The banking system

Question 1

what is the role of commercial banks?

Answer 1

• make profits through selling bank services to consumers
• accept savings, which they turn into loans and lend out to borrowers

Question 2

what is the role of investment banks?

Answer 2

• where bonds and shares can be bought and sold
• advisory roles in mergers and acquisitions

Question 3

what is systemic risk?

Answer 3

• when one banking system (e.g investment or commercial banks) fails, leading to the failure of the entire financial system

Question 4

what is a balance sheet?

Answer 4

a record of all liabilities, assets and capital in a bankw

Question 5

what is the equation for a balance sheet?

Answer 5

assets = capital + liabilities

Question 6

what are assets?

Answer 6

what the bank owns, which can be converted into capital

Question 7

what are liabilities?

Answer 7

what the bank owes

Question 8

what is capital?

Answer 8

anything owed to shareholders

Question 9

what are the two ways banks can fail?

Answer 9

bank run = many customers withdraw their deposits at the same time, leaving the bank with no liquidity
insolvency = liabilities are greater than assets

Question 10

what is the role of the central bank?

Answer 10

• implement monetary policy
• a bank for banks (lender of last resort)
• regulates the financial system

Question 11

what is moral hazard?

Answer 11

When banks or firms are more likely to take a risk because they know they will be covered (i.e by the central bank)

Question 12

what is regulatory capture?

Answer 12

when regulators begin to work in favour of the bank/firm that they are regulating