Week 3 Flashcards
What are the main activities of banks
- Borrowing money from customers
- Lending money to customers
What is a bank’s balance sheet?
It is a statement of what an institution of company owns at a given time.
What is the golden rule of balance sheet?
Total assets = Total liabilities
How are bank’s assets divided?
Financial assets
- Reserves
- Cash items
- Deposits at other banks
- Securities
Customer assets
- Commercial and Industrial assets
- Mortgages
Physical assets
- Branches
- Buildings
How are bank’s liabilities divided?
Wholesale funding
Customer deposits
- commercial deposits
- retail deposits
Bank capital
- Assets - Liability
- Owed against shareholders
- Cushion against a drop in value of assets due to defaults which could force bank into insolvency.
What is used to calculate a bank to deposit ratio base (LDR)?
customer deposits
If LDR > 100%
Bank has loan book greater than deposit base
If LDR < 100%
Bank has loan book less than deposit base
What is the net interest margin?
Difference between interest rate a bank pays on its liabilities and interest rate it generates from its financial assets
What services do banks provide?
- Foreign exchange
- Payments
- Insurance polices
- Investment services
Using a T account show what happens if you open a current account with HSBC using Cash
Using a T account show what happens if you open a current account with HSBC using a cheque from Barclays.
Show using T account how a bank makes profit when HSBC receives 100 as checkable deposit. Bank has to maintain 10 reserves. What happens to the excess? What is that process called?
What concerns does a bank manger have?
- Liquidity management
- Asset management
- Liability management
- Capital adequacy management
Suppose a bank has required reserves of 10% and it suffers a deposit outflow of 10M what happens do the balance sheet?
If a bank has excess reserves, a deposit outflow does not necessitate changes in other parts of its balance sheet.
Higher the costs associated with deposit outflows, more excess reserves the bank will want to hold.
Suppose a bank has required reserves of 10% and it suffers a deposit outflow of 10M what happens do the balance sheet?
Since reserves are a legal requirement the shortfall must be eliminated Since excess reserves are insurance against costs associated with deposit outflows.
What are the ways of eliminating shortfalls?
- Borrowing
cost incurred on the interest rate they have to pay on borrowed funds from the interbank market - Selling securities
cost of selling securities is the brokerage and other transaction costs - Central bank
Borrowing from the federal reserve is called the discount rate - Reduce loans
most costly way of acquiring reserves and it will antagonize customers.
What are the goals of asset managers?
- Seek Highest possible returns on loans and securities
- Reduce risk
- Have enough liquidity
What tools do asset managers use?
- find borrowers who will pay high interest rates and low default risks
- purchase securities with high returns and low risk
- lower risk by diversifying
- balance need for liquidity against increased returns from less liquid assets
What is liability management?
- Decisions made by banks in order to maintain liquid assets to meet bank’s obligations to depositors
- Due to rise of money centre banks in 1960s
What are the 3 reasons why banks hold capital?
- Prevent bank failure
- Amount of capital affects return for shareholders of a bank
- Regulations
How does a bank’s capital prevent from insolvency. Show using two banks T accounts below. Say 5M loans go bad so they are written off. How would they look after the write off?
What is return on Assets?
What is return on Equity?
