W7 - Banking Flashcards
(10 cards)
What do banks do?
- Make monetary financial institutions
- Crucial for the economy (loans, deposits, electronic payments)
How do banks make profit and formular for it
Recieve interest on loans, L and pay interest on deposits D
Profit = r(l)L - r(d)D
r = interest rate
How to calculate the profit margin on new loans?
r(l) - r(d)
- must earn more on loan than pay deposits
Bank Balence sheet
- Deposits = short term liabilities
- Loans = Long term assets, repaid over time
Illiquid assets
Assets/ investments that cant be easily converted into cash at current price
(e.g houses,
What happends when banking goes wrong?
- Bank runs
- Insolvency
- Due to bad risk management
What is bank runs
Due to the beliefe that a bank is in financial difficulty, customers try to withdraw deposits quick
- reserves + illiquid assets may not cover
What is insolvency
When a banks net worth is -
(net worth = assets - liabilities)
What do insolvency problems result in?
High levels of leverage
What is leverage and how to calculate
When u borrow funds to purchase new asset, in hopes that new assets/ gain surpasses the cost of borrowing
Total assets/ net worth
