Phillip's section

Question 1

Why are politicians so keen to nationalise banking?

Answer 1

1) Banks play incredibly important function in economy
– payments and allocation of new money.
2) The stability of the system isalso paramount for continued lending
3) The banking industry is rife with conflicts
of interest

Question 2

What is money?

Answer 2

Anything widely accepted as payment, particularly by the government as payment of
tax, is, to all intents and purpose, money

Question 3

What does money comprise of?

Answer 3

1) Banknotes and coin
2) Central bank Reserves
3) Commercial bank money/deposits

Question 4

What does central bank money comprise of?

Answer 4

1) Banknotes and coin
2) Central bank Reserves

Question 5

Which money is actually circulating the economy?

Answer 5

Banknotes and coin

Question 6

What is a legal tender?

Answer 6

Legal tender is anything recognized by law as a means to settle a public or private debt or
meet a financial obligation, including tax payments, contracts, and legal fines or damages

Question 7

What is the the primary determinant of how much commercial banks lend?

Answer 7

the primary determinant of how much they lend is the confidence that the loan will be repaid and confidence in the liquidity and solvency of other banks and the system as a whole.

Question 8

What is the name of the stone money used in the Yap Island group?

Answer 8

Rai stones

Question 9

What is the name of the benchmark interest rate set by the SARB?

Answer 9

Repo rate

Question 10

Is the repo rate an interest rate paid on deposits at the SARB or an interest rate paid on loans from the SARB or both?

Answer 10

It is both

Question 11

Explain what the SARB sees as a well-functioning monetary policy transmission mechanism?

Answer 11

The SARB wants their repo interest rate to be the benchmark interest rate in the money market, i.e.
when they adjust the repo rate they want all other interest rates to adjust in lock step.

Question 12

What are the disadvantages of CBDC (i..e central bank digital currency)

Answer 12

-perhaps more costly than physical cash

• Privacy problems
• Under complete control of the central bank

Question 13

What do depositors want from banks?

Answer 13

They want to know that:

1) The bank has got enough cash to pay them back their
deposit when they want it back.
2) The bank is only giving loans to people that will pay back.
3) If an unforeseen event hits the bank, then the bank will
not fail

Question 14

What agency problem may exist in banking?

Answer 14

the agency problem is between the bank and the depositors

Question 15

Why is there an agency problem between the bank and the depositors?

Answer 15

Managers know more about bank and might have
wrong incentives due to performance contracts, resulting in them not acting in the best interest of the bank and depositors

Question 16

What is the formula for ROE in Phillip’s section?

Answer 16

ROE = leverage x profitability
= assets/equity x net profit/assets
thus = leverage x ROA

Question 17

What is the Conflict over ROE for bank managers and depossitors?

Answer 17

The conflict of interest between managers and depositors is that managers may have performance contracts. Therefore, to ensure they get bonuses, they may want the banks performance to look good. Therefore, they would like > leverage to make the ROE higher. whereas depositors would like lower leverage even if it meant a lower ROE

Question 18

Do S.A banks charge a fixed rate or do they charge a variable rate? and what is that rate called?

Answer 18

SA banks charge a variable rate called the prime interest rate. The prime rate is 3.5% higher than repo

Question 19

What is the difference between Basel I capital coverage calculation and the Basel II and Basell III calculation?

Answer 19

Basel 1 only took into
account whether capital (Tier 1 and Tier 2) could cover CR AND MR by >
8%

However, Basel II took into account whether
capital could cover improved
CR, MR AND OR by > 8%

Basell 3 introduced new K to the calculation i.e CET1 AND it introduced that the total capital should cover the risks by > 8% AND surcharges

Question 20

Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:

The central bank’s benchmark interest rate is increased?

Answer 20

It would increase because all banks in the system will increase their loan rates

Question 21

Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:

Loan transaction volumes at Bank X decrease significantly?

Answer 21

It would increase because Cost per loan will increase and thus a higher return per loan is required

Question 22

Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:

The income tax rate in the country that Bank X operates in decreases.

Answer 22

It would decrease because Less tax is to be paid, thus, less expenses, thus, less return is needed

Question 23

Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:

The regulator determines that Bank X should keep more cash on hand.

