Chapter 2 - The Business Lines of a Bank Flashcards
(11 cards)
What is a financial intermediary?
A financial intermediary channels funds from savers to users—examples include banks, insurance companies, pension funds, and hedge funds.
How do banks differ from other intermediaries like insurance companies or pension funds?
Banks uniquely combine deposit taking (offering liquid accounts to households) with loan origination (making term loans to firms), under strict liquidity and capital regulations.
What are the main business lines of a modern bank?
Banks typically operate in eight areas:
- Private banking (wealth management)
- Commercial banking (deposits & corporate loans)
- Investment banking (underwriting, M&A advice)
- Payment services
- Asset management
- Trading
- Retail brokerage
- Agency services.
How has the structure of financial intermediation evolved?
Classically, small savers went to banks and large investors to securities markets. Now banks, pension funds, and hedge funds all serve a broad client base, and markets (stocks, bonds, derivatives) play a bigger role for everyone.
What is relationship banking?
A repeated bank–borrower partnership where the bank’s ongoing knowledge of a firm lets it offer better terms and support in distress, fostering credit even when impersonal markets might fail.
How does the Freixas model capture the value of relationship banking?
Borrowers with good projects accept a small markup because banks treat them more favorably if trouble strikes (value V), making bank debt preferable to market debt even at slightly higher rates.
What is shadow banking?
“Shadow” banks perform deposit-like funding via repos (collateralized sales with promises to repurchase) and lending via securitization (issuing securities backed by loans) outside traditional deposit/loan contracts.
How does a repo differ from a deposit?
In a repo, the lender buys securities with a promise to sell them back—if the intermediary defaults, the repo lender keeps the collateral, unlike depositors who rely on deposit insurance.
What is securitization in shadow banking?
Transforming a pool of loans into tradable securities sold to investors, letting banks recycle capital and tailor risk profiles, instead of holding loans on their own balance sheets.
Why has shadow banking grown?
Capital and liquidity rules on traditional banks make repos and securitization attractive ways to expand funding and lending beyond regulated deposit channels.
What is open banking?
Regulatory frameworks requiring banks to share customer-authorized data with third parties via APIs, promoting fintech innovation, competition, and better credit allocation.
