Credit Markets (Banks) Flashcards
(20 cards)
What is the screening function of banks?
Banks evaluate borrower creditworthiness through credit analysis, relationship lending, and financial monitoring.
What does maturity transformation involve?
Funding long-term, illiquid assets with short-term, liquid liabilities like demand deposits.
How do banks manage risk?
By diversifying portfolios across loans, bonds, and interbank assets and using off-balance-sheet instruments.
What are bank reserves?
Vault cash and central-bank deposits held to meet withdrawal demands.
What comprises a bank’s loan portfolio?
Mortgages, corporate loans, consumer loans, and government securities.
What are demand deposits?
Customer funds in checking and savings accounts withdrawable on demand.
How is bank leverage defined?
The ratio of total assets to equity, amplifying returns and losses.
What triggers a bank run?
Depositors rushing to withdraw funds due to fear of insolvency.
What is insolvency in banking?
When a bank’s liabilities exceed its assets and equity is wiped out.
What are fire-sale dynamics?
Forced asset sales at steep discounts during liquidity crises, deepening losses.
What is the role of deposit insurance?
Protects small depositors, prevents runs by assuring fund safety.
What is the lender-of-last-resort function?
Central bank emergency liquidity provision to stabilize banks and markets.
What is shadow banking?
Financial intermediation by non-bank entities funded through wholesale markets.
How does securitization work?
Pooling loans into tranches sold to investors, spreading and hiding credit risk.
What are Basel III capital requirements?
Higher minimum equity ratios to ensure banks can absorb losses.
What is the Liquidity Coverage Ratio (LCR)?
Requirement to hold enough high-quality liquid assets to survive a 30-day stress period.
What is the Net Stable Funding Ratio (NSFR)?
Mandate to match asset maturities with stable funding sources.
What are countercyclical capital buffers?
Extra equity banks must build in booms to draw down during downturns.
What are LTV and DTI limits?
Macroprudential caps on loan-to-value and debt-to-income ratios to curb credit growth.
What are bank ‘living wills’?
Resolution plans to restructure failing banks without taxpayer bailouts.
