Chapter 1 Business of banking Flashcards
role of banks x5
- acts as a financial intermediary = efficent use of pooled resources
- facilitates the creation of money by expanding the supply of money through deposit and loan transactions
- creates financial products and services that benefit its customers
4.develops mechanisms for transferring money and making payments - contributes to the development of the economy
customers who deposit money are the banks……… as they are effectively borrowing money their money
creditors
customers who the bank lends money to are the banks …….. cos these customers owe the bank the money they borrowed
debitors
how would an investment bank participate in the debt capital market
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.
what is the underwriting spread
the difference between how much the investment bank bought the securities for and the price they are then sold on for.
what is the equity capital markey
where companies will sell shares to the public and wider pool of investors for the first time to raise capital
why would a chinese wall in an investment bank
to prevent exchanges or communication within the bank that could lead to a conflict of interest
what kind of deposits would the bank get from the wholesale debt market
government and corporate bonds
what are bills of exchnage and promissory notes
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.
what is the transfer of risk
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)
what are the two ways the bank makes money
- lending money at higher rates than they pay for deposits - the difference = the spread
- charging fees for products and services
what is maturity transformation
when the bank offers short term liabilities (such as deposits) and transforms them into longer term assets (such as loans)
what is credit risk
the probability of loss due to a borrowers failure to make paymen of any debt
what is liquidity risk
the potenyial inability of a bank to meet its payment obligations in a timely and cost effectively manner
interest rate risk
the risk that movement in interes rates will have an adverse effect on the value of an investment
what is solvency
th ability of a bank to meet its long term financial obligations.
would a home loan be in the assets or liabilites section of the banks balance sheet
assets
would transaction deposits, retained earnings and share capital be on the assets or liabilities section of the banks balance sheet
liabilities
the banks capital adequacy requirements and framework are based on….
the basal comittee on banking supervison
what are the Basel lll standards in NZ
released in dec 2012 by the basal committee on banking supervision. they are new global regulatory standards for bank capital adequacy and liquidity.
who is the Basal committee on banking supervision
an international group of banking supervisors that endevour to formulate broad supervisory standards and guidelines and recommend statements of best practsise
what are the 4 types of financial markets
- primary market
2.secondary market - exchange traded markets
- over the counter markets
what happens in the primary market
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. )
what is the secondary market
where securities are traded after their initial issue ie have already been issued through the primary market
