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Banking > Week 1 > Flashcards

Week 1 Flashcards

1
Q

What is a relational contract?

A

Informal relationship between bank & borrowers, sustained by value of future relationships

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2
Q

How do relational contracts benefit banks?

A

Lower screening & monitoring costs for customers with history

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3
Q

How do relational contracts benefit customers?

A

Easier to get future loans at relatively low rates

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4
Q

What is the advantage of relational over transactional banking?

A

Information reusability mitigates info asymmetry + allows flexibility

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5
Q

What is transactional banking?

A

Securitisation transaction where bank acts as broker

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6
Q

What are the theories to explain financial intermediation?

A
  1. Delegated monitoring
  2. Information production
  3. Liquidity transformation
  4. Consumption smoothing
  5. Commitment mechanisms
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7
Q

What is the ‘delegated monitoring’ theory?

A

Intermediaries have economies of scale in monitoring borrowers on behalf of surplus units

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8
Q

What is the ‘information producing’ theory?

A

Intermediaries have economies of scale in gathering information about deficit units

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9
Q

What is the ‘liquidity transformation’ theory?

A

Banks hold illiquid assets & issue surplus units with liquid secondary claims

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10
Q

What is the ‘consumption smoothing’ theory?

A

Banks allow customers to save & consume smoothly despite life changes

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11
Q

What is the ‘commitment mechanisms’ theory?

A

Demand deposits limit bankers’ risk-taking

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12
Q

What are the benefits of financial intermediation to surplus units?

A
  1. More liquidity
  2. Less risk
  3. Marketable securities e.g. CDs
  4. Lower transaction costs
  5. Simpler decision-making
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13
Q

What are the benefits of financial intermediation to deficit units?

A
  1. Larger amounts
  2. Longer time periods
  3. Lower transaction costs
  4. Lower interest rates
  5. Available when needed
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14
Q

What are the benefits of financial intermediation to society?

A
  1. Funds utilised efficiently
  2. More borrowing & lending
  3. Funding for high-risk ventures, important to future growth
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15
Q

What are other names for shadow banking?

A
  • Non-bank financial intermediation
  • Market-based finance
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16
Q

What is shadow banking?

A

Bank-like activities (mainly lending) that take place outside traditional banking sector

17
Q

What are the aspects of a bank’s transformation function?

A
  1. Size transformation
  2. Maturity transformation
  3. Risk transformation
18
Q

True or false: banks play an important role in the transmission of monetary policy

A

True

19
Q

What does OFI stand for?

A

Other financial institutions

20
Q

What separates banks from OFIs?

A

They are DTIs (deposit-taking institutions)

21
Q

What is a financial asset?

A

Claim for payment of future sum(s) of money

22
Q

How can you identify a financial intermediary?

A

Deals mostly with financial assets & liabilities

23
Q

Why are bilateral contracts illiquid?

A

They are unique / personalised

24
Q

What is systemic risk?

A

Risk of problems spreading between institutions & markets, potentially causing collapse

25
Q

Why say financial system instead of sector or industry?

A

Everything is highly interconnected

26
Q

What are the main intermediary functions of a financial institution?

A
  • Brokerage
  • Asset transformation
27
Q

When do financial institutions shift emphasis to the brokerage function?

A

When interest rates are low

28
Q

What are the general functions of an intermediary?

A
  1. Pooling savers’ resources
  2. Safekeeping, accounting, payments
  3. Providing liquidity
  4. Diversifying risk
  5. Reducing information costs
29
Q

What are examples of non-banks providing payment services?

A
  • Google Pay
  • Apple Pay
  • PayPal
30
Q

What does it mean when financial institutions ‘diversify risk’?

A

They allow each depositor to invest in a very wide range of different loans

31
Q

What do information asymmetries generate?

A
  1. Adverse selection - ex ante
  2. Moral hazard - ex post
  3. Agency (monitoring) costs
32
Q

What does CCP stand for?

A

Central (Clearing) Counterparties

33
Q

What are CCPs?

A
34
Q

What is market failure?

A

Inefficient allocation of goods & services in free market

35
Q

What is credit rationing?

A

Market failure where lenders are unwilling to lend at prevailing rate

Banking (10 decks)

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