Answer 23

It would increase because Cash earns no return and other assets need to return more as a result

Question 24

Would the average loan interest rate charged by an
African bank (Bank X) increase or decrease if:

Operational costs at Bank X gets slightly out of control and increases beyond the increase
justified by transaction volumes

Answer 24

It would increase because Return needs to be higher to pay the higher costs

Question 25

Would the average loan interest rate charged by an African bank (Bank X) increase or decrease if: Bank X improves its risk monitoring systems as a result the amount of risk-weighted assets (RWAs) decreases.

Answer 25

It would decrease because Less capital is required, thus leverage increase, thus lower interest rate is needed

Question 26

Would the average loan interest rate charged by an African bank (Bank X) increase or decrease if: The country that Bank X operates in improves its property ownership records at the deeds office and title becomes surer

Answer 26

It would decrease because Credit risk decreases as property rights would now be more secure

Question 27

Would the average loan interest rate charged by an African bank (Bank X) increase or decrease if: The regulator prohibits Bank X from paying a dividend for a few years.

Answer 27

It would increase because Capital accumulates, leverage decreases and higher return is needed to maintain ROE.

Question 28

How will decreasing interest rates on loans lead to an increase in the supply of houses?

Answer 28

Decreased interest rates mean that more people can afford to pay back a loan, all else equal, and thus with more loans more houses can be built

Question 29

Please explain why regulators put so much emphasis on the minimum capital that a bank should hold?

Answer 29

Insolvency is the ultimate form of bank failure and capital puts a buffer between the bank and insolvency. Regulators do not want banks to fail due to the extreme public cost involved. More capital means a larger buffer and less chance of insolvency. Capital is there to protect a bank against unforeseen events

Question 30

How should a bank protect itself against known risks?

Answer 30

By charging for it.

Question 31

What is the cash reserve ratio?

Answer 31

It is cash resources (i.e cash assets e.g C&C equiv.s & mandatory deposits in central bank) / Total liabilities

Question 32

What is CET1 in Philip's section?

Answer 32

Includes Share capital, surpluses, retained earnings including most reserves such as OCI. Excludes Pref. shares. Deductions like DT adjustments, intangible assets and investment in other banks.

Question 33

What are duties of a bank regulator?

Answer 33

* Appointment of executive directors are signed off on by regulator. * Regulator can restrict payment of dividends. * Regulators put constraints on capital structure. * Regulator oversees credit quality of loans. * Regulator requires daily/monthly reports. * Shareholders in any case own shares, not companies.

Question 34

What is the main method of bank regulation?

Answer 34

Ensuring adequate capital is main method of regulation. Basel 3 now also brought in minimum liquidity requirements and leverage ratio

Question 35

What is the repo rate?

Answer 35

It is the is SARB’s “policy instrument and It is the lowest short term risk-free interest rate in the economy.

Question 36

Why does the SARB want the repo rate to be the benchmark interest rate in the economy?

Answer 36

So that when it changes then all other rates should also change

Question 37

What adjustment must the SARB do to the repo rate when inflation is too low?

Answer 37

if inflation is too low, then reduce repo rate, all other rates drop, including lending rates, and more money is spent, increasing demand, increasing inflation

Question 38

What adjustment must the SARB do to the repo rate when inflation is too high?

Answer 38

if inflation is too high, then increase repo rate, all other rates increase, including lending rates, and less money is spent, decreasing demand, decreasing inflation.

Question 39

List the 4 interest rates in the economy and list them in their order

Answer 39

1) Repo rate 2) Interbank rate 3) Bond rates 4) Loan rates

Question 40

What is a repurchase agreement?

Answer 40

It is a form of short-term borrowing for banks, secured by government securities. The banks “sell” the securities to the SARB in exchange for Reserves and agree to “buy” the securities back at a slightly higher price in a few days time. The SARB’s “profit” on the transaction is the repo interest rate

Question 41

What is the repurchase agreement called For the party selling the security and agreeing to repurchase it in the future?

Answer 41

it is a repo;

Question 42

What is the repurchase agreement called For the party on the other end of the transaction (SARB), buying the security and agreeing to sell in the future?

Answer 42

It is a reverse repo

Question 43

How is the SARB protected against credit and market risks in a repurchase agreement?

Answer 43

“In order to protect the SARB against credit and market risks, commercial banks have to provide the SARB with Securities with an adjusted market value (“haircut valuation”).