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Banking > Week 10 - NBFIs > Flashcards

Week 10 - NBFIs Flashcards

1
Q

How do PTP lending platforms reduce information asymmetry?

A

Give ratings (e.g. A-D) to deficit units

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2
Q

What are some types of screening provided by PTP lending platforms?

A
  • Borrower ratings
  • Monitoring functionality
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3
Q

When & why did PTP lending gain popularity?

A

After GFC due to:
- loss of faith in banks
- less lending by banks

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4
Q

What is the advantage of PTP lending for surplus units?

A

Higher returns

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5
Q

What is the disadvantage of PTP lending for surplus units?

A

No deposit insurance

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6
Q

How does PTP lending differ from banking?

A

Involves some intermediation, but contract is directly between lender + borrower

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7
Q

What are examples of NBFIs?

A
  1. Insurers
  2. Pension funds
  3. Finance companies/houses
  4. Securities houses
  5. Mutual funds
  6. OFIs
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8
Q

What is insurance for?

A

Protecting individuals & their beneficiaries from income loss due to premature death/retirement

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9
Q

How does insurance work?

A

Pools risk to transfer income uncertainty from individual to group

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10
Q

How are insurers funded?

A

Collect premiums to invest in the financial market

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11
Q

What kind of interest rate risk affects insurers?

A

Reinvestment risk – suffer if rates fall

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12
Q

Why might insurers invest in property?

A

Hedge against inflation

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13
Q

What are the main types of life insurance?

A
  1. Term
  2. Whole
  3. Endowment
  4. Variable
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14
Q

How does term life insurance work?

A
  • No savings element
  • Pays if you die in the term
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15
Q

How does whole life insurance work?

A
  • Savings element
  • Covers whole lifetime
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16
Q

How does endowment life insurance work?

A
  • Savings element
  • Pays if you die in the term
  • Pays unit-linked face value if you survive term
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17
Q

How does variable life insurance work?

A
  • Invests in mutual funds
  • Value depends on asset returns
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18
Q

What do insurers mostly invest in?

A

Long-term government bonds & equities

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19
Q

True or false: in some countries, pension AUM > GDP

A

True

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20
Q

How much is pension AUM globally?

A

$35.4 trillion

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21
Q

What can happen when a stock is downgraded?

A

Institutional investors are forced to sell en masse

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22
Q

What type of interest rate risk affects insurers?

A

Reinvestment risk

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23
Q

What are an insurer’s liabilities?

A

Policy reserves i.e. expected payment commitment on existing policies

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24
Q

What are policy reserves based on?

A

Actuarial assumptions

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25
Q

Besides interest rate risk, what other risks affect insurers?

A
  • Actuarial risk (fluctuations in payouts)
  • Financial risk (fluctuations in rate of returns on portfolio)
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26
Q

Why regulate insurers?

A
  1. Prevent deceptive sales practices
  2. Ensure solvency
  3. Limit market power / cartels / high premiums
  4. Prevent unfair discrimination
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27
Q

What is the prudential regulation for insurers?

A

Solvency II, based on Basel II

28
Q

How do insurers manage risk?

A

Reinsurance

29
Q

What was the main pre-pandemic challenge for the insurance industry?

A

Low interest rates -> diversifying into credit, commodities, real estate, PE, indexed bonds

30
Q

What is the main post-pandemic challenge for the insurance industry?

A

Rapid increase in interest rates -> lowers value of long-term bonds

31
Q

What is an ongoing challenge for the insurance industry?

A

Competition from ‘InsurTech’ firms

32
Q

What is ‘private debt’?

A
  • Loans from banks
  • New asset class popular with insurers
33
Q

What is the pension system in most countries?

A

3 pillars:
1. State pensions
2. Workplace pensions
3. Private pensions

34
Q

How can you tell a private pension from any other investment product?

A

Requirement to retire before accessing money

35
Q

What are the main types of pensions?

A
  • Defined benefit
  • Defined contribution
36
Q

True or false: DB pensions may require variable contributions

A

True

37
Q

With a DC pension, what dictates value of payout?

A

Value of portfolio

38
Q

True or false: DC pensions allow individuals to choose their asset allocation

A

True

39
Q

What is the aim of pension regulation?

A
  • Avoid mis-selling
  • Promote disclosure
  • Capital adequacy
40
Q

How do finance companies/houses raise funds?

A

Issuing securities on capital market

41
Q

What are capital market securities?

A
  • Short-term notes
  • Commercial paper
42
Q

True or false: finance companies/houses are subject to more regulation than other FIs

A

False. No deposits = less regulation

43
Q

What is the benefit of a finance company/house for its parent company?

A

Diversifies revenues

44
Q

What are the main (overlapping) types of finance companies/houses?

A
  1. Sales finance institutions
  2. Personal credit institutions
  3. Business credit institutions
45
Q

How do personal credit institutions differ from banks?

A
  • Lend to riskier customers
  • Collateral that banks would reject
  • Higher rates
46
Q

What advantages do sales finance institutions have over banks?

A
  • Convenient access to customers
  • Faster approvals
  • Higher approval ratios
  • Lower rates
  • Lower fixed costs
47
Q

How do business credit institutions work?

A

Buy accounts receivable at a discount & take responsibility for collection

48
Q

What takes the place of regulation for finance companies/houses?

A

Market monitoring i.e. low-quality loans = less funding from market

49
Q

What are securities firms?

A

Essentially investment banks without the banks

50
Q

What do securities firms do?

A

Design, issue & trade securities

51
Q

What are assets for a securities firm?

A
  • Reverse repos
  • Receivables from other brokers
  • Security/commodity longs
52
Q

What are liabilities for a securities firm?

A
  • Repos
  • Limited equity
53
Q

What do mutual funds provide?

A

Greater diversification than an individual investor can achieve alone

54
Q

What is the 2nd biggest type of FI in the US by asset size?

A

Mutual funds

55
Q

True or false: mutual funds can be open- or closed-ended

A

True

56
Q

What does MMMF stand for?

A

Money market mutual fund

57
Q

What do MMMFs have in common with bank deposits?

A
  • Liquid
  • Safe
  • Short-term
  • Open-ended
58
Q

True or false: in the US, you can write cheques on MMMFs

A

True

59
Q

Why have bank deposits been declining since the 70s?

A

Money put into MMMFs

60
Q

What are the main types of US MMMFs?

A
  • Prime MMMFs
  • Government MMMFs
61
Q

What are prime MMMF investments?

A

Corporate debt securities

62
Q

What are government MMMF investments?

A
  • Government securities
  • Govt security-backed repos
  • Cash
63
Q

What are hedge funds?

A

A type of mutual fund

64
Q

What type of strategies do hedge funds use?

A
  • Riskier
  • More sophisticated
  • Proprietary
65
Q

What is a typical minimum investment for a hedge fund?

A

$1million+

66
Q

What is the regulatory limit on hedge fund fees?

A

None

67
Q

What characterises hedge fund investors?

A

Too wealthy to worry about liquidity & stability

Banking (10 decks)

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