Commercial, IB, and Balance Sheets Flashcards
What are the functions or engagements of commercial banks?
Accept savings
Lend out to businesses
Act as financial intermediaries where they give a small rate of return on savings and charge high IR to borrowers so they can profit.
Allows payment from one agent to another
Offers advice
What are the functions or engagements of investment banks?
Prop trading, where they task excess capital they have and invest it.
Market making where they ensure markers can exist by dealing with financial assets.
M&A where they give advice to help companies combine. IBs guide and help with the process.
New issues where they can help companies looking to issue bonds or shares by getting them in contact with buyers.
If nobody wants to buy it then IBs will buy instead and charge a higher fee on top.
What is a problem with IB and commercial banks nowadays?
A lot of banks engage in both sides, meaning systemic risk is much greater, whereby the failure of one side will lead to the failure of the other side as well and this can affect the whole industry.
Theres also risks of bank failure.
What is an asset?
commercial bank
It is anything of value that is owned by the commercial bank.
What is a liability?
commercial bank
It is anything a commercial bank owes. EG: deposits
What is capital?
commercial bank
It is a combination of shareholder funds and retained profits, that the bank owes to the shareholders. This falls under liabilities.
What is a balance sheet and what should it result in?
It is a sheet that must balance where assets= liabilities + capital
What does it mean if liabilities are greater than assets?
Firms owe more than they own, which can lead to bank failure.
