banking idustry

A

emergence of fintech
bitcoin
blockchain
AI
robotics
customer analystics and ‘big data’

39
Q

what is microeconomics

A

the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services ie supply and demand

40
Q

what is macroeconomics

A

focuses on issues that affect the economy as a whole ie unemployment rates, GDP, inflation and exports and imports

41
Q

what are 3 key economic indicators

A

GDP
balance of payments
net international liability position

42
Q

what is GDP

A

Gross domestic product - the monetary value of all the finished goods and service produced in NZ in a specific time period

43
Q

what is Balance of payments (interms of an economic indicator0

A

the record of all economic transactions between NZ and the rest of the world in a specified time period ie export and import levels

44
Q

what is the net international liability postion

A

all financial obligations owed by NZ to other countries after considering financial obligations owed to NZ by other countries

45
Q

what are 5 roles o the goverment

A
  1. legal and policy frameworks
  2. a stable environment for business activities
  3. support to business and individuals (ie roading and infrastructure and education)
  4. fiscal policy
  5. monetary policy
46
Q

what is the fiscal policy

A

is government spending and taxation that influences the economy.
the annual budget outlines the governments revenue (ie collecting taxes) and spending (ie health, education). these activities influence the purchasing power of households and business which in turn impact the economy. ie if the gov increase taxes household have fewer surplus funds for spending leading to less demand for good and services and ultimately lower economic growth

47
Q

what is the monetary policy

A

the Reserve Bank of New Zealand Monetary Policy Committee (MPC) uses monetary policy to maintain price stability and support maximum sustainable employment as defined by its current remit. The current one requires the bank to keep inflation between 1 to 3 percent on average in the medium term. controlling inflation preserves the value of money and encourages strong and sustainable growing in the economy over the longer term.

48
Q

how to the MPC implement monetary policy

A

by setting the official cash rate (OCR) which is reviewed by the reserve bank 7 times per year. the OCR influences other interest rates in the economy, affecting behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation

CQIB (7 decks)

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